What is disguised employment

Disguised employment occurs when a worker does a job like an employee but is labeled as an independent contractor or freelancer. This can lead to them missing out on benefits and protections usually given to employees.

Disguised employment is often linked to misclassification, resulting in workers being classified as self-employed or independent, even if an employer-employee relationship exists.

Apart from convenience, employers choose this strategy because they aren’t required to provide employee benefits such as minimum wage, holidays, or overtime pay. In other words, the employer denies protection to workers who are entitled to it under the law.

How to recognize a disguised employee

Disguised employment is recognized by reviewing the working relationship between the employer and the worker. Working duties, conditions, and expectations vary from employer to employer, so this review is usually case-by-case. The main goal of the review is to see if the employer controls the working relationship.

According to courts and case law, there are several factors where a self-employed contractor may need to be considered an employee, including:

• The worker is subject to work schedules determined by the employer

• The worker must be in an office determined by the employer and use the company’s equipment

• Instructions and deadlines are imposed by the client

• Leaves or vacations are directed by the client

The risks connected to disguised employment

The risks and penalties for disguised employment may vary from country to country. Every legal system legislates its own rules. Let’s see how some European countries are tackling this problem:

Disguised employment in the Netherlands

Before 2016, freelancers or self-employed professionals could apply for a Declaration of Independent Contractor Status (Verklaring Arbeidsrelatie, VAR), which allowed the freelancer’s clients to ensure they were dealing with independent contractors.

The problem was that independent contractors could possess a VAR declaration even though they were actually regular employees.

To prevent this, the Dutch government adopted the 2016 Assessment of Employment Relationships (Deregulation) Act (Wet deregulering beoordeling arbeidsrelaties, DBA) with a new system that put an end to disguised employment.

Disguised employment in France

In France, an employment contract is signed as soon as a person (employee) works in exchange for remuneration under another person (employer).

The employment contract must specify:

• Compensation/wage rate

• Required skill sets and qualifications

• Work hours

• Employee’s duties

• Obligations for both the employee and the employer

French labor law says that performance, remuneration, and subordination links between the employee and the employer are required for the employment contract.

If the contract is not suitably classified, and it is discovered that it actually disguises full employment, several consequences are triggered by it, the main being the necessity of re-qualification. The court can re-qualify the assignment contract as a permanent employment contract, providing the contractor with employee status.

Note: The employment contract is different from the service contract. In service contracts, there is no mention of subordination but only performance and remuneration.

Disguised employment in the UK

In 2019, the United Kingdom passed legislation IR35, which applies new regulations to working “off-payroll.” IR35 is the abbreviation for the intermediaries legislation, a set of tax rules that apply to you if you work for a client through an intermediary.

IR35 treats contractors as “deemed employees” if they would be considered an employee had they not been contracted through an intermediary. Deemed employees would be expected to pay income tax and National Insurance Contributions. IR35 rules took effect in April 2021.

To determine if IR35 applies, you can do an online assessment by completing an online assessment tool.

Disguised employment in Serbia

Serbia doesn’t have a designated business structure for freelancers or people working for foreign clients. That leaves contractors with the option to register as entrepreneurs and operate by invoicing (foreign) clients for their services.

When you work for one or more clients, especially in Serbia, you and the company risk disguised employment.

In late 2019, the Serbian government introduced the Independence test, an assessment that determines whether you are truly independent or not. If the case proves you are not an independent, you need to reclassify. The company that hired you can be at risk of paying fines, retroactive taxes, and social contributions. 

Disguised employment in Germany

Germany does not have clear statutory regulations defining contractor status. The German Federal Labor Court (Bundesarbeitsgericht) assesses the legal status of a contractor on a case-by-case basis, usually relying on the scope of instructions that was agreed on.

Overall, the more an employer can determine the contractor’s performance, the more likely the contractor would be classified as an employee.

Disguised employment vs. disguised unemployment

Disguised unemployment is also known as hidden unemployment and is a type of underemployment. Disguised unemployment occurs when a portion of a labor force is employed, but the employees aren’t provided with enough work to work at their full capacity and end up working in a redundant manner.

In most cases, there are a higher number of workers than there are job opportunities, which leads to the disguised unemployment. Workers could have no work at all or only enough work to work part-time hours, leading to low productivity.

Disguised unemployment can occur in small businesses and enterprises, with those in part-time or full-time work agreements, and across industries. This practice is common in rural areas in the agricultural sector and in urban areas in the service sector.

How to avoid disguised employment

Each country has its own assessment procedures in cases of potential disguised employment. A contract that explicitly defines the relationship as a contractor is not enough to guarantee that a ruling judge would agree with the classification.

However, drawing up an agreement that can precisely outline the relationship is vital in case of an audit. A valid contract that is legally binding and localized for both countries involved will protect you from the risk of re-qualification.

Here are some of the elements that constitute a suitable contract:

• The identification of the parties (the service provider and the client)

• The nature of the service to be provided, defined in a clear and exhaustive manner

• The exact obligations of the parties

• The compensation for the work provided

• The means made available by the parties

• The duration of the mission or service with clauses on renewal, notice, termination, and dispute

• The date and signatures of the parties

Drafting an iron-clad contract may seem like a complex task, but it is crucial to invest time and effort into making one. Luckily, you can let Deel handle contract creation and legal compliance for you, wherever you hire.