Revisiting the Issue of Employees vs Independent Contractors

Friday, February 27, 2015 | Published by

L&E Global - Employees vs Independent Contractors

In March of 2014, L&E Global published its first annual international practical guide on Employees vs Independent Contractors – Analysis on the difference between a contractor and an employee and the re-characterization of a contractor into an employee.

One year later, this topic remains all the more relevant. Today’s globalized and mobile workforce demands flexibility in order to satisfy their work-life balance requirements and provide employers with cost-efficient and productive personnel.

Nevertheless, while contractor agreements appeal to both employers and the individual, there are important distinctions between a self-employed worker/contractor and an employee. These distinctions are all the more significant since failing to understand these differences could be costly to an employer. Generally speaking, the most important element to the distinction between a contractor and an employee under the laws of most countries is subordination.

Subordination is defined as ‘the consequence of authority on the part of the employer in respect of the employee’. In other words, the employer is defined as the person that ‘postulates authority’ by issuing instructions, which the employee must follow, as well as the right to supervise or maintain control over the employee’s performance.

Although there is no legal definition of ‘subordination’ it matters less how the parties define their relationship in their agreement; what is most important is the reality of the situation; i.e. whether or not subordination actually exists based on the actions of the parties.

If an individual is responsible for organising their own workload and occupational activities than subordination does not exist, as the individual is free to carry out his employment obligations without being subject to the ‘authority’ of another.

On the other hand, if someone is claiming to be an ‘employee’ they must prove that they are under the authority of another and that their actions are subordinate to that authority, i.e. the employer directs their actions and the employee is not free to independently dictate their work organisation.

Typically, employers and employees are free to determine the nature of their collaboration, provided that the performance of the contract corresponds to the said nature. Some factors helpful in determining whether or not a link of subordination exists include:

  • The parties’ intention as expressed in their agreement
  • The freedom to organize the working time
  • The freedom of work organization
  • The ability to exercise supervisory control as a superior

If the performance of the agreement reveals factual elements incompatible with the qualification chosen by the parties, a re-qualification of the relationship (from self-employed to employee or conversely) could occur. The said general criteria are to be used in determining whether such factual elements exist in a particular case.


Re-characterization refers to changing the status of a contractor into an employee. In many jurisdictions, there are no specific laws that lead to an automatic re-characterization of a contractor into an employee. However, when the factual execution of the employment relationship does not fit the qualification given by the parties, that relationship can be re-characterized by Court decision. If a clear link of subordination exists between the parties, the contractor may be re-characterized as an employee.

The risks of re-characterization are born solely by the employer and generally imply the payment of:

  • arrears in taxes and social security contributions (plus penalties) over the sums paid to the contractor
  • arrears in salary emoluments
  • payment of termination indemnities, where relevant

Severance pay will be mandatory if deemed employment is recognized under the circumstances described above and re characterized, or if it is provided by virtue of a contract between an employer and the contractor.

In addition to the re-characterization issue, if an employer should engage contractors, an employer should be aware of e.g. the official notification requirement for foreign contractors and issues of compliance with health and safety regulations. Moreover, in certain circumstances, an employer could be jointly and severally liable for arrears in, among others, taxes and contributions in the event of illegal employment by subcontractors used by the contractor.


There are several guidelines which, in most jurisdictions, help to avoid uncertainty in an independent contractor’s agreement which could, as a result, prevent re-characterization. The most important is to properly document the relationship:

  • Have the relationship accurately documented with a clear statement of contractor’s tasks and obligations.
  • Do not use company employment application or forms when making initial engagement. Refer to contractor “as such”. Avoid words such as “employee”.
  • Register all temporary work labor; enhance process of visibility of temporary labor and provide necessary guidelines.
  • Add language to withhold payment or terminate immediately for cause in case they breach their obligation of paying their employees and being financially sound.

Another way to prevent re-characterization is to limit the assignment. The agreement should not make inferences to, or guarantee, the length of assignment or future employment. It is also important to avoid freelance status after employee-status at the company extending or renewing temporary assignments, as these may be barred or limited under local law. In regards to the day-to-day treatment of the independent contractor, it is important to avoid a situation of subordination by giving specific orders and instructions to contractors. It is also necessary to avoid integrating the independent contractor into the organization.


Another area of distinction involves the responsibility to pay taxes and social contributions. Generally, in an employee-employer situation, the employer is required to pay social security contributions and income taxes on wages. However, in a self-employed worker/contractor situation, the individual alone is responsible for ensuring that these contributions are satisfied. In the past few years, many countries have sought to harmonize the social security position of self-employed workers to align their benefits with those received by ‘employees’. However, this process is ongoing as to date a legal definition applicable to a self-employed worker’s social security position has not yet been delineated.


To conclude, it is extremely important for companies to be aware of the distinction between employees and self-employed contractors in order to ensure that the employment relationship is clearly defined and the accompanying obligations are followed accordingly.

Read the full publication at L&E Global Knowledge Center.