Is your contractor really an employee?

We are regularly asked to identify whether a worker is an employee or a contractor. The significance of the distinction is that the former have a wider range of legal rights when compared to a contractor. This is true in many European jurisdictions.

Contractor advantage

Unlike contractors, employees are entitled to termination rights, which include the right to severance pay. Employees may also benefit from an advantageous collective bargaining agreement, if one applies to their role. For this reason, organisations often enter into contractor (or consultant) arrangements. Such contracts can be easily terminated, and the business does not have to provide benefits outside of what has been agreed in the contract. It is also the individual who has to account for tax on his income, and there is no need to set up local payroll. Moreover, utilising a contractor arrangement is beneficial when doing business in a country for the first time; there is no need to set up a local company nor is there a requirement to get authorisation to employ in that country.

Rising claims undermine contractor status

In most European countries, however, it matters not what you label the arrangement; whether or not an individual will be a consultant or employee depends on what the relationship is like in practice. Indeed, there has been an increase in individual claims in this area. Complainants argue that they are in fact an employee and therefore entitled to the local benefits and employment rights.

French example

An example of this is a recent Supreme Court case in France (Cass. Soc., 6 May 2015, no. 13-27.535). A contractor (“auto-entrepreneur”) argued that his commercial arrangement with the company was in fact an employment contract. The trial judges rejected his claim; he had refused to attend an exhibition and he regularly invoiced the company for his services.

However, the Supreme Court overturned this ruling. The Court found evidence of sufficient control by the company over the work of the individual for there to be an employment relationship. For instance, he was required to comply with the company’s daily work schedule; and obliged to attend individual interviews and sales meetings. He was also required “to conclude sales, according to a determined procedure, failing which these would be rejected”. The degree of control test is at the heart of the relationship and is relevant to many jurisdictions, including the UK.

Employer caution

Organisations using consultant arrangements are therefore reminded to consider carefully the actual relationship in practice. An incorrect classification could give rise to employment liabilities, and the business could be liable to account for unpaid tax and social security obligations.