Characteristics of an entrepreneur’s vs. employee’s activity
The tax legislation does not define ‘contracts signed with an independent entrepreneur’ and ‘employment contracts’. If the contract’s nature is unclear, the tax authorities will examine its characteristics to evaluate it. This way, it can be decided whether the worker or operator is an employee on the payroll – or an independent contractor.
The overall situation and the key characteristics
The characteristics can be seen as representing either form or substance.
The first ones, the formal characteristics, relate to how various obligations are fulfilled when starting up business and maintaining it. The second ones, the substantial characteristics, are about the meaning of the contractual obligations. “Substance” also has to do with the real circumstances and conditions of the work.
Examples of characteristics having to do with form:
- whether the worker/operator is a registered, self-employed (T:mi) entrepreneur or an owner of a corporate entity
- the arrangements that cover the worker’s/operator’s social insurance
- whether or not the worker/operator is on the Prepayment Register
- whether or not the worker/operator is on other registers
- submittal of the legally required reports to authorities
- the existence of a permit, license, authorisation
Examples of characteristics having to do with substance – the actual circumstances:
- the matters agreed upon in the text of the contract
- worker's/operator's degree of personal autonomy and independence
- whether he or she works for someone else or for oneself
- who has the rights of directing and overseeing the ongoing work?
- whose tools, materials and supplies the worker works with?
- the time when work is done
- the place where work is done
- the principles of compensation
- how direct expenses are reimbursed to the worker/operator?
- responsibilities, warranty agreements and insurance policies
- rules on how the contract should be terminated if necessary
- the existence of restrictions against taking on other assignments, existence of a non-compete rule, and existence of agreements on confidentiality
Characteristics visible to other parties, not to the payer
In addition, some additional facts and circumstances may be important but not necessarily visible to the payer. If the payer has claimed that the worker/operator is an independent contractor and should not be considered an employee, the following characteristics may support the payer’s claim:
- The relative size of the operator’s business activity
- Whether or not the operator’s business is a well-known activity in the local community
- The degree of independence in the operator’s business activity
- The way the operator has organised its activity
- The fact that the operator takes on financial risks
- The fact that the operator’s activity is aimed at making profits