Glossary

Disguised employment occurs when a worker performs duties similar to an employee but is classified as an independent contractor or freelancer. This misclassification can lead to workers being denied essential benefits, such as paid leave, minimum wage protections, and social security contributions. Employers may misclassify workers to reduce costs and avoid legal responsibilities, but doing so carries significant risks, including financial penalties and legal disputes.

Identifying Disguised Employment

Determining whether disguised employment exists requires analyzing the relationship between the worker and the employer. While the specifics vary by country, some key indicators of disguised employment include:

• The worker follows a schedule set by the employer
• The employer requires the worker to use company-provided equipment
• The worker is expected to work from a designated location, such as an office
• Deadlines and project deliverables are dictated by the employer
• The worker is not free to take on additional clients or negotiate their work terms independently

Many governments and legal systems assess these factors on a case-by-case basis to determine whether a worker should be classified as an employee rather than an independent contractor.

Global Approaches to Disguised Employment

‍Countries have developed different regulations to address the risks associated with disguised employment.

• Netherlands: The country abolished the Declaration of Independent Contractor Status (VAR) in 2016, replacing it with a system that evaluates employment relationships to prevent misclassification.
• France: French labor law assumes an employment contract exists when a person works under the authority of an employer in exchange for compensation. Courts can reclassify contracts as permanent employment agreements if disguised employment is found.
• United Kingdom: The UK’s IR35 legislation, implemented in 2021, classifies certain contractors as “deemed employees” for tax purposes, meaning they must pay income tax and National Insurance contributions.
• Serbia: Serbia introduced the Independence Test to determine whether contractors are truly independent. If misclassification is detected, companies may face fines and retroactive tax obligations.
• Germany: Instead of clear-cut regulations, German courts assess contractor relationships based on how much control the employer has over the worker’s tasks and performance.

Avoiding Disguised Employment Risks

‍To minimize the risk of disguised employment, businesses and workers must ensure that contracts accurately reflect the working relationship. A strong contract should clearly define:

• The scope of work and services provided
• The worker’s independence in managing tasks and schedules
• Payment terms and invoicing structure
• Termination conditions and renewal clauses
• Ownership of work and intellectual property rights

While a well-drafted contract helps protect against misclassification, it does not guarantee compliance in the event of an audit. Employers and workers should remain informed about local labor laws and seek legal guidance when structuring independent contractor agreements.