Self-employment and deemed employment
Throughout the countries of the western economic world we observe a similar development: a trend towards atypical employment relationships, with a working environment in which “self-employment” is increasingly seen.
Reasons are diverse: there is a strong desire for freedom and autonomy
for employers and workers. Another special treat (or fundamental component of the profit model) for employers is the absence of labour and social security regulations when engaging self-employed contractors instead of regular employees: “Uberisation”.
Employment or not? – two is not enough
Is the whole labour market of the western economic world facing a turning point? It becomes increasingly evident that conventional labour law can no longer cope with the value considerations of a modern labour market. Flexibility and efficiency are the magic words, which applies to both sides, employers and employees.
Outside the EU, legal systems tend only to provide black or white solutions with regard to the nature of an employment relationship, which means one can either be an employee or a self-employed contractor. This sharp distinction does not suit for a vast number of modern employment relationships.
In the EU, many countries have an intermediate “worker” status but even then, many people no longer want to be pressed in a tight corset of mandatory working and resting time regulations, but rather want
to work whenever it suits them. They do not shrink back from magic roundabouts, and they may want other benefits, such as lower tax and social contribution rates. They do not object to receiving (perhaps unforeseen) social protections which accompany that status. This text explores the inconsistent relationship between tax status and other rights, and the possibility of unintended consequences.
Uberisation and Austrian reaction
The business model of Uber causes strong reactions. Social legacies often determine the legal and “shadow legal” response to business models. In France, for instance, Uber’s market entry set off an avalanche of violence culminating in a strike paralysing the French capital, during which the managers of Uber France were arrested and questioned by the police for two days.
In fact, Uber, a role model of freelancer systems in many other countries, is eking out a niche existence in Austria as a consequence of the specific legal environment. Surprisingly, to the majority of Austrians, it is in business but appears as a “poor imitation” compared to foreign sister companies. In the Austrian version, there
is hardly anything left from the initial idea to act as a superordinate intermediary agency between self-employed drivers and end customers.
The taxi lobby, which bemoaned a circumvention of the hard to obtain taxi licences, is strong in Austria. Therefore, after a short but punchy fight, Uber settled on a compromise and now engages only licensed car rental companies as contract partners instead of self-employed drivers. Up to now, this trade-off is accepted by Austrian authorities due to the assumption that only regular employees of car rental or taxi companies falling under the “Collective Bargaining Agreement for Passenger Transportation with Automobiles” are engaged as drivers.
The current system is miles away from the initial idea of an independent intermediation agency working with self-employed drivers only. All in all, the Uber concept is not to be seen as a success story in Austria so far.
But “Uberisation” is an unfair term if taken as a catch-all word for the phenomenon of debatable self-employment. Much more is at stake for consultancy business (of all sorts) and marketing businesses such as franchises and sales agents.
Austria – a daunting example
As an example, Austrian labour law is highly regulated – overregulated, in the view of many experts. Myriads of laws, regulations and collective bargaining agreements make it a “provision jungle” so that Austrian employment law is a slippery ground for entrepreneurs and employers.
Due to a rich trade union history in the wake of the Second World War, Austrian labour law regulations are very socially oriented and employee friendly. Collective bargaining agreements cover almost every industry sector and not only single employer undertakings. They usually provide detailed regulations
e.g. with regard to minimum wages (and regular wage increases), working conditions and general conditions for the termination of the employment relationship.
Various forms of engagement
Generally, three forms of engagement are known: the regular employee, who is fully integrated into an employer’s business and subject to the employer’s control and binding guidelines; the self-employed contractor, who performs a certain definable and distinguishable piece of work using his own tools on basis of a service contract independently and the freelancer as some kind of hybrid between the other two categories.
In most countries, two of the mentioned three employment categories are customary; however, freelancers are usually deemed as self-employed. In Austria, for example – very much to the typical Austrian approach to find a pragmatic workaround for every problem – a freelancer is handled like a regular employee in terms of social security only. With regard to all other aspects (such as labour law protection or tax) a freelancer is deemed as self-employed, with fewer protections.
Choosing the correct type
The choice of the correct engagement form can be tricky. Different interests influence the decision process. The concrete contractual framework has an initial impact on the labour and social law treatment of the relationship, but does not determine it.
X a regular employee enjoys full protection of labour law regulations. The employer is obliged to pay social insurance contributions according to the Austrian General Social Insurance Act (ASVG) and ancillary wage costs. The employer is obliged to deduct wage tax and pay it to the tax authority;
X a self-employed contractor does not enjoy the protection of labour law regulations. She is fully responsible with regard to her social security contributions according to the Austrian National Industrial Insurance Act (GSVG); and
X a freelancer’s hybrid status becomes evident with this regard: she does not enjoy protection of labour law regulations and is responsible for paying income tax herself (like a self-employed contractor). In terms of social security contributions, the freelancer is also chameleon: if she holds a (suitable) trade licence, she is insured according to the GSVG as self-employed, if not, she is insured according to the ASVG like a regular employee.
Self-employed in CEE countries (% of total employment)
15 Czech Republic
Source: Lipták ‘Is atypical typical? – atypical employment in Central Eastern European countries’ on the basis of Employment in Europe 2010 data, and updated by Taylor Wessing to July 2015
The fiscal crisis and reinterpretation of status
Self-employment and other atypical work arrangements have remained robustly common in CEE countries with 3 of 5 countries remaining above European average figures. However, the trend is downwards (unlike in the UK). But in Austria, across the board, courts and authorities tend to reinterpret contractual agreements between supposed self-employed parties as regular employment relationships in the course of respective public levies audits. In Austria, the auditing social insurance
companies have an interest in such reinterpretations because this means revenue for them.
It even appears there is competition between the big social insurance systems (both state owned).
In the case of such reinterpretation, the redesignated employer has to pay additional payments for social security contributions and ancillary wage costs for up to five years back, which is a real concern. Back payments for tax are a matter of the concrete individual case.
A reinterpretation in a civil/labour law respect raises other questions. A redesignated employee could claim minimum wages according to the applicable collective bargaining agreement, special payments such as customary 13th and 14th instalments (mandatory holidays and Christmas allowances according to the CBAs), paid vacation leave, sick pay, severance payments, etc. Such massive payment obligations are capable of sending a company into insolvency.
Across Europe, pressure on public sector finances can result in increasing assessment and collection burdens on business,
imposed through the use of deemed employment status.
The crux of the matter
Not even the best contractual framework is able to protect against such consequences. Surveying authorities never tire of emphasizing that the examination subject is not the contractual paperwork but rather how it is applied in real life.
At times one could have a hunch that this principle is applied capriciously by the authorities. In some cases it is just not possible to use one’s own equipment/ operating material. Sometimes, a large assignment makes it unrealistic to have several other principals or customers which leads to the assumption of the sole reliance to one principal, and employment status.
A number of different cut-down employment versions are established in different European countries to stimulate the economy, for example:
X in Germany (mini-jobs);
X Slovakia (quasi-employment relationships for part-time employees); and
X Poland (so-called “trash contracts” according to civil law regulations instead of labour law regulations).
The success prospects of these are highly local and specific to individual countries. Mini-jobs or zero hour employment relationships, or work on demand constructs will most probably not work in Austria. Such contracts would be deemed as regular employment relationships by the local authorities as well as courts.
Two 2015 incidents in Austria show the problems that even public institutions have. One case concerned a Salzburg regional hospital, where a team of doctors had been engaged (as a consequence of a political decision) on a service-contract basis. The situation resulted in the reinterpretation of the contractual relationships of the doctors as well as a number of other affected service contracts of the province of Salzburg. Additional sums of €1.3m of social security contributions and €2.7m of tax were payable by the province of Salzburg as the owner of the hospital according to media reports. Another case concerned the General Accident Insurance Institution, which is an integrated part of the social security system. A doctor was engaged for the purpose of conducting mandatory occupational medical support for specific districts. The case also ended the reinterpretation of the contractual relationship by the Austrian Administrative High Court.
There is a strong public sector interest in self-employment status: it is not just a question of private business seeking to reduce labour cost. This is seen also in the UK, whose IR35 rules prevent disguised employment through the use of personal service companies by directors. These rules are thought to generate some GBP550million p.a. from over 200,000 business directors. However, the
UK tax authorities also calculate some GBP430million will be lost in 2015 through enforcement difficulties. So they are consulting about passing the assessment and collection burden on to end users, in a similar way to a collection system for mainstream employment.
Across Europe, pressure on public sector finances can result in increasing assessment and collection burdens on business, imposed through the use of deemed employment status.
Certainty and its absence
A downside of many regimes is the lack of a real and binding preliminary review of a specific contractual relationship upon request. In contrast to Germany, where such an institution exists, Austrian law only knows a preliminary opinion with regard to social insurance, which means a company can ask the social insurance company
if it is not sure whether a specific contract is to be deemed as service contract or regular employment contract. But the opinion does not have any binding force and a subsequent authority audit may come to a different result. In Austria, this unpleasant situation is reinforced by the fact that there are nine different social insurance companies (one for every provincial state), which theoretically can hold diverging views with regard to the same factual situation and often do.
There is little consistency between the choice of status made between workers and those who engage them, and the approach of the tax authorities. It can be possible to preserve tax efficiency, through the use of limited companies and partnerships (sometimes in combination) which create separate legal personalities and help reduce taxation and social security costs of the individual’s remuneration.
Even if these lower tax structures are upheld, the question of professional rights does not necessarily follow this tax status. They may still have quasi-employment rights. For example, UK law firm partners can have “worker” status, with the social rights referred to elsewhere in this report (see “Standing in the way of
control”). Under UK case law as at autumn 2015, those protections can also include whistleblowing rights, and rights to claim age and sex discrimination – even where the individual operates through a company with separate legal personality. That is to say that a company or a partnership can claim discrimination too if “the corporation in question reflects the characteristics of one individual (or possibly a group)”.
In modern work structures, the hunger of the authorities for tax and worker protections means there is a strong appetite to eat away at the boundaries of legal personality. Businesses need to be farsighted in designing and operating structures that can withstand scrutiny from those they work with, as much as the revenue- gathering authorities.