Companies and individuals acting on the Swedish labour market should be aware of the delimitation in law between consultants and employees. Whether an individual is to be considered a company consultant or an employee will determine the applicability of employment protection and could have significant tax implications affecting both companies and private individuals.
The title of an agreement between a company and an individual regarding the individual's performance of work for the company does not determine how the parties' relationship should be considered from a legal perspective. As such, a consultancy agreement could actually be legally considered to regulate employment at the company. According to case law, demarcation should be determined based on what the parties have agreed – for example, the conditions under which the work is to be performed (see Labour Court, AD 2012:24).
If a consultancy agreement is in reality to be legally considered as an employment agreement, the employing company must act in accordance with the laws protecting employee rights, including:
- employment terms;
- working hours;
- acceptable legal grounds for termination of employment; and
- employees' rights to vacation with paid salary.
If these requirements are not fulfilled by the company in question – even if the company believes that employment protection laws are not applicable – it could, among other things, risk being required to pay damages for terminating the contractual relationship with the individual in breach of the Employment Protection Act.
Even if a consultancy agreement complies with civil law requirements, the Tax Agency may still hold that an individual under such an agreement is an employee from a tax perspective. A typical example may be when a former employee shifts from being employed to working as a consultant, or when a consultant effectively works only for a single client or commissioning company, meaning that the consultant is not sufficiently independent in relation to the client or commissioning company.
Whether a contractual relationship is to be considered as an employment or consultancy agreement should be determined through an overall evaluation of the circumstances in each individual case, based on specific factors.
From an employment perspective, some of the most important assessment criteria in identifying an employment or consultancy agreement include whether there is an obligation for the individual to perform the work himslef or herself or whether the work has been performed mainly by one specific individual. This indicates an employment rather than a consultancy relationship. If the individual has had other assignments for other companies, this indicates a consultancy relationship. If the contractual relationship between the parties has endured over a significant period this indicates that it is an employment and not a consultancy agreement. In general, the individual's independence in relation to the commissioning company is particularly relevant when determining whether he or she should be taxed as a consultant or an employee.
Other relevant assessment criteria include which party has managerial responsibility and whether compensation is based on mainly time or performance. If the individual has managed the work and received compensation from the company based on performance, this indicates that the contractual relationship between the parties is a consultancy agreement. If the individual has not been compensated by the company for expenses, this also indicates a consultancy agreement. If the company has provided the individual with the required work materials, the contractual relationship between the parties is considered an employment agreement (see Glavå and Hansson, Arbetsrätt, third edition, 2015, Chapter 1.4).
If a consultancy agreement is considered an employment relationship, the commissioning company is liable both for withholding income tax and the payment of employer contributions. The employer's contributions are made up of the following charges:
- old-age pension;
- survivor's pension;
- sickness insurance;
- parental insurance;
- work injury;
- labour market; and
- general payroll tax.
For 2017 the charges amount to 31.42% of the total salary.
If the consultancy agreement fulfils the legal requirements to be considered as a consultancy agreement, the consultant should be registered for F-tax. If the consultant is registered, the paying company must not withhold income tax or pay employment contributions in relation to the remuneration. A person who is registered for F-tax is responsible for his or her own income tax and social security contributions.
To avoid the risk of unforeseen employment and tax consequences, companies and individuals acting on the labour market should be aware of the demarcation between consultants and employees from both tax and employment law perspectives.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For further information on this topic please contact Viktoria Hybbinette or Justus Pettersson at Wistrand Advokatbyrå by telephone (+46 31 771 21 00) or email ([email protected] or [email protected]). The Wistrand website can be accessed at www.wistrand.se.