The Increasing Costs of Contractor Misclassification in the EU: What Companies Need to Know About the New ECJ Ruling
On November 29, 2017 the European Court of Justice (ECJ) ruled that misclassified self-employed contractors who are really workers or employees could claim back holiday pay all the way to 1996—the year that the European Union’s (EU) Working Time Directive was introduced. The case, King v. The Sash Window Workshop Ltd, involved a window cleaner who was awarded £27,000 ($36,400) to compensate him for paid annual leave to which he would have been entitled had he been classified as a worker or employee. Before this ruling, liability was limited to one or two years’ back pay in most EU countries.
In all EU countries, workers and employees have the right to at least four weeks’ (and in some countries, even more) paid vacation leave (often referred to as annual leave or holiday leave). By contrast, self-employed contractors are not entitled to paid annual leave or other benefits that depend on “worker” or “employee” status.
As companies that use contractors have found, particularly in the “gig economy” there are many consequences when a contractor successfully challenges his or her status and is found to be a worker or employee. Among these consequences are that the employer is obligated to pay a back bill for the benefits that it had failed to provide. In the past, these back bills tended to cover the last two years of unpaid benefits. But this important judgment effectively removes that limit so claims can go back to the commencement of the right.
Independent Contractor or Employee: Factors to Consider
The tests courts use in Europe to assess whether someone is truly an independent contractor are very similar to those used in the United States and elsewhere in the world. Factors include:
- whether the individual has his or her own business that he or she manages and in which he or she invests;
- whether the company pays the worker on a regular schedule or at the completion of projects;
- the extent to which the worker is integrated into the business’s operations;
- whether the individual is working on specific tasks defined by the company;
- the extent of control that the company exercises over how and when the individual works.
The takeaway for employers that use contractors in the EU is to examine their arrangements and assess the risks of misclassification. As the saying goes, “If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.” Preparing a good independent contractor contract will help, but will not avoid a misclassification finding when used for an individual who is, in reality, working as an employee. When most of the above factors support contractor status, there are some practical steps organizations can take to minimize risks when drafting their independent contractor agreements:
- State in the contract that the contractor is registered as an independent service provider and include the local business registration number where applicable.
- Make explicit in the contract that the contractor will comply with all local laws and taxation requirements.
- Check the laws of the relevant jurisdiction to determine whether the contract needs to be bilingual. This is a requirement in many countries.
- Do not include the contractor in employee compensation or equity plans.
- Ensure that any badge, business card, or email address that you provide a contractor clearly states that he or she is a contractor.
- Be careful with terminology. Companies might want to use terms such as “services” rather than “work,” “liaison” instead of “supervisor,” and “defect in performance” instead of “discipline.”
- Consider including provisions whereby the contractor agrees to indemnify the company or pay a certain amount if he or she claims, in the future, to be an employee. Such provisions are more effective in some jurisdictions than others but, nevertheless, may serve to deter legal actions regardless.
- In many countries it can be preferable to contract with a company set up by the contractor—rather than contracting directly with the contractor. This generally reduces the risk that a misclassification will succeed.