a. Factors that Determine Who is an Employee and Who is an Independent Contractor
A worker who has an employment contract is considered as an employee. There are three essential elements creating an employment contract: Personal work, remuneration and “relationship of authority”. The third element is the most significant. An independent contractor is a person (or a company) performing professional activities in respect of which he/she is not bound by an employment contract; this means that he/she does not work under the authority of an employer. Consequently, it is the lack of subordination, which distinguishes an independent contractor from an employee so that if one of these parties exercises an employer’s authority over the other, the relationship will be considered an employment contract.
If a Danish court is required to decide whether a person is an employee or an independent
contractor, the court will consider:
• if the person carrying out work is in a subordinate position and takes instructions and works under supervision/control from a manager;
• which party is responsible for the result of the work performed;
• if the person carries out work for only one contractor or if he/she has other customers;
• does the person fulfill his/her work obligations regularly and using the same methods of work as ordinary employees employed by the contractor, including if the person has fixed working hours, makes use of working tools owned or facilitated by the contractor, makes use of the contractor’s canteen facilities, participates in social activities available to the contractor’s employees, etc.?;
• if the person must personally perform the work or if he/she can designate the work to another person;
• if the person runs a personal financial risk when carrying out work for the contractor;
• if the person has established his/her own independent business registered with the Danish Business Authority.
b. General Differences in Tax Treatment
For an employer doing business with an independent contractor, payment of the agreed fees will be made directly to the independent contractor without deducting any tax and with the addition of VAT (25 %) on the contractor’s fees. Thus, the independent contractor is personally responsible for the payment of taxes and VAT to the Danish Government. Within the framework of an employment contract, the employer is obliged to withhold tax at source.
Furthermore, the independent contractor must file an annual tax account (turnover deducted with all business related costs, declaring appreciations on business assets and interest paid) to the Danish tax authorities, while the employee will only file a summary tax return form as the employer will report almost all important information related to the remuneration earned by the employee to the Danish tax authorities.
The level of income tax for independent contractors and employees is similar. The income tax level is progressive – the higher the income, the higher the tax level, ending in a maximum tax level of approximately 60% per cent, but the independent contractor may benefit from certain tax advantages, such as the ability to deduct business related costs.
Pension and Supplementary Pension Contributions
Under Danish law, it is not mandatory for employers to give employees access to a pension scheme. However, quite a number of individual employment agreements and, in general, all collective bargaining agreements will involve the payment of supplementary pension contributions, both by the employer and by the individual employee to a pension labour market pension scheme. The level of labour market pension contribution is solely a contractual matter and not set by legislation. Apart from pension schemes involving civil servants, a Danish labour market pension scheme will be a “defined-contribution” pension scheme. The employer of an independent contractor is obliged to, and cannot make pension contributions to the independent contractor’s privately established pension scheme.
An employer is responsible for the declaration and payment of both the employee’s and the employer’s supplementary pension contributions in accordance with the Danish Act on Labour Market Supplementary Pension (Act no. 1110 of 10 October 2014), which provides that employers and employees must contribute to a Governmental supplementary pension scheme, for employees who are employed in Denmark. The employer’s contribution is a fixed monthly payment of approximately EUR 40 covering a fulltime employee and the employee’s contribution approximately EUR 20. The supplementary pension is paid out in addition to the Governmental old-age pension scheme. The employer of the independent contractor is not bound to make contributions to the Labour Market Supplementary Pension on behalf of the independent contractor.
c. Differences in Benefit Entitlement
Independent contractors are not entitled to specific benefits; they only receive the fees agreed between the parties with the addition of VAT (25%).
Apart from the agreed salary and benefits, employees are entitled by law to the payment of either holiday pay (12.5% of the salary and all taxable benefits) or salary during five weeks’ holiday per holiday year, and salary or state sickness benefits during periods of sickness.
d. Differences in Protection from Termination
The way in which contractual relationships are terminated is the same for contracts covering the relationship between contractors as it is for termination of other forms of independent contracts, which means the parties are free to agree whatever terms they wish.
For employees, there are a set of rules restricting the termination of the employment of employees and such rules are based on either mandatory legislation or on individual or collective agreements. As a general rule, an employee cannot object to being dismissed, neither can trade unions or governmental bodies. However, certain procedures may be provided for according to collective agreements. If a dismissal is not made on fair grounds, the employee may be entitled to compensation for unfair dismissal.
A number of employees enjoy special protection against dismissal (e.g. pregnancy, paternity or parental leave, position as shop steward or safety steward, complaints against unequal treatment, etc.). The rules providing this special protection are derived from legislation or collective agreements. Depending on the specific case, the protection requires certain procedures to be followed prior to the issuing of the notice of dismissal.
e. Local Limitations on Use of Independent Contractors
There are no limitations on the use of independent contractors, but they must register as “business owners” with the Danish Business Authority and with the tax authorities.
f. Other Ramifications of Classification
Where an employer’s business is closed down, employees can benefit from the intervention of the “Employees’ Guarantee Fund” (Lønmodtagernes Garantifund, ”LG”). The LG is mainly financed by the Danish Government, by employers’ contributions and reimbursements by receivers and liquidators of the amounts that were paid in advance to the employees. In practice, the LG pays the amounts payable to the employees and recovers them afterwards from the receivers and liquidators. The LG supports employees in case of bankruptcy, insolvent liquidation and business closure.
Following certain legal criteria, the LG makes different kinds of payments to the employees: Closing-down indemnities, contractual indemnities, pension contributions, bonuses, holiday allowance, and severance payments based on legislation and on certain collective agreements.
g. Leased or Seconded Employees
A “lease” of employees can only be arranged through temporary work agencies, namely an agency for the purpose of hiring out their employees to other companies in need of extra workers. However, these companies will not become employers to such temporarily employed employees, but will instruct them in their day-to-day work during the ‘lease’ period.
“Leased employees” are protected by the Danish Act on Temporary Work (Act no. 595 of 12 June 2013), which provides that the hired employees are entitled to the same level of salary, benefits and working conditions as if they were employed directly by the company hiring them.
A secondment of employees will typically only take place through an agreement entered between the seconded employee, the employer and the company to which the employee will be seconded, typically for a limited period of time.
h. Regulations of the Different Categories of Contracts
In Denmark, employment relationships are regulated through legislation, collective bargaining agreements or individual agreements. However, all employment relationships (provided they exceed one month’s duration and the employee works on average more than eight hours per week) must adhere to the mandatory Danish Act on Employment Contracts (Act no. 240 of 17 March 2010). This Act regulates terms and conditions of employment and sets out what clauses must be included in an employment contract, such as salary and benefits, holiday entitlement, notice period, place of work, whether the employment is covered by a collective bargaining agreement, etc.
Finally specific rules apply to particular groups of employees, such as the Danish Act on Seamen (Act no. 73 of 17 January 2014), the Danish Act on Civil Servants’ Rights (Act no. 488 of 6 May 2010) and the Danish Act on Farming and Household Assistants (Act no. 712 of 20 August 2002).
In comparison, agreements entered into with independent contractors are not regulated and there are no Acts which regulate the engagement of independent contractors. Instead, the general civil, commercial and corporate laws will apply to an independent contractor agreement.