a. Laws and Guiding Principles
A re-characterization of an independent contractor may occur if the person performing the work is deemed to be an employee, for example in terms of the Act on Employment Contracts, the Holiday Act or the Salaried Employees Act. A re-characterization of an independent contractor as an employee may also take place if the tax authorities conclude that the payment for services under the contract with an independent contractor in reality, is payment for work performed under an employment relationship.
For example the Danish Holiday Act Section 1.2 (Act no. 1177 of 9 October 2015) defines an employee as follows:
”For the purpose of this Act an employee shall be taken to mean a person receiving remuneration for personal work in an employment relationship.”
As the wording of the above definition may be considered “circular” and no general rule exists in Danish legislation to assist with defining an employee or an employment relationship, a re-characterization can only be made by the Danish courts after an in-depth analysis of how the parties interacted with one another. The courts will consider a number of factors, but the most important guiding principles to determine if work was carried out by an employee or an independent contractor will be the following criteria:
• if the person carrying out work is subordinate, takes instructions and works under the supervision/control of a manager;
• if the person regularly or perhaps even on a daily basis carries out work for the same employer and typically works for only one employer;
• if the person carries out work for only one employer or if he/she has other customers;
• if the person fulfills his/her work using the same working methods as ordinary employees employed by the employer, including if the person has a fixed number of working hours, makes use of tools owned or provided by the employer, makes use of the contractor’s canteen facilities, participates in social activities available to the employer’s employees, etc.
• if the person is required to perform the work personally and is not allowed to delegate the work to another person;
• if the person is responsible for the outcome of the work;
• if the person runs a personal, economic risk when carrying out work for the employer; and
• if the person has established his/her own independent business, registered with the Danish Business Authority and the tax authorities.
b. The Legal Consequences of a Re-Characterisation
In the event of re-characterization, there are several legal consequences regarding employment, tax and social security relations, which will affect both the independent contractor and the other party to the contract.
If a relationship is re-characterised as an employer-employee relationship, the independent contractor will be deemed to be an employee and will be entitled to claim a number of benefits, such as the right to be dismissed with notice (either through legislation, a collective bargaining agreement or a customary notice), dismissal with salary, pension contributions and other benefits under the relevant collective bargaining agreement, the payment of holiday pay, etc. The employee could also claim a legal severance payment in the case of unfair dismissal.
Non-compliance with the Danish Holiday Act will result in both the obligation to pay for holiday periods, which should have been supported by the employer and an obligation to pay salary or holiday allowances for future holiday periods. Furthermore, the employer will be liable for interest on holiday pay not paid to an employee and is likely to be fined for non-compliance.
Furthermore, if an employment relationship was subject to a collective bargaining agreement, but the agreement was disregarded by an employer, this will be considered a breach of the collective bargaining agreement, and will lead to a fine being imposed in accordance with Labour Court practice.
The employer could be held liable for having withheld personal income tax, especially if the independent contractor cannot pay the income tax. Tax fines are likely to be imposed. However, the employer will not be solely liable for the taxes, because if the authorities request payment of the taxes from the employer, the latter will have recourse against the employee for the amounts paid. Furthermore, both the employer and the employee will be fined for tax evasion.
Supplementary Pension Scheme
In the event of a re-characterisation, the supplementary pension scheme will become applicable. In terms of this scheme, the 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. The employer’s contribution is a fixed monthly payment of approximately EUR 40 covering a fulltime employee; the employee’s contribution is approximately EUR 20. Danish authorities may, in principle, impose a fine as a penalty for non-compliance with the scheme.
c. Judicial Remedies Available to Persons Seeking ‘Employee’ Status
A person seeking employee status may attempt to negotiate with his/her employer, but would normally have to file a lawsuit with the ordinary courts. If a trade union finds that an employer is in breach of a collective bargaining agreement, the Danish Labour Court will be asked to rule on this question.
Typically, it is only when the independent contractor relationship comes to an end and the individual concerned initiates legal proceedings, that the court will examine the employment status, as well as the contractual terms. When there are a sufficient number of elements, which are not compatible with the chosen form of employment status, it will be re-characterized as an employment contract and the individual concerned will, based on their claim, be awarded several amounts depending on the execution and termination of their employment contract.
An alternative is to request the holiday authorities to assess whether the person is entitled to holiday pay or salary during holiday periods, which is an equivalent to seeking employee status through the courts. If the employer rejects the ruling from the holiday authorities, the employee will need to file a lawsuit against the employer.
d. Legal or Administrative Penalties or Damages for the Employers in the Event of Re-Characterisation
If the individual is considered an employee, he/she is likely to be entitled to compensation for any economic loss suffered, including for example salary and benefits during a notice period, severance pay and holiday pay accrued.
If the re-characterization is initiated by the tax authorities based on taxation issues, both the employer and the employee may expect to be liable for the payment of tax at source for the period of time when the independent contractor actually held the status of employee. Furthermore, the employee can expect an investigation into and a re-examination of his/her tax accounts for a number of previous years and tax-deductions made will be investigated in order to determine if they were made wrongfully.
Non-compliance with the Danish Holiday Act and with tax legislation is likely to lead to the imposition of fines and payments for interest related to mandatory payment of holiday pay and tax at source. Extensive tax evasion may qualify as a criminal offence and a breach of the Danish Criminal Code.