a. Factors that Determine Who is an Employee and Who is an Independent Contractor
The Italian Civil Code defines an employee as a person who commits himself/herself for remuneration, to cooperate in the company’s business by contributing his/her manual and/or intellectual activity in the service and under the control of the employer. This means that the main features of employment are cooperation1 and subordination.2
Therefore, the main feature of the subordinate employment is that the employee is subject to the employer’s organizational, directive and disciplinary powers.
Further additional features which help identifying a subordinate employment, identified by Case law, are the absence of any business risk on the employees, the obligation to follow a fixed working time, to justify absences and agree holidays, a fixed (meaning not related to the achievement of targets) salary paid at fixed deadline.
Employees are mainly divided into: open-ended/fixed-term employees, full time/part-time employees, and apprentices (an apprenticeship contract is aimed at both training
and employing young people. At the end of the contract, if none of the parties withdraw, the relationship continues as an open-ended employment relationship).
Pursuant to the Italian Civil Code, an independent contractor (or self-employed person) is a person who undertakes to perform a job or a service for a consideration, without being under the principal party’s control and supervision.
In the field of the distinction between subordinate employment and self-employment, we should also take into account the employment contract belonging to the grey area
between self-employment and subordinate employment such as the coordinated and continuous collaborations (“Co.Co.Co”) and the project-based contract, which is a particular form of collaboration characterized by elements of the self-employment relationship and elements of the subordinate employment relationship.
In the last year, the grey area has been deeply reviewed: from the one hand, the Italian legislator eliminated the project-based contract and, on the other hand, starting from 1 January 2016 the Italian legislator changed the rules governing the “Co.Co.Co” and the VAT consultancy contracts, considering subordinate employment the contractual relationships providing personal and continuous work activities which are regulated and organized, also in relation to timing and workplace, by the employer, except for:
- collaboration relationships envisaged and governed by collective bargaining agreements aimed at meeting the productive and organisational needs of specific sectors;
- forms of collaboration provided for in the framework of intellectual professions for which enrolment in specific professional registers is required;
- forms of collaboration provided by members of boards of directors or of audit comminees of businesses;
- forms of collaboration provided in the sports sector.
Always in order to make the open-ended employment contract the regular form of employment, the Legislative Decree no. 81/2015 has provided that from 1 January 2016 employers entering into a permanent employment contract with individuals who already have a self-employment contract with the same employer, are entitled to the cancellation of the tax, social security contribution and administrative violations committed in relation to the misclassification of the working relationship, if the employee signs a settlement agreement with regard to the previous employment contract and, in the following 12 months from the hiring, the employer does not dismiss the employee for reasons other than just cause or subjective justified reasons.
Given the above, today, the main categories of self-employed persons are the following: freelance professionals, the so-called “VAT number consultants”, those providing coordinated and continuous collaborations (“Co.Co.Co.”) and commercial agents.
Agency contracts, are governed by the Italian Civil Code and if applicable by the Economic Collective Agreements (“ECA”) for agents.
Agents, who must be qualified and enrolled with the Chamber of Commerce, perform their activities at their own risk, undertaking to promote, in return for a commission, the execution of contracts in a specific territory, on behalf of one or more principals.
Agents must perform their activities according to the instructions received from their principal; however those instructions shall not cancel out the autonomy of the agent, who always remains a self-employed person.
Under Italian law, agency agreements may be established either for a fixed-term or an opened-term.
In case of termination, the Italian Civil Code provides for an indemnity to be granted to the agent.3
Social security contributions with ENASARCO, (the national institution providing assistance and welfare to trade representative and agents and their families) are compulsory for all commercial agents who perform their activity in Italy. The principal must enroll the agent with ENASARCO, which (i) provides social security benefits to agents in addition to the pension treatment granted by INPS, and (ii) pays to agents a part of the termination indemnity (so called FIRR) upon expiration or termination of the agency agreement for any reason whatsoever.
The applicable principles in order to distinguish an employee from an independent contractor can be found in case law.
The Courts constantly reiterate that, in principle, every activity may be indifferently fulfilled based on an employment relationship, rather than a self-employed one.
This means that the distinction between an employee and an independent contractor consists not in the kind of activity, but rather in the way in which it is performed.
The employment relationship is regulated by the provisions set forth by Sections 2104 4 and 21065 of the Italian Civil Code (while, vice versa, such provisions are not applicable to a self-employed relationship).
In particular, a worker is considered an employee if he/she is subject to the directive, organizational and disciplinary power of the employer. These powers consist in the employer giving specific orders as well as the exercise of a constant activity of vigilance and control on the execution of the employee’s duties, and in the giving of sanctions in case of breaches made by the latter.
On the other hand, the contractual typology formally chosen by the parties, and other criteria like the continuity of the activity, adhering to a predetermined working time, the appointment of a fixed workspace within the employer’s premises, the payment of an agreed remuneration at fixed intervals, the absence of an even minimal business structure (by the worker), are complementary to and of secondary value in qualifying the relationship.
Such criteria, however, could on the contrary, be considered decisive in case of duties which, given their intellectual nature, rather than the fact that they are merely repetitive, cannot be subject to a continuous supervision by the employer/principal.
b. General Differences in Tax Treatment
Employee’s remuneration is subject to income tax (the so-called IRPEF). The employer, acting as a withholding agent, must withhold IRPEF as well as other local taxes in the pay slip and then pay them to the tax authorities.
The same applies to self-employment, although the remuneration of independent contractors also attracts VAT, payable by the principal. Social security contributions for employees are around 33% of the employee’s remuneration; around 10% borne by the employee, the remaining 23% by the employer. The employer withholds the amount from the employee’s pay slip and is responsible for making payment to the relevant public bodies (INPS and INAIL). The employer will incur administrative sanctions for the delay or omission in payment.
With regard to independent contractors, generally the remuneration paid corresponds to the actual company cost, since social security contributions are then directly paid by the independent contractor (in certain cases the principal may be required to pay the worker a contribution towards social security contributions of around 4%. There is a peculiarity here in that for the so-called Co.Co.Co.’s workers, although considered independent contractors, two thirds of social security contributions (around 28%) are due by the principal, who is also responsible for payment to INPS and INAIL of all such contributions.
c. Differences in Benefit Entitlement
In general, mandatory benefits provided for by the law or by the collective agreements in favor of employees (holidays, sickness and injury benefit, company car, PC or cell phone, etc.) do not apply to self-employed persons, who are compelled to perform their activity properly organizing the required time and all the necessary means, accepting all the relevant hazards.
For as regard parental leave anyway, the Jobs Act has finally provided measures to support parental care, by extending paternity leaves to all categories of workers. Plus, self-employed workers will be receiving maternity allowances even when employers did not pay contributions associated with their work.
The principal and independent contractor may however agree on specific benefits and in cases, even more favorable than those indicated above.
Furthermore, Co.Co.Co’s. workers are entitled to be treated similarly to employees in this regard.
d. Differences in Protection from Termination
From an Italian employment law perspective, the real differentiating factor between employees and self-employed persons can be found in the context of unfair termination of the respective relationships. Employees hired under an open-ended contract are strongly protected by the law.
In fact, the dismissal of an employee hired under an open-ended contract can be grounded only on a just cause (Art. 2119 of the Italian Civil Code) which is when occurs a cause that does not allow the working relation to continue even on a provisional basis (no notice) or when occurs a justified reason (Art. 3 of Law no. 694/1966) distinguished in subjective (serious breach of contract) and objective (corporate reasons or in any case reasons not related to the employee’s conduct). ). This latter type of dismissal compels the employer to give the employee the notice period provided for by the applicable collective agreements, or to pay him/her the relevant payment in lieu of.
Dismissals must be served in writing
The employee may challenge the termination by filing a lawsuit within a maximum of 240 days from the date of the dismissal. In particular, pursuant to Art. 6 of Law no. 604/1966, the worker who wants challenge the dismissal as unfair has 60 days, starting from the receipt of the dismissal letter, to challenge the dismissal Out-of-Court (usually by way of a lawyer’s letter) and a further 180 days to file a Court claim. Please find below a brief outline of the consequences of dismissal held as unfounded in Court:
On the other hand, except for contractual provisions to the contrary, the principal may always freely terminate an open-ended self-employment relationship.
The independent contractor is generally not granted any specific protection against the termination of his/her relationship (except in some cases the right to be given a notice period or to be paid the relevant payment in lieu thereof, or the right to be paid some particular indemnities – see the agency contracts).
Whereas in the case of a fixed-term relationship, regardless of its nature (employment or self-employment) the employer/principa 6 cannot withdraw until the expiry date, except for (i) where there is a just cause for termination or, in project-based contracts, where the collaborator matter-of-factly shows his/her professional unfitness, (ii) cases which were specifically identified in the contract, and (iii) the general remedies against the non-performance provided for in the Italian Civil Code.
The so-called termination ante tempus (that is, before the expiry date) by the employer/ principal entitles the employee/self-employee to claim the remuneration due until the natural expiry date.
e. Local Limitations on Use of Independent Contractors
With regard to the limitations on the use of independent contractors, Italian employment law does not establish particular restrictions, even from a quantitative point of view, in compliance with the principle, provided for by the Italian Constitution regarding freedom of economic enterprise granted to the employer.
The applicable collective agreements may however fix the maximum percentage of independent contractors (in particular for workers on project-based contracts) in relation to the total workforce.
f. Other Ramifications of Classification
There are some important ramifications of the classification, such as:
- self-employed persons are not entitled to temporary lay-offs schemes;
- self-employed persons cannot exercise union rights in the workplace, as provided for by Law no. 300/1970;
- if an employer becomes insolvent, its employees take priority over the other creditors (including self- employed persons) for unpaid remuneration and social security contributions.
g. Leased or Seconded Employees
The use by an employer of employees hired by another employer is possible, but only in the ways and within the limits provided for by Italian employment law, since in general the “leasing” of manpower is not permitted.
The rules on supply of labour introduced by the Legislative Decree no. 276/2003 have been replaced by Articles. 30-40 of the Legislative Decree no. 81/2015 with the implementation of Law no. 183/2014.
Through staff leasing, the user can request employment agencies authorized by the Ministry of Labor 7 and registered in a special register, to supply manpower.
After the amendments of the Legislative Decree no. 81/2015, labour supply, as a commercial contract, may be:
- fixed-term and without technical, production, organizational and replacement reasons even if connected to the ordinary business of the user (as before);
Unless otherwise envisaged in collective agreements, the number of workers leased under labour supply agreements on an open-ended basis may not exceed 20% of the number of permanent workers employed by the user company on 1 January of the year in which the agreement is stipulated.
The supply of workers on an fixed-term basis, meanwhile, is subject to the quantitative limits set forth in collective agreements applied by the user company.
For the duration of the placement, supplied employees perform their duties in the interests of and under the instructions and control of the user (disciplinary powers however remain with the employment agency) and are entitled to the same working conditions as those equivalent employees of the user, and are also entitled to exercise union rights.
In the case of workers engaged under open-ended contracts with the agencies, the same are entitled to a monthly indemnity for their availability, in the periods where they do not have any job.
The user is jointly liable together with the agency for the remuneration and social security contributions due to the agency employees, and is also responsible for the damages caused to third parties by such employees in the execution of their duties.
The labour supply, as described above, presents the advantage for the user that it can avail, for the period of time deemed necessary, of a person who – on one hand – is for all intents and purposes an employee (and therefore who is subject to the directive and disciplinary power, as well as to other duties like that of fidelity), but – on the other hand – is not on its pay roll.
However, the labour supply means that the user has to bear the costs of work as well as the fees related to the agency’s service.
The employer may also use seconded employees.
According to Italian law (Section 30 Legislative Decree no. 276/2003), the secondment of an employee for the execution of specific duties presupposes that his/her employer has a real and actual interest in it.
Secondment is temporary; however no set maximum duration is provided for by law.
The worker’s employer remains legally responsible for all the economic and regulatory treatments due to him/her during the secondment (usually, the costs are then tipped over to the other employer).
The applicable collective agreements may contain provisions regulating specific payments (e.g., the reimbursement of the relocation cost related to the secondment) to which the seconded employee is entitled, or these are agreed directly with the seconded employee. The consent of the employee to his/her secondment is not required, unless the secondment involves a change of duties.
The secondment must be necessarily justified by technical, production, organizational or replacement reasons, when it entails the transfer of the employee to a production unit located more than 50 km from the one to which he/she was assigned before the secondment.
In case of violation of the main principles applicable to secondment (interest of the worker’s employer and temporary nature), the employee may claim the constitution of an open-ended employment contract with the end user of his/her services.
Finally, the employer may enter into a service agreement, through which the contracting firm’s employees perform their duties in favor of the employer.
According to Section 29 of Legislative decree no. 276/2003, service contracts are characterized by the fact that the contractor organizes all the necessary means for the execution of the service or the work, assuming the business risk and exercising the organizational and directive power over its employees.
Also, in this case, the employer is allowed to (indirectly) use employees without the need to hire them, simply paying the costs for the services received, as agreed with the contractor.
However, there are possible disadvantages. Firstly, unless otherwise provided by the applicable national collective agreements, the principal is jointly and severally liable with the contractor and each eventual sub-contractor, for a period of two years from termination of the contract, to pay the employees of the contractor and/or any sub-contractors, their salaries as well as social-security contributions and insurance premiums owed in relation to the period of performance of the contract8. Similar joint and several liability between principal and contractor is envisaged by law (Section 26 of Legislative Decree No. 81/2008) for any workplace accidents not covered by INAIL sustained by the contractor’s employees that occurred due to the violation of workplace safety statutes.
Secondly, in the absence of the elements indicating a true service contract, the contractor’s employee (again) may claim the constitution of an open-ended employment contract with the principal.
New rules concerning the secondment of employees in the European Union are set forth in Legislative Decree no. 136/2016 which has implemented the EU Directive 2014/67/EU.
h. Regulations of the Different Categories of Contracts
In Italy, the different types of employment and self-employed relationships are substantially regulated by the civil code or by specific laws.
In particular, the open-ended employment relationship is governed by the civil code; while some particular aspects (working time, health and safety at work, dismissals, etc.) are governed by separate and recently enacted laws.
The characteristic elements of fixed-term, part-time and apprenticeship relationships are regulated by ad hoc laws while other rules not expressed there can be derived – if not conflicting – from the rules applicable to open-ended contracts.
Each of the self-employed relationships, instead, has its own regulation, each one is very different from the other: therefore, common roots can rarely be found.
General civil law principles regarding obligations and contracts (the principles of correctness and good faith, resolution or suspension of the contract for intervened impossibility of the performance, etc.) may be used for both employee and self-employed relationships, in the absence of special regulations, provided that they are compatible with such relationships.