a. Factors that Determine Who is an Employee and Who is an Independent Contractor
According to the Portuguese Labour Code, employment comprises the commitment of an individual to provide manual or intellectual activity to an employer (company, organization or individual), against payment of an agreed salary and under the employer’s supervision and direction, this being materialised on the employer’s power to give orders to the employee, on the way to perform the work. In independent contracting, the provider undertakes to render a certain result through his or her manual or intellectual work and is not subject to the counterparty’s power to give orders that is found in the employment type relationships.
Legal subordination (the power to give binding orders) is pointed out as being the decisive criterion to draw the line between employment relationships and independent contracting (self-employment). Nevertheless, in view of the difficulty to distinguish, in practical terms, cases that should qualify as one or the other, case law and authors have elected typical factors, which suggest the existence of subordination. The most relevant are:
- working time fixed by the beneficiary of the activity (the presumed employer);
- work being provided in a specific place determined by the presumed employer;
- the use of working tools provided by same presumed employer;
- payments being made on a periodical or regular basis (particularly fixed amount payments);
- the shaping of the work performance being based on regular orders and instructions from the presumed employer; and
- integration of the presumed employee/independent contractor in the presumed employer’s organisation (or production) structure.
Additionally, when two of the abovementioned factors are met, there is a legal presumption that the case should be qualified as employment (even if the provider is formally presented as an independent contractor) meaning that in a specific lawsuit, the burden of proof on the qualification of the case as an independent contractor relationship will fall upon the presumed employer.
b. General Differences in Tax Treatment
Employers, employees and independent contractors are, in general, subject to contributions for the Social Security system, although there are separate rules and systems for employees, on the one hand, and independent contractor on the other. The amount of contributions is calculated on the basis of the gross amount or the salary or fees received.
In the case of employment relationships, the social security contribution rate is 34,75% (of the employee’s monthly gross salary). 23,75% is borne by the employer and 11% by the employee (being deducted by the employer from the employee’s monthly salary, upon payment). In case of non-profit organizations, the employer’s rate is reduced to 22,3%.
In the case of independent contractors, social security contributions are due and fully borne by the independent contractor and calculated at the rate of 29,6% of fees received, although there are some special regimes subject to different contribution rates.
When 80% or more of a given independent contractor annual turnover (fees) are paid by the same entity, or group of entities, and such annual fees are equal to or exceed 2.515,32 €, the same entity is subject to an annual social security contribution equal to 5% of the annual fees it paid to the independent contractor.
There are a few specific cases where independent contractors are exempt from paying contributions to social security. These include cases of independent contractors that:
- accumulate self-employment with employment, provided that the following conditions are met:
– the activities are separately provided to different entities that do not belong to the same company group;
– the employment activity is subject to social security contributory system that includes all the social protection covered by the social security system applicable of independent contractors;
– the amount of the monthly average salary covered by such social security system is equal to a minimum monthly value of 421,32 € which is a reference amount fixed annually as a social support index (IAS).
- are simultaneously pensioners, within the cases where professional activity can be legally cumulated with payment of pension allowances;
- during the previous year have paid contributions over an annual income amount that does not exceed 2.527,92 € (which is six times the amount of the social support index – IAS).
In all cases and as a rule, tax withholdings must be made over amounts paid to the employee and to the individual independent contractors although the rates depend, in the case of the employees, on a specific table that takes into account both the monthly income and the employee’s family situation.
Services provided by independent contractors are generally subject to VAT (Value Added Tax). In some cases, however, services rendered by independent contractors are VAT exempt, that being the case for example, of independent contractors whose yearly turnover of taxable income does not exceed 10.000 € or in the case of specific activities connected with medical services, education, or arts and culture.
c. Differences in Benefit Entitlement
With the exception of the requirement to pay social security when the fees paid by a specific company or company group represents 80% or more of the independent contractor’s annual turnover, there are no mandatory benefit entitlements for independent contractors.
Contrarily, employee benefits include paid holiday leave of at least 22 working days and special allowances such as vacation and Christmas allowances (of an annual amount, in both cases, roughly equivalent to one month’s pay). Other leaves, such as marriage leave, maternity and paternity leaves and some authorised absences for family care, are also granted by law to employees. Collective bargaining agreements usually include other benefits such as meal and transport allowances, school allowances for employee children, seniority bonuses and in some cases, complementary pension plans or other social benefits.
d. Differences in Protection from Termination
Employees benefit from robust protections against contract termination considering that, as a rule, employees are not granted discretionary contract termination rights (the exception being termination during an initial probation period. Terms for the probation period vary between 15 and 240 days, according to the type of activity and the nature of the agreement; for average permanent employment contracts, the probation period duration is limited to a maximum of 90 days). Temporary contract duration agreements are also restricted to cases legally grounded on temporary company needs or on specific legal provisions that expressly allow temporary engagement and these are restricted. Therefore, termination upon contractually agreed duration is also limited to legally allowed cases.
Additionally, the employer is only allowed to terminate the contract in case of (a) mutually agreed termination; (b) dismissal for disciplinary grounds subject to prior internal dismissal disciplinary procedure; (c) individual or collective dismissal (for economical, structural or technological reasons), subject to an internal procedure and prior notice periods, which depend on the seniority of the employees affected by dismissal; (d) dismissal grounded on the employee’s failure to adapt to the position, subject to specific and detailed pre-requisites.
Lawful dismissal for disciplinary reasons is limited to cases where the employee commits a serious offense that makes it unreasonable for the employer to keep the employment relationship (just cause). The following cases are examples of just cause under Portuguese law, provided they are sufficiently serious (or their consequences are sufficiently severe) to make it unreasonable, in practical terms, to maintain the existing employment relationship: (i) illegitimate disobedience to lawful orders received from the superiors; (ii) breach of rights and guarantees of other employees; (iii) repeated conflict provocation with other employees; (iv) repeated lack of interest in performing duties that are part of the job role, with the required level of care; (v) serious material damages caused to the employer; (vi) untrue statements in absence of justification; (vi) unjustified absence from work causing direct damage or serious risks to the employer (this being presumed as such, if the number of unjustified absences in any calendar year reaches five successive or ten interrupted absences); (vii) intentional non-compliance with health and safety rules at work; (viii) physical violence, insults or other offences punishable by law, committed at the workplace in relation to other employees, members of corporate bodies or the individual employer not belonging to such bodies or his delegates or representatives; (ix) kidnapping and in general all crimes against freedom of those persons referred to above; (x) breach or refusal to comply with court or administrative decisions and acts; (xi) critical productivity reduction.
In these cases, dismissal depends on the employer organising a formal (non-judicial) disciplinary proceeding, subject to strict formalities and to time limits. As a rule, proceedings must be initiated within 60 days upon the employer becoming aware of the infraction and, in any case, within one year as from the moment the infraction took place (unless the behaviour also qualifies as a criminal offence, in which case, the criminal law statute of limitations period, if longer than one year, will apply).
Individual or collective dismissal is also admitted when based on objective grounds. These are restricted to economical, structural or technological grounds and may consist of market grounds understood as a reduction in the employer’s activity, caused by a decrease in demand for its goods or services or the impossibility, whether legal or practical, of placing those goods or services in the market. The employer’s economical or financial imbalance, a change to its business activity, the restructuring of the business organisation or the replacement of the employer’s main products may qualify as structural grounds. Technological grounds relate to changes in production techniques, automation of production tools, computerization of services or automation of means of communication.
Redundancy on objective grounds is subject to a formal internal procedure that must be initiated by the employer, which involves employee representative structures and may also involve the labour authority observers. Strict notice periods also apply, including a prior notice for the final dismissal communication to be effective, which, depending on the affected employee’s seniority, varies between 15 (employees that have been with the employer for less than one year) and 75 days (employees whose seniority is equal to or exceeds 10 years).
Severance compensation in cases of individual or collective dismissal (for economical, structural or technological reasons) as well as in dismissal grounded on the employee’s failure to adapt to the position, is based on a calculation that takes into account the affected employee’s seniority and remuneration.
Pregnant employees, those that have given birth in the previous 120 days and those breastfeeding, as well as any employee on paternity leave, enjoy special protection against contract termination. Dismissal of any of these categories of employees is illegal without a prior favourable opinion from the competent authority in the area of equality of opportunities between men and women. If the authority states an unfavourable opinion, the employer may only proceed with dismissal of the protected employees through a court decision, recognising the existence of a valid motive in a lawsuit, that may be filed up to thirty days after the unfavourable opinion has been issued.
In contrast, independent contractors who are self-employed do not benefit from specific legal protection against termination and the parties are free to agree upon the termination conditions in the contract.
Nevertheless, if an independent contractor is dismissed and he/she believes that the contractual relationship materially qualifies as an employment agreement, a lawsuit may be filed in the labour courts, within the year immediately following termination, to assess the nature of the former contractual relationship and assess, under such light, its termination by the company.
e. Local Limitations on Use of Independent Contractors
In Portugal, there are limitations on the use of independent contractors as such. Nevertheless, there are, as referred to above, measures that envisage to excluding companies from engaging and keeping employees at their service agreements that, formally, are qualified as independent contracting.
f. Other Ramifications of Classification
Strict health and safety provisions at work directly benefit employees and are, generally, not required in the case of independent contractors.
Working time limitations and minimum rest period provisions also apply in the case of employees. Generally, working hour limits are set at eight hours a day and forty hours a week, although collective bargaining agreements very frequently include shorter working hours. There are a number of flexibility instruments that in some cases depend on an agreement between employer and employee and sometimes on collective bargaining agreements. In all cases, nevertheless, certain maximum limits apply. Additionally, the employer must keep an accurate work time registration system that allows the labour authorities to check the work performed, per employee, per day.
No mandatory working time restrictions apply to independent contractors.
There are two work compensation funds, which employers must contribute towards monthly, with 1% of remunerations paid to employees engaged after October 2013. These funds aim at guaranteeing that employees receive at least 50% of mandatory severance compensation payments.
g. Leased or Seconded Employees
As a principle, under Portuguese law, employers are prevented from assigning employees to other entities, in terms that allow the recipient entities to exercise authority and supervision powers over the employees, whilst the assigning employer keeps the employment contractual relationship with the original employee.
One of the allowed exceptions to the above mentioned principle is that of temporary agency work (temping agencies) holding the required license to temporarily assign workforce to third parties in exchange for remuneration, as a main business activity. Other than being additionally allowed to provide employee selection, orientation and professional training services as well as services in the areas of human resources management and consultancy, temping agencies are not allowed to provide other services. In Portugal, there are two types of temporary agreements between an employee and a temporary work agency (tempting agency): a fixed-term temporary agreement and an open-ended temporary agreement.
The agreement entered into between a user company and a temporary work agency is of a temporary nature. This is the agreement under which the employee is leased by the temporary work agency to the user company in need of workforce.
The temporary agency work is therefore based on a triangle type relationship involving two different contracts and three entities. The triangle comprises two separate (but frequently connected) contracts: (i) a labour relationship between the temping agency and the temporary work employee; and (ii) a service agreement (a workforce lease agreement to be more precise) between the temping agency and the user company, by which the first agrees to assign its temporary work employee(s) to the latter. There is no direct contractual relationship between the user and the temporary work employee. Temporary workforce lease agreements can only be entered into in specific cases, connected with temporary company workforce needs, such as for temporarily filling-in vacant employment positions during a recruitment process or for replacement of employees that are off on sick leave or that, for any other reason, are temporarily away from work. Other cases in which temporary workforce lease agreements are admitted are cases where additional workforce is required to respond to temporary activity fluctuations or company intermittent workforce needs, or cases where the implementation of specific limited duration company projects are at stake.
Specifically, the cases under which the use of temporary agency work is allowed are the following: (i) direct or indirect replacement of an employee who is temporarily absent; (ii) direct or indirect replacement of an employee with a pending lawsuit against the company challenging dismissal (and requesting reinstatement in the job); (iii) direct or indirect replacement of an employee on unpaid leave; (iv) direct or indirect replacement of a full-time employee temporarily providing part-time work; (v) seasonal activity workforce needs; (vi) exceptional temporary increase of the company activities; (vii) workforce required to execute an occasional task or defined and non-lasting service; (viii) vacant job position, during the respective recruitment process; (ix) intermittent manpower requirements resulting from activity fluctuations during days or part of days, provided the use of temporary work does not exceed half of the users standard weekly working hours; (x) replacement of employees that are subject to intermittent absence periods to provide direct family support, of a social nature, for days or part of days; (xi) workforce requirements in temporary projects.
Apart from tempting agencies, the other possibility for temporary employee assignment is an employee assignment between affiliated companies or entities sharing common structures. Employee assignment in these cases is limited to a maximum period of five years.
In these cases, assignment is possible provided the following requisites are met: (i) the assigned employee is a permanent employee of the assigning company; (ii) the assignment is agreed between affiliated companies (or companies that share common organization structures or means); (iii) the employee agrees to the assignment; (iv) the assignment is agreed for fixed periods (e.g. one year) that may be automatically renewable up to a maximum of five years; (v) the assignment agreement is made in writing.
h. Regulations of the Different Categories of Contracts
Employment contracts are subject to the provisions of the Portuguese Labour Code and some specific labour and social security legal acts. In a number of cases, collective bargaining agreements agreed between unions and either companies or company associations also apply to unionised employees and employers that have executed such agreements or that belong to the relevant employer associations. In a number of cases, companies agree to extend the collective agreement provisions to non-unionised employees and in a number of cases, government decisions extend the provisions of collective bargaining agreements to a whole business activity or economic sector of activity, either on a restricted geography or to all of the Portuguese territory. These provisions, regulating employment relationships, do not apply to independent contractors.
The Portuguese Civil Code contains provisions on service agreements that specifically apply to independent contracting and, as a rule, these are not restrictive or mandatory provisions, but mostly subsidiary provisions that apply when the parties have not provided for differently, in the contractual document.