a. Factors that Determine Who is an Employee and Who is an Independent Contractor
The Romanian Fiscal Code provides for legal definitions for Dependent Activities –
“any kind of activity performed by individuals during an employment relationship that generates income”
– and Independent Activities –
“any kind of activity performed by individuals in order to obtain income, that meets at least four of the following criteria:
3.1. the individual has the freedom of choice of where and how he performs his activity and the program for the activity;
3.2. the individual has the freedom to perform activity for more than one customer;
3.3. risks inherent to the activity are assumed by the individual who performs the activity;
3.4. the activity is performed by using the patrimony of the individual that performs the activity;
3.5. the activity is performed by the individual through use of his intellectual and/or physical performance, depending on the specific activity;
3.6. the individual is part of part of a professional body/professional order that has representation regulatory and supervision rights over the profession conducted un-
der special regulations governing the organization and the exercise of the profession in question;
3.7. the individual has the freedom to conduct his activity directly by hiring personnel or in collaboration with third parties, according to legal provisions”
The new legal definitions were introduced in the new Fiscal Code that became applicable in 2016 and are a result of the confusion the old legal definitions that were unclear created. As a result of being regulated as distinct activities by tax law they have different legal regimes and they are submitted to different tax regimes.
Dependent activities, meaning those arising from an employment relationship, are subject to special regulations of employment law, while independent activities carried out by individual contractors are – as a rule – subject to the general provisions of civil law. In order to perform dependent activities an individual employment contract between employer and employee must be concluded according to the Romanian Labour Code, while independent activities are provided on the basis of civil contracts concluded in the general conditions stipulated by the Romanian Civil Code. Also, as a result of the new definition of independent activities, the legal provision clearly states that they can be performed on the basis of specific professional contracts such as legal assistance contracts specific to the lawyers.
Individual employment contracts are extensively regulated by the Romanian Labour Code, which provides a framework of strict rules on the conclusion, enforcement, amend-ment, suspension and termination of such contracts, while independent activities can be provided by individual contractors under a variety of civil contracts, some of which enjoy a special regulation in the Romanian Civil Code – such as the mandate contract, others just observing common rules stated in the Romanian Civil Code. Romanian legislation does not regulate a special contract under which the independent activities are carried out. However, indirect legal provisions and common language, use the general term of “service providing contracts” when referring to the legal basis on which independent activities are provided by individuals.
Employment status is acquired by individuals only by entering into an individual employment contract that must be concluded in writing in order to be valid. The individual employment contract must be registered in the electronic records of region-al institutions that monitor and control the correct application of employment law, prior to the beginning of the dependent activity. The existence of an individual employ-ment contract validly concluded is what distinguishes the legal status of employees to the legal status of individual contractors. Even the criteria introduced by the new legal definition for the independent activities point to the fact that they have to be analyzed while taking into consideration the content of the contracts the individuals conduct in order to perform the specific activity.
Both individual employment contract and civil contracts, under which independent activities are provided by individuals, are subject to the general principle of mutual consent involving an agreement between the two contracting parties – the individual providing the activity, both dependent and independent, and the beneficiary. However, for the employment contract there are minimal legal limitations under which the parties cannot negotiate certain terms, such as the guaranteed minimum wage or the minimum number of days of annual leave enjoyed by employees, while in civil contracts there can be negotiated clauses without restrictions other than those imposed by general civil legislation on prohibited clauses in any type of civil contract – such as the prohibition for the inclusion of clauses that are a fraud under the law, or immoral clauses. For specific independent professions there can also be legal provisions on the minimum content of the contracts, but usually the clauses that are mandatory are different from the ones in the employment contracts. From the existence of these general restrictions arises a dis-cussion on the simulation of an employment relationship by concluding a civil contract, in order to avoid the legal limitation imposed by employment law. In these cases, the re-characterization of the civil contract as an individual employment contract and the establishment of the existence of a simulation must be made by the court.
In order to limit these attempts to avoid the legal limitation imposed by employment law, individual contractors that provide independent activities are subject to prior authorization under strict regulations. In case of concluding contracts with unautho-rized individuals that provide activities for a beneficiary we can find the premises for unlawfully receiving individuals for work, a conduct sanctioned as a contravention or exceptionally even as a criminal offence according to national law.
In fact, the only legal definition of the individual contractor generated by transposing Directive 89/391/EEC into national law by Government Decision No. 300/2006, referring to the work performed on permanent or temporary sites, it qualifies them as “any person authorized to carry out a professional activity independently and assume contractual duty to the beneficiary … to achieve … works for which he is authorized”.
A separate category of individuals that provide independent activities for a beneficiary is those of the liberal professionals or freelancers – for example health professionals, lawyers, notaries, experts, mediators, etc. Usually these professions have indepen-dent regulations and they are organized according to their own statutes. Given the fact that each liberal profession is exercised under different conditions, for each of them a regime was regulated for the registration, authorization, effective performance of work, membership of professional bodies, their contributions under pension schemes, the possibility to provide the specific activity under the liberal profession status or as an employee (as in the medical staff case). The liberal professionals usually provide their activity on the basis of a collaboration contract regulated by the same statutes.
The employees are conducting their activity in a subordinated relationship with the employer, while the individual contractor is engaged in a civil legal relationship with the beneficiary of the activity, which is characterized by the equality of the parties. Em-ployees carry out their work for the benefit of the employer who assumes the risks of the activity performed for him, while the independent contractor bears the risk of the contract under common law and criteria that distinguishes the independent activities from the dependent activities.
Regarding the remuneration of the activity provided, the employee is legally entitled to receive a salary for his work, while the individual contractor will negotiate the remu-neration for the activity that he performed. A special mention must be made of the fact that the work performed under a full-time individual employment contract is entitled to a minimum compensation for the employees established by government decision – i.e. a minimum gross salary per economy guaranteed for payment. A lower remuneration of an employee cannot be settled upon, even if both parties agree. On the other hand, individual contractors do not receive a guaranteed minimum income, even in the situation in which they are providing an activity comparable to full-time employment. For some independent activities legal previsions establish minimum limits for the remuneration of at least part of the individual contractor’s activities.
b. General Differences in Tax Treatment
As noted at the beginning of this analysis, the tax treatment of the two categories of individuals providing dependent or independent activity is regulated differently. Regard-ing income tax, whether the income is a result of a dependent activity based on an indi-vidual employment contract or the income is a result of an independent activity provided by an individual contractor, the Romanian fiscal system establishes a unique 16% income tax regime that differs in the way in which the income tax is withheld and remitted by the two categories of individuals. Thus, for employees the 16% income tax is calculated, withheld and paid to the tax authorities by employers, while independent contractors must declare income subject to income tax, owing advance payment of income tax or final payments of income tax, according to the tax treatment of their choice.
Regarding social contributions for the employment relationship, they are paid jointly by the employee and the employer the latter having the obligation to calculate, withhold and remit both the employee quota and an additional quota owed by him for the use of employee labor. As for the individual contractors, they are required to pay social security contributions in a direct, declarative system. Efforts have been made in order to equalize the quotas owed by the employees and the individual contractors. For the individuals providing either independent or dependent activity, social rates of contributions are aligned, with the additional quotas being paid by the employer for the use of employee labor. Given the fact that the employer has to pay additional social contributions for each employee, the cost of the activity performed is higher for employers than for the beneficiaries of the activities performed by the independent contractors. It is also one of the main reasons why beneficiaries requiring the work of individuals choose to contract under the civil law rather than establishing an employment relationship.
Regarding persons exercising liberal professions, most of these professions have organized their own pension systems, and professionals are no longer required to contribute to the public pension system. However, a special situation arose with notaries who established their own pension system, but still have the existing obligation to contribute to the public pension system. There are also liberal professions for which there is no organized personal pension system; these professionals are contributing to the public pension system, usually by conducting a contract with the entitled authority.
c. Differences in Benefit Entitlement
Contributing to the medical system in equal ways, both the employees and the individual contractors are medically insured, meaning that they will receive equal treatment in the public medical system (free emergency treatment, low payments in case of hospitaliza-tion, compensations for certain type of medication etc.). However, individual contractors will not benefit from paid medical leave, since this is a compensation that is recognized only for employees.
Both employees and individual contractors benefit from parental (maternal and/or paternal) leave compensation according to their previous income, with the exception of the medical maternal leave that is also recognized only for female employees.
Employees only benefit from unemployment compensations on termination of employ-ment and from incentives provided by the Government in order to encourage them to find work outside their geographical area or to relocate. Compensations and active mea-sures after collective dismissals are recognized only for employees.
Employees contribute and benefit from the national public pension system, while individual contractors can contribute and benefit from the national pension system if they conduct a contract with the entitled authority. As stated, some professions have a distinct pension system and the professionals will contribute and benefit from that distinct pension system.
Social protection measures for employees are recognized by law. These measures in-clude employees’ health and safety, working conditions for women and young people, establishing a minimum gross salary per economy, weekends, paid annual leave, work performed in special conditions, training, and other specific situations. This general rec-ognition of social protection rights has its basis in the constitutional regulation, regu-lations governing each of these issues being alternatively established. Individual con-tractors do not enjoy legal protection on these rights and will negotiate in accordance with the principle of mutual consent the conditions under which they will provide their activities.
Though both the employment contract and civil contracts under which the individual contractors provide their activities involve a negotiation between the parties, for the individual employment contract, the Romanian Labour Code provides a number of essential clauses to be necessarily included in all the contracts, while the content of civil contracts under which individual contractors perform independent activities is not regulated.
An important aspect for the activities performed by employees is that the working pro-gram is regulated and a number of rests periods and benefits for working overtime are guaranteed. Also, there are strict regulations on work performed during the night and work performed during the holidays. For the individual contractors these rights are not guaranteed, so there are no laws regulating their daily rest, their weekly rest, overtime rewarded with time off or extra pay, just as there are no rules in place for the activity conducted during the night or during holidays. This situation may open the possibility of abuses committed by beneficiaries of the independent activities that may require the contractors to work on short deadlines or require an amount of activity that forces the independent contractor to work continuously for a long period of time. Not benefiting from the legal protection of these minimum rights, individual contractors must negoti-ate civil contracts in such a manner as to avoid taking an excessive workload for a short period of time, or accepting tasks that imply working extensively by night time without proper rest time.
Another legally recognized right for employees is the right to paid leave. The Romanian Labor Code establishes a minimum number of days of annual leave that employees may benefit from for their work, with the possibility of negotiating a greater number of days of annual leave by individual negotiation, or collective negotiation, at each employer’s level, while usually independent contractors are paid only for the time they perform the independent activity. Usually civil contracts are concluded for a determined period of time, or for a specific campaign and have no provisions on periods of time in which the contractors are paid the specified amount of money for that period without any activity being conducted during the specific period – similar to a paid leave. As for the right of sick leave, as stated even if the independent contractors are contributing to the public health system, there are no regulations stating the conditions in which the contractors may not perform the activities they were contracted for by the beneficiary due to health reasons. Independent contractors do not benefit from paid sick leave, but can negotiate clauses with the beneficiary on this matter.
d. Differences in Protection from Termination
There are differences in the legal treatment in case of termination of the two types of contracts – individual employment contracts and civil contracts under which the independent contractor provides activities for a beneficiary. The termination of the contracts by mutual consent of the two parties is always possible in both types of contracts. Even in this case, there is a special rule for the individual employment contract stating that in the event of mutual agreement on termination of contract the employee has to be the one who asks the employer for termination of the employment relation-ship, while in civil contracts termination by mutual consent may be requested by either party.
Regarding the termination of contracts by individual initiative of the person providing the activity for a beneficiary, the employees have the legally recognized right to resign, subject to a notice period that benefits the employer. There are legal provisions stating the maximum notice period, but notice periods can be negotiated to a lower level. As for the individual contractors they can denounce a civil contract only in accordance with the common law as long as they negotiated the possibility of unilateral termination of the contract. Considering the activity provided by an independent contractor as having a successive character in accordance with the Romanian Civil Code, in case of termination of the civil contract at the contractor’s initiative, he must provide a “reasonable” notice, in the absence of express contractual provisions on this matter.
The most significant differences in the two types of contract termination can be observed in the case of termination of the contracts by the initiative of the beneficiary. The ben-eficiary may initiate termination of the civil contract, in a similar, symmetrical way that the individual contractors providing independent activities can, according to common law, or to the negotiated provisions of the civil contract, with a reasonable notice period as previously mentioned. As for the employer, it may take the initiative of the individual employment termination for his employees only in the cases stated by the Romanian Labor Code. Thus, the employer may dismiss his employees for reasons regarding the employee’s person, if the employee has committed a serious disciplinary offense, if he is subject to preventive arrest or house arrest for a period exceeding 30 days, or is found to have a physical and/or mental inability to perform specific work activities as well as in the case of professional unfitness of the employee. The employer may also dismiss employ-ees for reasons not related to the employee’s person in case of motivated dissolution of the work position, in which case the dismissal can be individual or collective. Termination of the individual employment contract by the employer in situations other than those covered by the Romanian Labor Code is not possible.
Another important issue related to the termination of contracts by the initiative of the beneficiary is the handling of disputes that may arise from abusive denunciation. Thus independent contractors, if they consider that the beneficiary has abusively terminated the civil contract, can only use actions based on common law and such disputes fall un-der the jurisdiction of judges that handle general civil litigation. As being submitted to common law, most of these disputes are assigned to lower courts, under the criteria of the value of the matter. As for the dismissed employees, the Romanian Labor Code pro-vides a separate section on control and punishment of unlawful dismissals. As a result of these special provisions, the annulment of dismissal measures fall under the jurisdiction of specialized judges at higher courts. There are also special rules of procedure regarding labor disputes, including overturning the legal burden of proof, so that the employer is the one that must prove the legality and validity of the dismissal, even if the claim comes from the employee. These exceptions to common law are a consequence of the subor-dination relationship between employer and employee, which generates the need for additional protections to employees that are considered to be at a disadvantage.
Regarding the restoration of the anterior situation – restitutio in integrum, as a result of a court ruling finding the unfairness of termination by the employer, the employee is provided with the legal right to be reintegrated and the right to receive damages equal to the wage indexed, actualized and updated and all other rights to which he would have received if he had not been dismissed, while for the independent contractors only com-mon law provisions apply in terms of damages.
The labor law provides a number of special cases of rightful termination of the individual employment contract, while civil contracts follow the common law rules for the rightful termination of contracts. Some cases of rightful termination of contracts operate in both individual employment contracts and civil contracts, such as the occurrence of the death of the individual provider of the activity – employee or independent contractor, or the death of the beneficiary – if the beneficiary is an individual, or the completion of the peri-od for which the contract was concluded. On the other hand, there are some special cas-es of rightful termination of the individual employment contract, cases that do not apply to civil contracts. One such case is the rightful termination of the individual employment contract, in the event of a simultaneous fulfillment of standard age and minimum period of contribution conditions in the public pension system. While independent contractors contribute – as a rule – to the public pension system, the civil contracts under which
they provide their activities do not terminate on the simultaneous fulfillment of the two conditions for retirement. Independent contractors are entitled to pension on demand, and the retirement does not have any effect on the existence of the civil contract. For certain categories of professionals – such as lawyers – that contribute to their own pen-sion system, if they retire under their statute provisions, they no longer have the right to fully practice their profession.
Rules on collective dismissal and the protection of individuals in case of collective dis-missal only apply to employees. This is the case, not only because the legal provisions provide the legal frame only for the employees, but also because the individual contrac-tors negotiate and conclude civil contract on their own not as a collectivity of profession-als providing a specific activity.
e. Local Limitations on Use of Independent Contractors
In some specific industries and also in the public services there are some limitations in the use of independent contractors for specific activities. For example, in ports oper-ations the employers can only use the work of employees that are subject to specific registration and authorization at the port’s authorities. Also in public services the public institution can only use the work of public servants (employees with a special Statute) or employees for the main activity, with the possibility of contracting under civil law only for specific areas, such as lawyers for legal matters.
f. Other Ramifications of Classification
Some of the independent professions have special Statues that limit the activity of the professionals to only one type of activity. For example, a lawyer as an independent pro-fessional cannot perform work under an employment contract (aside from a few excep-tions, such as teaching activities in universities). That is not the case for the employees that can usually perform work (without limitations on what kind of activity they perform) for more than one employer without limitations (unless the employee agrees to an ex-clusivity clause).
g. Leased or Seconded Employees
In the case of leased or seconded employees there is no direct contract between the beneficiary of the activity and the employees, meaning that the employees don’t con-duct civil contract with the beneficiary. A contractual relationship exists between the initial employer and the beneficiary, while the employees continue the employment with the initial employer.
Individual contractors have the liberty to conduct civil contracts with any beneficiary meaning that they will have contractual agreements with all the beneficiaries. Individual contractors cannot be leased or seconded since they are not subordinated to any of their contractual partners.
h. Regulations of the Different Categories of Contracts
As stated for the employment contract there are legal provisions on the minimum con-tent and the form of such contract. Parties must negotiate at least the minimum clauses as stated by law having the possibility to add additional clauses according to their ne-gotiation. For the civil contracts there are only few general rules that apply, giving the parties a wider range of possibilities when negotiating such contracts. For some specific independent professions there are regulated contracts that independent professionals need to use.
An alternative for beneficiaries who do not want to enter individual employment con-tracts or civil contracts directly with independent contractors, is entering into the so-called “service providing contracts” with other entities that will provide personnel to the beneficiary. The personnel provided will not gain the employee status at the beneficiary company and will not be in any contractual agreement directly with the beneficiary. In such case, there is no direct contractual relationship established between the beneficiary of the work performed and individuals that will perform the work. A direct contractual relationship is established between the beneficiary and the entity that provides the per-sonnel. The staff is paid by the entity that provides the personnel, while the beneficiary pays any negotiated amounts for the services provided by the entity. In such cases, the entity that provides personnel can be an employer for the leased employees, or just an intermediary for legally authorized individuals that will perform their activities for the beneficiary the intermediary chooses and in the terms the intermediary negotiates for them.
The work is performed by the personnel on behalf of the beneficiary, but in case the activities are not conducted as stated in the contract or requested by the beneficiary, being the fact that there is no contractual relationship between the beneficiary and the personnel that performs the activities, there is no direct action against the personnel, instead the beneficiary has a direct action against the entity that provides the personnel.
The personnel not being hired by the beneficiary, the latter is not bound by specific legal provisions of labor law, but by the contractual provisions that were negotiated with the entity, which provided the personnel and the general provisions of civil law common to all contractual relationships. If the personnel is employed by the entity that contracted with the beneficiary, all special labor law provisions will apply between the personnel and their employer.
In some areas, however, to avoid the use of under-qualified personnel for work under special conditions and in important fields that require rendering tasks with a high de-gree of risk by individuals who may not enjoy the special protection of employees, legal provisions prohibit service providing contracts for the activities the beneficiary is legally authorized to perform.
As stated earlier, civil contracts under which individual contractors provide independent activities and the service providing contracts between the beneficiary and an entity that provides personnel do not enjoy independent regulation under Romanian legislation so that they are governed by common law rules.
For those aspects regarding individual employment contracts and employment relation-ships in general, not specifically regulated by labor law, the rules of common law will be used as well, as a result of the fact that the employment contract is a variety of civil contracts. This being the case, in some situations the distinction between an individual employment contract and a civil contract tends to be very subtle and the correct charac-terization of the contract by the court can be required.