a. Factors that Determine Who is an Employee and Who is an Independent Contractor
According to the Serbian Labour Act, an employee is an individual holding an employment agreement with an employer. An Employer can be either a domestic or a foreign legal entity or individual. An employment relationship is normally established by an employee entering into an employment agreement with the employer. The Labour Act requires the employment agreement to be concluded prior to the commencement of work, in written form, and prescribes its mandatory elements. The Labour Act also sets the minimum employee rights (such as daily and weekly rests, vacation entitlement, working time limitations, minimum salary, mandatory allowances, conditions and procedure for termination of employment, notice period, protection of certain employee categories).
The law provides for several types of contractual relationships other than employment, the most widespread of which is a service agreement. An employer can engage an individual under a service agreement only for the performance of work that falls outside the scope of the employer’s business activities. Apart from the requirement that a service agreement is to be made in a written form, the Labour Act is silent on the terms of a service agreement. The minimum guarantees that apply to employees do not extend to individuals working under a service agreement. The parties to a service agreement are largely free to stipulate the terms of engagement, including the remuneration amount, and a notice period in case of unilateral termination. The Obligations Act prescribes the general terms of a service agreement, which apply to the extent the parties have not agreed otherwise.
Employers, especially those in the consultancy and IT sector, mostly use a service agreement (often called a ‘consultancy agreement’) for engaging individuals registered as entrepreneurs. The terms ‘contractor’, ‘self-employed person’, or ‘freelancer’ are widely used to refer to an entrepreneur. The Companies’ Act defines the entrepreneur as a natural person who is registered in the public register for performing certain business activities. It is relatively easy for an individual to register as an entrepreneur. An entrepreneur is liable with all his assets for the obligations stemming from the performance of business activities.
The Labour Act recognises employment even in the absence of a written employment agreement, by prescribing that if an individual commenced working at an employer without an employment agreement in place (or a genuine agreement outside employment), it shall be deemed that he established an on-going employment relationship with that employer. This notion is known as ‘factual employment’. Also, a non-genuine agreement for work outside employment can be deemed as an employment agreement, by applying the general rule of the Obligations Act on the nullity of the simulated agreement and the validity of the concealed (dissimulated) agreement instead (provided that the conditions for the existence of the concealed agreement are fulfilled).
The law does not explicitly prescribe the set of qualities that allow for re-classification. When delineating employment from out-of-employment status, the courts tend to take into account the presence of the qualities of an employment relationship stemming from the Labour Act, in particular the following:
• whether the activities fall within the scope of the employer’s business activities. The limited scope of activities allowed under a service agreement is the main point of difference between an employment relationship and engagement under a service agreement. The risk from reclassification is higher if the employer already has employees who work on the same or similar tasks as the contractor, or if the work performed by the contractor can be subsumed by a role existing at the employer;
• whether there is a strong relation of subordination, such as a requirement to obey the day-to-day instructions of the employer;
• whether the contractor enjoys the employee rights provided by the law (such as a fixed monthly remuneration, fixed working hours, increased pay for overtime, salary compensation during vacation and sick leave, holidays, mandatory allowances), and/or does he benefit from the rights that the employer provides to its regular employees (e.g. working tools, use of company email, a company car, fringe benefits);
• whether the employee is employed elsewhere on a full-time basis. The Labour Act prescribes that an employee may concurrently work at multiple employers, provided that his total working hours do not exceed the full-time hours. If the employee works full-time elsewhere, the courts would probably see it as an obstacle for recognising additional employment;
• whether the contractor is subject to the same rules of conduct as the employees of the particular employer (e.g. whether the employer’s code of conduct applies to the contractor);
• whether there is a requirement for the contractor to provide the services personally, i.e. without the possibility of subcontracting;
• whether the contractor’s work is continuous and extends over an unlimited period of time, rather than being a one-off engagement (e.g. for creating or repairing a specific item), or project-based work; and
• whether the contractor undertook to work exclusively for the employee.
A single employer engaging a substantial number of individuals outside employment can be perceived by the authorities as unusual, especially given that Serbian law and practice traditionally treat employment as the basic form of engagement. The relevant authorities’ can therefore become suspicious in that situation as to whether the nature of the relationship between the employer and the contractors is genuine. Another situ-ation, which can invite suspicion from the relevant authorities, is where the contractor regularly works in the employer’s offices.
Engaging an individual who is registered as an entrepreneur (versus an individual who is not registered as an entrepreneur) does not safeguard an employer from the risk of the engagement being found to be (concealed) employment. This is because the notion of being an entrepreneur does not represent a separate entity from the individual regis-tered as an entrepreneur.
When it comes to the assessment of employment vs. out-of-employment relationship by administrative authorities (i.e. the labour inspectorate and the Tax Authorities), the employer’s legal presence in Serbia can be relevant. If a foreign company has no presence in Serbia in the form of a subsidiary, a branch or a representative office, the labour inspectorate and/or the Tax authorities will most likely not consider that company as an employer with the capacity to enter into an employment contract governed by Serbian law. This follows from an official opinion of the Serbian Ministry of Labour, which stated that an individual cannot conclude an employment agreement with a foreign-based company which is not registered in Serbia (through a branch/ representative office), because the individual would be unable to enjoy all the rights stemming from mandatory social security. Although it can be argued that this opinion is not in accordance with the Labour Act (because the Labour Act prescribes the possibility of foreign-based legal entities and natural persons to engage individuals based on employment agreements for working in Serbia), and although the obstacle related to social security is technical in nature, the labour inspectorate and the Tax Authorities are likely to follow the Ministry’s opinion. Unlike these authorities, the court is less likely to consider the Ministry’s opinion as authoritative, and is instead more likely to rely on its independent interpretation of the Labour Act.
b. General Differences in Tax Treatment
The differences in tax and social security obligations can differ significantly depending on the type of engagement entered into by the parties.
In an employment relationship, the employer is obliged to calculate, pay and withhold: salary tax, at a flat rate of 10% and social security contributions at a total rate of 37.8%. The mandatory social security contributions go towards pension and disability insurance, health insurance, and unemployment insurance. The Social Security Contributions Act provides the maximum amount for social security contributions to be five times the average salary in Serbia. If the income generated by an employee exceeds the maximum amount, social security contributions are payable on the maximum only with the income exceeding the maximum is subject to salary tax only.
The same salary tax rate and social security contributions rates (10% and 37.8%, respec-tively) apply to an independent contractor who is registered as an entrepreneur. The main difference between the taxation of the two categories comes from the possibility for the independent contractor to be in the lump-sum taxation regime. If the Tax Authori-ties accept the entrepreneur’s application for lump-sum taxation, the Tax Authorities will determine the base for his tax and social security liability by using various criteria, such as the type of business, the average monthly salary in Serbia or the relevant municipal-ity, the market conditions for performing the business activity, the location of premises, and the entrepreneurs age. Given the lengthy criteria and the lack of consistency in its application by the Tax Authorities across the country, it is difficult to provide an accurate assessment of tax base in the lump-sum taxation regime.
The lump-sum taxation model is the most popular taxation option among freelancers. Under the lump-sum taxation regime, the entrepreneur’s tax and social security base is determined in a fixed amount, which is usually much lower than it would be if he was employed. This enables the entrepreneur to take home more money than he would as an employee, especially if his remuneration is significantly higher than the average salary in Serbia.
An entrepreneur is eligible to apply for the lump-sum taxation if:
• his annual turnover (in the year preceding the year for which tax is determined, or the expected turnover at the start-up of the business) is not higher than RSD
6,000,000 (approx. EUR 48,400);
• he does not operate in one of the following businesses: accounting; bookkeeping; audit; tax advising; marketing; market research; wholesale; retail; hospitality (hotels and restaurants operation); financial mediation; and business related to real estate;
• he is not registered as a value added tax payer, in accordance with the applicable regulations; and
• he does not receive investments from others.
c. Differences in Benefit Entitlement
The minimum rights provided by law to employees (such as working time limitations, minimum salary, leaves and rests, paid vacation, paid sick leave, etc.) does not apply to contractors, and the parties are free to agree on the terms of engagement. An indepen-dent contractor is typically only paid for the services he effectively rendered.
Below, we discuss the benefits that the independent contractors are typically concerned about when negotiating the engagement. Some employers stipulate full or partial coverage of these benefits, making them equal or similar to those granted to employees. This could contribute to the risk of re-classification, although so far the significance of providing these entitlements to contractors has not been tested in the context of re-clas-sification.
Paid sick leave
For the first 30 days of sick leave, the employer is obliged to pay salary to the employee at the rate equivalent to 65% of the employee’s average salary over the 12 months prior to the month in which the inability to work occurred (‘reference salary’) in case of sickness or injury unrelated to work. Where the employee suffered occupational disease or injury at work, the employer is obliged to pay the employee 100% of the reference salary. After 30 days, the compensation is funded by the state. Maternity leave benefit
A female employee is entitled to pregnancy leave and childcare leave. Pregnancy leave starts no earlier than 45 days, and no later than 28 days, prior to the due date and lasts for three months from the childbirth. Childcare leave commences upon the expiry of the pregnancy leave. Pregnancy leave and childcare leave combined may last for up to 365 days (or up to two years in case of giving birth to a third (and every next) child). During pregnancy and childcare leave the employee is entitled to be paid an amount equivalent her average basic salary for the 12 months preceding the absence (‘reference salary’), up to a maximum amount equivalent to five average salaries in Serbia. The employer is obliged to calculate and pay this to the employee, and can receive a refund of the equivalent amount from the state.
An independent contractor is also entitled to receive payment during pregnancy leave and childcare leave. The payment is calculated according to the same formula as for employees, the difference being that the contractor’s basis for the calculation of this benefit is her base for social security contributions. If the contractor is in a lump-sum tax regime, the base for social security contributions is usually significantly lower than what the contractor’s reference salary would be. Therefore, such contractor will receive a lower amount during maternity leave than an employee with comparable gross earnings. Compensation for post-termination non-compete covenant
For employees, a non-compete clause can be stipulated in the employment agreement, with the post-termination non-compete limit being a maximum of two years. In order for the post-termination non-compete to be valid and enforceable, the employer must undertake in the employment agreement to pay the employee a specific compensation.
Conversely, a post-termination non-compete covenant stipulated in the contractor’s ser-vice agreement is valid and enforceable even if the company does not pay compensation (provided that it is not excessive from a competition law aspect). This is under the as-sumption that the service agreement with a contractor is a genuine service agreement. If the service agreement would be re-characterised as employment agreement, the post-termination non-compete would be held unenforceable in the absence of special compensation for that period.
d. Differences in Protection from Termination
The differences in the possibility of terminating an independent contractor and an employee are significant. According to the law, an employer may unilaterally terminate an employee only if there is a valid reason. The possibilities for termination due to employee’s misconduct are limited to the breaches prescribed by the Labour Act, the employer’s general enactments, and/or the employment agreement. Other grounds in-clude redundancy, committing a criminal offence in relation to work, and underperfor-mance. The termination procedure is very formal. Although the Labour Act does not prescribe a mandatory notice period in case of unilateral termination (except in case of underperformance), the termination procedure is often lengthy (the duration depends on the circumstances of the particular case, and the pace of successfully delivering the termination documents to the employee in accordance with special rules).
An independent contractor may be terminated even without cause, if so stipulated in the agreement, with the obligation to observe any contractual notice period. In practice, termination of an independent contractor without cause is usually subject to a one-month notice period.
e. Local Limitations on Use of Independent Contractors
The Labour Act prescribes that a service agreement can be concluded for work, which does not fall within the engaging entity’s business activities. Therefore, the type of the work performed by the independent contractor is a factor when determining whether the relationship with the independent contract is genuine. Other than that, in Serbia there are no other explicit limitations on the use of independent contractors.
f. Other Ramifications of Classification
A person engaged outside employment is not entitled by law to the minimum rights that the Labour Act grants to employees (such as working time limitations, minimum salary, leaves and rests, paid vacation, paid sick leave, etc.), and the parties are free to agree on the terms of engagement. There are certain rights however that apply equally to those engaged outside of employment as to employees including, the same mandatory occupational health and safety standards and protection from harassment in the workplace (mobbing) and anti-mobbing protection.
g. Leased or Seconded Employees
In March 2013, Serbia ratified the International Labour Organisation’s (ILO) Private Employment Agencies Convention (No. 181), committing to regulate staff leasing, and to enable the work of staffing agencies. However, staff leasing or temporary staffing have not been regulated in Serbia. Nevertheless, this type of engagement is quite common, and is tolerated in practice. There are several outsourcing companies in Serbia that pro-vide staff leasing services. Still, staff leasing arrangements, because they are not regu-lated, entail a risk from recognition of an employment relationship between the leased individual and with the company, which is the beneficiary of staff leasing arrangements. A leased employee’s claim for recognition of employment with the company for which he actually works could especially take place if the leased employee is dismissed as a result of terminating the business cooperation agreement between the staff leasing agency and the company that uses staffing services. Currently there is no relevant court practice, and the associated risks are considered remote.
h. Regulations of the Different Categories of Contracts
Serbian law defines several types of agreements outside employment:
• service agreement (elaborated in section II a.). This type of agreement is the most commonly used for engagement outside employment, and is used to engage individuals (usually independent contractors, i.e. entrepreneurs). The law does not prescribe different categories of this contract;
• agreement on temporary and occasional work, which can be concluded for the performance of work which by its nature lasts up to 120 working days in calendar year (e.g. seasonal work);
• agreement on vocational training, and agreement on vocational development, used for trainee work;
• agreement on additional work, for up to 1/3 of full-time working hours (this agreement can be concluded with employees engaged full time by another employer);
• voluntary work agreement (only with respect to non-for-profit activities); and
• management agreement (for engaging a company representative outside employment).