a. Laws and Guiding Principles
The Labour Act prescribes, that an employment relationship must be established by the employer and the employee, by entering into an employment agreement before employ-ment commences. However, the Labour Act upholds the existence of an employment relationship even in the absence of a written employment agreement, by prescribing that if an individual commenced working at an employer without an employment agree-ment in place (or a genuine agreement outside employment), it shall be deemed that he established an indefinite-term employment relationship with that employer. This is known as ‘factual employment’.
In addition, a sham agreement for work outside employment can be deemed as an employment agreement, by applying the general rule of the Obligations Act on the nulli-ty of the sham agreement and the validity of the concealed agreement instead (provided that the conditions for the existence of the concealed agreement are fulfilled).
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 the foreign company as an employer with the capacity to enter into an employment agreement, and would therefore not re-characterise a contact. This follows from an official opinion of the Serbian Ministry of Labour, according to which an individu-al cannot conclude an employment agreement with a foreign-based company, which has no legal presence in Serbia (as elaborated on in section II a. above). Tax Authorities and the labour inspectorate would likely follow the Ministry’s opinion.
b. The Legal Consequences of a Re-Characterisation
The contractor can claim re-characterisation before the court. The contractor can claim the benefits pertaining to an employment relationship (e.g. increased pay for any overtime work and night work), which would have arisen in the three years before the re-characterisation.
Alternatively, if the labour inspectorate finds that the nature of the contractor’s engage-ment resembles employment, it may order the employer to enter into an employment agreement with the contractor.
In addition, the Serbian Tax Authorities could determine, by applying the ‘substance over form’ principle, that the engagement of the contractor is to be treated (according to its economic substance) as employment for tax purposes. There is no established practice of the Tax Authorities as to re-classification of a contractor’s relationship into an employ-ment agreement, but the Tax Authorities would presumably rely on specific criteria (see section on General Differences in Tax Treatment). As a consequence, the Tax Authorities could consider the contractor’s income as salary under an employment agreement and order the employer to pay the full amount of personal income tax and social security contributions that it should have paid on the salary. The statute of limitations for the tax audit is five years from 1 January of the year following the year when tax was due (the statute of limitations is paused by each action of the Tax Authorities related to a taxpayer in respect of assessing and collecting tax; Once the pause comes to an end, the statute of limitation period commences again and the time elapsed does not count).
The tax-related risks would be very remote if the engaging entity does not have a legal presence in Serbia. In that case, the entire burden of tax and social contribution pay-ments is on the contractor, hence the contractor (and not the foreign entity) would be deemed liable. The law recognises the notion of ‘secondary tax duty’, according to which the entity that contributes to or assists the primary taxpayer (in this case, the contractor) in tax evasion is also liable for tax evasion. However, this has yet to be applied to a foreign entity in the context of re-classification.
c. Judicial Remedies Available to Persons Seeking ‘Employee’ Status
Re-characterisation of a service agreement as an employment agreement is generally possible upon a claim for declaratory relief filed by the independent contractor.
d. Legal or Administrative Penalties or Damages for the Employers in the Event of Re-Characterisation
The employer could be liable for a misdemeanour and subject to a fine of ranging from RSD 800,000 to RSD 2,000,000 (approx. EUR 6,450 to EUR 16,130). The responsible person at the employer could be fined from 50,000 to RSD 150,000 (approx. EUR 400 to EUR 1,200).
If the Tax Authorities were to classify a contractor relationship as employment, the employer can be found liable for a misdemeanour (failure to timely file the tax return, calculate, and pay taxes) and fined from 30% to 100% of the unpaid tax, the amount of the fine cannot be less than RSD 500,000 (approx. EUR 4,000) for a legal entity. In addition, the employer can be found liable for the criminal offence of tax evasion (Serbian Criminal Code defines the tax evasion as intentional avoidance of payment of taxes, social security contributions and other statutory duties). The penalty for the criminal offence can be imprisonment of up to 10 years and a monetary fine.