a. Factors that Determine the existence of an Employee or an Independent Contractor
The legislator does not provide a clear definition on the concept of “contract of employ-ment”, but we can figure it out by looking at the Workers’ Statute (Estatuto de los Traba-jadores) and its delimitation of the scope: it refers to workers who provide their services voluntarily, paid by others, and within the organization and direction of another person or legal entity, called employer or businessman.
Then, characteristic features of wage labor can be found, and so forth, on the contract of employment, as a link that regularizes the provision of such services, and for which a person (the employee) agrees to carry out an activity, for some time (definite or indef-inite), in the context of organization under the direction of another (the employer) in return for payment.
However, for a relationship to be born, a real service taking place or a precise activity made personally and voluntarily, whether paid or unpaid, is insufficient,: we need to join those other elements, which are precisely the provisions allowing us to qualify it as “work”, particularly the assumption of the costs, risks and individual economic results of productive activity by the service receiver (alienation), as well as dependence or subordination of the worker on the employer, being within its disciplinary and organizational circle.
The employment relationship has a “statutory assumption” status in Spain as the Workers’ Statute establishes that there is an employment relationship every time work is performed under someone else’s direction, organization and account, for remuneration.
Regarding the definition of independent contractor, in the legislative landscape there are several definitions of self-employed, both in the area of Social Security as well as in others (e.g. in the construction sector). For reasons of legislative modernity and coherence, the reference should be to that established by the Law 20/2007 of July 11, approving the Statute of Independent Contractors.
Independent contractors are natural persons who carry out, on a regular basis, personally, directly, on their own account and outside the sphere of management and organization of another person, an economic or professional activity for profit, whether or not being employed.
The following are automatically included under the scope of application of the Statute of Autonomous Work, provided that they comply with the requirements indicated above (and without prejudice to the provisions of their respective specific rules):
• the industrial partners of joint-stock companies and limited partnerships.
• community members of communities of goods and members of irregular civil societies, unless their activity is limited to the mere administration of the goods in common.
• those who exercise the functions of management and management that involves the performance of the position of director or administrator, or provide other services for a capitalist company, on a profit and in a regular, personal and direct manner, when they have the effective, direct or indirect control.
• economically dependent self-employed workers.
• foreign self-employed workers who meet the requirements set out in the regulations on immigration law.
It is important to know that the qualification of the contract does not depend on how it was determined by the parties but by the effective configuration expressed in the obligations accepted under the agreement and its performance – “primacy of facts” principle.1
To this extent, the factors that will determine the distinction between an employee and an independent contractor are the following:
• personal nature of the relationship
• exclusivity and assiduity
The employment nature of the bond is not denied by the breadth of the degree of autonomy available to the worker when performing the service, but to consider a services relationship as “work”, it must happen within the scope of organization and direction of the employer, jointly providing personal services, and the consequent alienation to the company´s risk taking action 2.
Case law has even held that “dependence” is the most decisive vertebral element in the employment relationship.3
However, this element cannot be understood as a strict subordination of the employee to the employer, so in order to appreciate it, it is enough for the worker to be within the rector and disciplinary circle of the company.4 It involves conducting professional activity within the organization and direction of the employer, so that the employer can perma-nently modulate the content of the delivery required for the worker.
In contrast, there is no labor relation when a person has his own business and acts as a labor entrepreneur.5
The Courts nowadays are declaring that there are common signs of dependence: the assistance at work or a place designated by the employer and the submission to a timeta-ble, the personal performance of work, supported in certain services with an exceptional regime of substitutions or replacements, the participation of workers in the employ-er’s workplace organization, which is responsible for scheduling his activity and, on the contrary, the absence of the worker’s own business organization.
This concept is useful to explain that the employee is rendering his services to another, which is called the employer.
They hold different criteria to apply it:
- Alienation because of the fruits.
– It reveals that the essential and defining facts on an employment contract lay on his fruits, fruits that, from the first moment of production will belong to someone else, but never to the worker.
- Alienation because of the risk. From this perspective, three essential characteristics are required:
– Labor costs to be assumed by the employer;
– The fruit or result of the work to be incorporated into the assets of the employer;
– Economic results depending on the employer, but the worker is not affected by it, nor is his participation in the economic risk.
- Alienation because of the market.
– The product of the work provided by the employee is not going to the market directly but has to pass through another person: the employer or the business.
Alienation assumes that the worker does not retain ownership of the outcome of his work, which is transmitted to the employer, who incorporates it as its own market. Thus, there will not be a labor relationship if both profits and losses are taken as a risk by the worker.
The company contribution of appliances, instruments and necessary equipment for the development of the work, are a sign of alienation.6
A contrario of what was said hereinabove, workers who personally and directly carry out an economic activity for gain is classified as a self-employed worker.
The existence of arrangements for payments under the benefits or outcomes (prof-it sharing, commissions, performance bonuses) considering that a minimum wage is guaranteed for the worker, is not an obstacle to the consideration of alienation.
Very personal nature
The personal side of the employment relationship is based on two different affirmations: First of all, we have to bear in mind that the employee can only be a natural person – and not a legal person. Then, this employee cannot be exchanged. The employment contract is an intuitu personae relationship. The employer hired his employee because of his own skills, experience and identity and those elements are essential to the contract.
In order to appreciate the existence of a labor contract, it is compulsory that the activity is made in an exchange with the compensation coming from the employer, without regard to its precise form (wages, bonuses, etc).
On the contrary, an independent worker will be paid thanks to services or fees paid by his/her clients.
Exclusivity and assiduity
Both notes have been deeply studied and analyzed by case law.
i. Exclusivity is not a required point, unless there is a full-time agreement 7, or other work involving unfair competition.8
Moreover, the exclusivity clause, during a long period of time and designed in strict terms, enforces the labor consideration of services providing dependence on a relationship of subordination between the parties.9
ii. The note of assiduity can be considered a clue that guides us to the existence of an employment relationship.
As part of an antithetical concept of assiduity, briefness of service is another factor, which may exclude the qualification of a relationship as a labor one.
Thus, we can see that the independent contractor does not comply with the feature notes described above, as there is no dependence, because he confronts the whole orga-nization of his own work. In addition, the independent contractor assumes the financial risk of the business (both benefits and losses), not collecting a fixed amount, but one depending on the work performed, and that is the reason why neither alienation and compensation notes can be appreciated here.
b. General Differences in Tax Treatment
In this section, we will make a comparison of tax issues between independent contractor and employees. The taxes that, basically, affect both parts, are Personal Income Tax (IRPF), VAT and social security contributions.
Personal Income Tax
This is a personal, direct and progressive tax that affects incomes earned by individuals in a calendar year. According to that definition, between an independent contractor and an employee, both earning the same income, great differences would not exist when paying this tax, unless, as with the deductible expenses by person, the independent contractor may also deduct that one in addition to its activity.
Both the independent contractor and employee must fill in an annual statement (D -100 model) of personal income tax. Also, the independent contractor will be required to sub-mit quarterly statements of personal income tax installment payments of their incomes (130 or 131 models) as well as the quarterly and annual summaries of withholdings, the incomes practiced in the payroll to their workers and the invoices of professionals (111 model quarterly and 190 model as an annual summary).
Value Added Tax
It is an indirect tax on consumption and falls on the final consumer, so both the independent contractors and employees have to pay VAT on their purchases.
The independent contractor also acts as an intermediary, paying the difference between the VAT that they have passed on to their customers and the VAT that they have incurred on their purchases allocated to the activity, taking into account the quotes of VAT that have affected his bills, regardless of whether he has earned it or not.
Additionally, the independent contractor must submit quarterly VAT self-statements (303 or 310 and 311 models) and also an annual summary (model 390) for informational purposes.
Social Security Contributions
Here is where we can find greater differences between the two figures, both in the determination of the base, as in the types to be applied and for which coverage is protected. Fees for both are calculated in the same way, applying a percentage to a contribution basis.
The base price of the employee, between a minimum and maximum limit depending on the payroll in turn, also depends on the working hours among others. Instead indepen-dent contractor choose between a minimum and maximum cap base by going public irrespective of time to devote to the activity and income. Attention must be attracted on the fact that specialties exist in the case of independent contractors who have more than 47 years and being the baseline in 2016 of 893,10 € per month. The base can be modified twice a year.
The contribution rates vary significantly depending on whether we speak about employ-ees or independent contractors.
For the employees, the rate is 7.05% or 8.30% depending on the type of contract and the employer is required to enter the Social Security Fund fee.
For independent contractors, the total percentage depends on the coverage to which he subscribes, with a minimum of 29.80 % or 26.50% if not quoted by IT (Temporal Incapac-ity) derived from common contingencies.
A worker compulsorily quotes for common, professional training, Social Guarantee Fund and unemployment.
Independent contractors are required to quote for the coverage of IT for common contingencies, except those that are already covered by another social security scheme (i.e., multiple jobs). The coverage of AT Work Accident) and EP (Professional Disease) is voluntary, except for the TRADE contractors for which it is required. The price for cessation of activity is also voluntary, but if the latter is quoted it is mandatory.
Also at birth and extinction of the obligation to contribute there are differences: as long as a worker quotes by the working period, the independent contractor quotes in full months.
There are other aspects to be taken into account only in the case of independent contractors:
The vast majority of independent contractors are exempt from this tax, a fact, which will be reflected in his statement filled in the Tax Office census prior to the beginning of its activity (036 or 037 model). Otherwise, they must fill in the 840 model.
Annual Statement of operations with third parties
It is a statement (347 model) with character information to be submitted during the month of February, since 2013, indicating those persons or entities, customers or suppliers, with whom the independent contractor has exceeded 3,006 € in the previous year.
c. Differences in Benefit Entitlement
Social Protection programs offered to independent contractors have suffered from significant changes over recent years up to the current configuration of the protective action set to enter into force soon – the Special Scheme for independent contractors.
The protective action of the Special Scheme for independent contractors includes the following features:
• temporary disability
• maternity and paternity
• risk during pregnancy and breastfeeding
• care for children affected by cancer or other serious illness
• permanent disability (total, absolute and severe disability)
• death benefits
• professional Contingencies
• provision for cessation of activities
• social care
• social services
We can say that the main differences between the General System of Social Security (GSSS) and the Special Scheme for Independent contractors are in pension benefits as well as maternity and paternity.
As for retirement, its regulation is the same as the GSSS with some specialties:
As of 2016, the normal retirement age is:
• 65, if they quote 36 years or more;
• 65 years and 4 month, if they quote less than 36.
However, in response to the toxic, dangerous or arduous nature of the pursued activi-ties, and in the terms established by regulations, even those which development is still pending, affected independent contractors who meet the conditions to be entitled to order to receive the retirement pension, except for age reasons, can access retirement faster on the same assumptions and collective rights as for employed persons. Also, independent contractors with disabilities will be understood in the same conditions as employed persons.
On the possibility of access to early retirement for a worker who had mutual status to 01.01.1967 and to collect contributions in various regimes and, by applying the rules of reciprocal calculation, the pension should be recognized for according to the rules of the RETA, provided acknowledgment of the age requirement in any of the other schemes that have been considered for the aggregation of insurance periods. Access to early re-tirement person concerned to the age of 63 years is suspended until 31/03/2013 (RDL 29/2012 disp.adic.1 ª).
In order to calculate the amount of pension applied to the regulatory base, compute the percentage obtained exclusively from the effective contribution years of the beneficiary. The amount to be received as a pension is paid monthly, in two bonuses.
It is calculated in the same way as with GSSS. If there are gaps, in periods when there was no obligation to contribute, they are not complete as in the GSSS, but these months are overdrawn and yet they are computed as divisor. That is, the corresponding divider remains unchanged despite the months considered as zero-based unlisted.
Origin of the pension
The time of the event originating the pension is:
• for those who are already registered, the last day of the month in which work termination occurs;
• for those who are in a similar service, the last day of the month in which the presentation of the application happens;
• for workers who are not registered, or similar situation, from the application moment.
The waiting period requires 15 years of contributions, 2 of which must be within the 15 years immediately prior to the contingency. No scale is applied, according to attained age on 01.01.1967, when calculating the contribution years.
As for maternity and paternity leave, independent contractors are entitled to maternity benefits (contributory and non-contributory ones) and also paternity to the same extent and on the same terms and conditions provided for workers in the RGSS, with specialties indicated.
The periods of cessation of activity during which they are entitled to receive the mater-nity and paternity match, in terms of duration and distribution, the labor rest periods established for employed persons. The only difference is the possibility of receiving the subsidy more compatible with a part-time job, in which case the perception of the subsi-dy and the reduction of activity can only be made in a percentage equal to 50 %.
If, while collecting the subsidy on a part-time job regime, a process of IT starts, without caring about contingency may, where appropriate, also perceived IT allowance. In this case, the regulatory base of IT allowance is reduced to 50 %.
Thus, the difference with the general scheme is that, by agreement with the employer, resting part-time workers employed by maternity leave, do not set a specific percentage reduction.
d. Differences in Protection from Termination
Upon termination of employment, the employer must provide the employee with:
• company certificate and listing documents useful to the employee, if appropriate, in order to prove and be able to ask for unemployment benefits.
• a document proposing settlement of owed amounts, when communicating the complaint settlement of the agreement or, where applicable, the notice of termination.
It must also make knowledgeable to the company council, documents relating the termination of the employment relationship. A failure to comply with them is punishable as a serious offense in labor with a fine.
As evidence, to prove the termination of the agreement by mutual agreement or will of the worker, the worker may be required to sign the settlement receipt, albeit without it being mandatory.
Indeed, upon termination of the employment contract between an employer and a worker, the first has to pay the employee, in any case, accrued and concepts, such as unpaid wages, the share of bonuses and the amounts of unused vacations.
However, independent contractors do not enjoy such protection, as they are individuals who perform on their own and outside the scope of management and organization of another person, a business or professional activities for profit.
Thus, the main difference in the termination of contracts is that in the case of inde-pendent contractors, they do not have a liquidation or compensation to attend the no dependency note, however workers under employment relationships do have the right to rely economically on the employer.
However, it should be taken into account that economically dependent worker (TRADE), which are a unique category of independent contractors, to apply it as a general rule, the common system established by the status of self for all the collective independent contractors, subject to certain peculiarities that presents its professional status.
One of those quirks refers to the contract termination and the consequent compensation, which is regulated by Spanish Law, unlike the independent contractors.
Thus, the contractual relationship between TRADE and his client may be terminated for any reason provided by law, as well as the causes that the parties have agreed to in the contract, unless they constitute abuse of law, and in particular, by any of the following circumstances:
• mutual agreement of the parties.
• death, retirement or disability incompatible with professional activities.
• withdrawal of TRADE, and there must be the advance notice provided or according to custom.
• will the TRADE, found in serious breach of contract by the counterparty.
• will the client for cause, and there must be the advance notice provided or according to custom.
• by decision of the employee who was victim of violence.
In addition, the termination of the contract between the customers TRADE may lead to compensation in any of the following circumstances:
• breach of contract by the other party that sometimes results in damages.
• will the client without cause.
• withdrawal of the TRADE, subject to fulfilling the obligation of notice, when the cause is material injury to halt or disrupt the normal conduct of its business.
e. Local Limitations on Use of Independent Contractors
Those workers who render their services and who do not comply with the requirements deriving from their legal conception are expressly excluded from the scope of the Statute of independent contractors and, in particular:
i. Employment relationships, that is, employed persons.
ii. The activity that is purely and simply limited to the mere performance of the position of director or member of the administrative bodies in companies that have the legal form of a company.
iii. Special labor relations, which are:
• senior executive staff.
• domestic staff.
• convicts who are serving a prison sentence.
• professional sports players.
• artists in public shows.
• individuals intervening in commercial transactions on account of one or more business owners without assuming the risks inherent thereto.
• handicapped workers providing their services at special employment centres.
• port stevedores who provide their services through state companies or individuals who carry out the same tasks as the latter at ports managed by Autonomous Communities.
• any other task that is expressly declared to be a special employment relationship pursuant to the Law.
f. Other Ramifications of Classification
As we know, independent contractors are a group, which operates financially as professional or independent contractors in different economic sectors (agriculture, fishing, handicrafts, trade, transport, diverse professional, etc.). Within this large group we can distinguish, together with the figure of the classic or ordinary independent contractors, other figures that include the autonomous nature of their business, have their own characteristics, such as economically dependent independent contractors (TRADE). Those particular contractors meet all requirements of any independent contractors themselves and conduct their business primarily for a single client, the economically dependent.
In the previous section, we mentioned one of the peculiarities of this figure as in the contract termination, but this time we must speak further on what constitutes econom-ically dependent workers (TRADE).
They are economically dependent independent contractors who:
• perform an economic or professional activity for profit;
• perform this activity in a usual, personal and direct way.
• work mainly for one person or entity, named Customer, and;
• perform their activity for a client or a company but still receive 75 percent of the working income of this activity.
Also, for the performance of economic or professional activity as economically dependent workers, it must cumulatively meet the following additional requirements:
• they must not be responsible for employees or contract or subcontract all or part of the activity with others, both in terms of the customer contract activity which depends economically as activities that could contract with other customers.
• they must not run their activity indistinctly with workers providing services under any form of recruitment provided by the customer.
• they must have their own production infrastructure and equipment necessary for the conduct of business and independent of their client, when in such economically relevant activity.
• they must develop their own activity organizational criteria, subject to the technical indications that his client could receive.
• they must receive a payment based on the result of their activity, according to the agreement with the customer and taking on risk and responsibility thereof.
g. Leased or Seconded Employees
As mentioned above, the working relationship established between the employer and the employee has a personal nature, that means that it is a very personal obligation, which cannot be transferred to a third party, partner, associate or employee not related to the employer for any legal connection.
However, independent contractors gather double circumstances of being independent contractors and entrepreneurs, with the possibility of hiring, in turn, other employed persons. This double circumstance determines the right of independent contractors to join unions either existing or to be established and also to join any of the existing business associations established or to be established, without prejudice to the possibility of self-employment associated specifically.10
Thus, Spanish case law has ruled that labor cannot be regarded as personal service delivery when substitution without the permission of the company is possible.11
Therefore, the employed persons, to be subject to the guidelines of an employer cannot delegate its functions to another person or hire another worker; while independent contractors can give employment to employed persons.
However, it should be noted that the TRADE, this special form of independent contrac-tors cannot be responsible for employees or contract or subcontract all or part of the activity with others, both in terms of outsourced activities with the client’s economically dependent as activities that could contract with other customers.
h. Regulations of the Different Categories of Contracts
In Spain, there are a variety of employment contracts and all of them are properly regulated in the Statute of Workers. There is a common root that weaves all contracts, since they must follow certain general principles of law.
In terms of capacity, we can say that, those who can sign a contract are:
• the elderly (18 years).
• all children under 18 legally emancipated.
• over 16 and under 18 if they have parental permission or from whom it is responsible. If living independently, with the express or tacit consent of their parents or guardians.
• foreigners in accordance with the laws applicable to them.
• on the form, there is a principle of freedom of form, which means that it can be made orally or in writing.
Writing is mandatory when required by statute, and always in the contracts regarding:
• to carry out a work or service.
• part-time jobs, fixed relay discontinuous.
• at home.
• workers hired in Spain for Spanish companies abroad.
• the term contracts which duration is longer than four weeks.
However, each party may require the agreement to be written, at any time during the course of the employment relationship.
The types of contracts can be further classified into two categories: indefinite contracts and temporary contracts. The first category includes part-time contracts (if the ratio is undefined), and ordinary and indefinite permanent employment promotion; the second group, all of the others.
In principle, any labor contract is permanent and full time, unless the employment con-tract states otherwise.
The rules governing each type of temporary contract, establish what the minimum and maximum duration of the contract is.
Furthermore, there are a number of common principles of temporary contracts, which are:
The possibility of setting a term of relationship or hold a final term, exceptionally supported when justified by an objective reason, pointing out the legal provisions that can hold fixed-term contracts in the event that the own specific standard, to cover temporary nature needs, and provided that, in the case, attend specifically the objective cause is to be held.
However, in Spain, this exceptionally has not prevented the excessive growth of tempo-rary contracts. The significant weight of temporary workers (around a third of all salaried employees) is an anomaly in the European context, and has led to a strong segmentation between permanent and temporary employees.
Contracting temporarily is limited to the legally regulated cases, existing in this field a reserve of law derived from the Constitution and an expressed authorization to the regu-lations to complement the legal regulation of the procedures laid down in the law.
In all of these contracts, the principle of causality is present as an element that defines and classifies. The temporary contract requires a cause that justifies it, that is, in Spain, temporary hiring is eminently causal.
Rules of necessary rights
The determination of the cases of temporary contract and its nature constitutes a rule of necessary rights core. Legal regulations authorize collective agreements to supplement the contents set by law, in the aspects that the effects are determined but cannot overlap the legally imposed limits.
As for the reference to civil law, note that as a general rule, in our system, the provision of labor for the production of goods and business services is subject to labor law and, therefore, qualifies as a juridical labor. The use of commercial or business figures to define personal activity services still remains an atypical formula to qualify the performance of work within a productive organization.
Therefore, the legal employment relationship arises from a bilateral legal business, the contract between the two subjects, worker and employer, who agreed to it.
Finally, as for the limits, it can be said that, although the employment contract is a regulated contractual relationship, there are two legal precepts of diverse origins and functions, which block the ability of the parties to the employment contract to alter the legal and conventional working and employment conditions in which you insert the worker performing the services in specific industry productive with a specific qualification.
i. On the one hand, the non-withdrawal rule provides for individual autonomy, less favorable conditions or simply anti – labor and employment regulations or conventionally fixed. The will of the parties specified in the employment contract cannot establish the prejudice of the worker, less favorable or contrary to the laws and collective agreements.
ii. On the other hand, the law imposes a principle of unavailability or inalienabili-ty of rights granted to workers imperatively by law or by collective agreement. The workers cannot validly use, before or after given, the rights that are recognized by rules of necessary rights, nor of those recognized as unavailable by collective agreement that extend to the transaction or waive of the rights recognized by rulings favorable to the employee, subject to the possibility of transaction within legal limits.