2. Re-Characterisation of Independent Contractors as Employees
a. Laws and Guiding Principles
A reclassification may occur if a worker engaged as an individual contractor is deemed to be an “employee” under the Working Environment Act.
A form of reclassification may also take place if the tax authorities conclude that payments made for work performed by a person in fact constitutes payment for work performed as part of an employment relationship.
b. The Legal Consequences of a Re-Characterisation
If the person who has performed work tasks for the employer is reclassified as an “employee” by the court, the reclassified employee is normally entitled to permanent employment with the employer. This entails full protection under the Working Environment Act, including rules on protection against unfair dismissals, working time and overtime regulations. In addition, an employee is entitled to holiday pay in accordance with the Holiday Act and full social security benefits pursuant to the National Insurance Act. In addition, see section d) below.
c. Judicial Remedies Available to Persons Seeking ‘Employee’ Status
The person seeking recognition as an “employee” may first attempt to enter into negotiations with the employer. However, such disputes will typically require the filing of a lawsuit before the courts, claiming employee status.
d. Legal or Administrative Penalties or Damages for the Employers in the Event of Re-Characterisation
If the employee is granted “employee” status pursuant to the Working Environment Act, he may be entitled to retroactive payment of holiday pay, overtime remuneration and other statutory benefits.
The Supreme Court issued a judgment in 2025 providing guidance on how the financial restitution should be carried out in cases of misclassification.
The case concerned three healthcare workers who had been engaged as independent contractors. The healthcare workers initiated legal proceedings against the employer, alleging that they had been incorrectly classified and that they were, in substance, employees. On this basis, they claimed entitlement to retroactive payment of holiday pay, overtime remuneration, and other statutory benefits. The employer accepted that the workers had been misclassified as individual contractors but contested the claims for additional payments.
The issue before the Supreme Court was how the financial settlement following the incorrect classification should be determined.
The Supreme Court held that the mandatory provisions of the Working Environment Act must form the basis for calculating any supplementary entitlements, unless validly derogated from by agreement. This implies, for example, that work exceeding the statutory limits of 9 hours per 24 hours and 40 hours per 7 days constitutes overtime and must be compensated in accordance with the Act’s provisions governing overtime work.
However, deductions must be made if the amounts already paid fully or partly compensate for the claims asserted. This assessment will necessarily depend on the specific circumstances of each individual case. Furthermore, the burden of proof regarding any overcompensation rests with the employer.
With regard to holiday pay, the Supreme Court stated that it should be calculated on the basis of the payments made under the contractor agreement. The employer further argued that parts of the claim for holiday pay were time-barred. The Supreme Court stated that the limitation period runs from the earliest point at which the employee could have claimed payment of the holiday pay. Since the healthcare workers had never arranged for or taken holiday leave, the holiday pay claims had not yet fallen due, and the limitation period had therefore not begun to run.
If the re-characterisation is done by the tax authorities related to tax questions, both the employer and the person performing the work tasks may be liable for extra tax payments and punitive tax payments. Such tax obligations may be claimed for work performed during the last 10 years.
