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1. Re-Characterisation of Independent Contractors as Employees

a. Laws and Guiding Principles

Factors that suggest the existence of a real contract of employment can be found in the Portuguese labour code as well as in several judicial decisions.

Despite the contract designation or qualification given by the parties, being that of an independent contractor agreement, the same may be re-characterized by the Portuguese labour courts, as being an employee relationship based on the actual terms under which it is performed.

As briefly referred above, Portuguese law defines an employment agreement as a contract in which a person assumes the obligation, in exchange for remuneration, to render work to another person, under the latter's authority and instructions. In contrast, an independent contractor is considered to provide a certain result of an intellectual or manual activity.

Three essential elements are to be found in an employment contractual relationship:
(1) the rendering of an activity, (2) in exchange for remuneration, and (3) under the authority and instructions of the employer.

Subordination is an inherent feature of employment (which is not found in independent contractors) and understood as the legal situation of one who is subject to the orders and instructions given by another, with respect to the carrying out of a certain task. The activity is not self-determined as it is in the case of an independent contractor.

Examples of factors that have been found by courts to suggest, or to indirectly reveal subordination, may be found in features such as:

i) who determinates the period during which the activity is to be performed;

ii) who determines the place where the activity is performed;

iii) whether there is periodical or regular fee or remuneration payment;

iv) whether remuneration is based on time spent as opposed to other criteria;

v) who organises or owns the means and tools needed to carry out the activity;

vi) whether contractual bond is of durable or stable nature throughout a significant period of time;

vii) what type of orders and indications are provided by the beneficiary to the activity renderer;

viii) whether the activity renderer is included in the production chain of the beneficiary (e.g. whether he/she is subject to any sort of hierarchy chain-type of organisation);

ix) whether all of the provider’s fees come from one service beneficiary (being economically dependent of such beneficiary).

Finally, as mentioned above, the Portuguese Labour Code contains a legal presumption that an employment relationship is in place if at least two of the following features are found:

  • the place of activity is either at the premises of its (the activity’s) beneficiary or determined by it;
  • work tools and equipment belong to the beneficiary;
  • the provider follows a timetable determined by the beneficiary;
  • the provider is paid a fixed (or guaranteed) amount based on a certain periodicity;
  • the provider executes management or supervision functions within the beneficiary’s organization.

Should any of these features be present, the burden of proof that the relationship is not an employment one is borne by the company.

b. The Legal Consequences of a Re-Characterisation

Hiring employees involves costs and burdens that some companies sometimes try to prevent by resorting to outsourced solutions and service agreement alternatives. Sometimes, nevertheless, these are then structured, in practical terms as actual employment relationships. Re-characterization may occur either as a result from an inspective visit or control from the labour authority targeted at a specific situation, entity or activity sector or when the individual personally raises the issue and claims recognition as employee. This is usually connected with cases where independent contractors claim employee protection against dismissal from labour courts.

When re-characterization is obtained from the court, social security proceedings are also usually initiated to obtain retroactive pay of social security contributions from the employer. As a rule, the employer will have to pay the employee’s part of the contribution to the social security services (and deal with the right to claim the amount directly from the employee).

Additionally, the company may have to adhere to the Work Compensation Fund and to the Work Guarantee Compensation Fund (and be subject to pay an additional 1%), which may be due retroactively and the employer will have to contract a work accidents insurance and comply, in general terms, with existing obligations in terms of health and safety at work.

In the event that the independent contractor agreement is deemed to qualify as an employment contract, the employee is entitled to all credits arising from a subordinated relationship, such as paid holidays, Christmas and holidays allowances, meal allowance (if this payment is set forth in an applicable collective bargaining agreement), and others that may be foreseen in an applicable collective bargaining agreement.

c. Judicial Remedies Available to Persons Seeking ‘Employee’ Status

Persons seeking “employee” status may address the competent labour court by lodging a declaratory action and if the court declares that an employment relationship is in force. In cases where the special lawsuit for re-characterization is initiated (by initiative of the public prosecutor based on the inspective activity of the labour authority), the court is also required to fix the specific point of time in the past when the employment relationship is deemed to have started.

d. Legal or Administrative Penalties or Damages for the Employers in the Event of Re-Characterisation

Re-characterization also usually gives place to administrative infringements and fines being applied to the employers.

Companies resorting to independent contractor agreements in conditions that justify re-characterization, qualify as a very serious misdemeanour, punishable with the payment of a fine, varying between € 2,040 and € 9,690. Companies in a relation of reciprocal ownership, control or group, as well as the company directors may be jointly liable for the payment of the fine.

In case of recidivism, the company may be deprived from the right to receive benefits or allowances granted by public service or entities, for a period up to 2 years.

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