1. Legal Framework Differentiating Employees From Independent Contractors
a. Factors that Determine Who is an Employee and Who is an Independent Contractor
The Romanian Fiscal Code provides th legal definitions for Dependent Activities -
“any kind of activity performed by individuals during an employment relationship that generates income”
- and Independent Activities -
“any kind of activity performed by individuals in order to obtain income, that meets at least four of the following criteria:
3.1. the individual has the freedom of choice of where and how he performs his activity and the program for the activity;
3.2. the individual has the freedom to perform activity for more than one customer;
3.3. risks inherent to the activity are assumed by the individual who performs the activity;
3.4. the activity is performed by using the patrimony of the individual that performs the activity;
3.5. the activity is performed by the individual through use of his intellectual and/or physical performance, depending on the specific activity;
3.6. the individual is part of part of a professional body/professional order that has representation regulatory and supervision rights over the profession conducted un-
der special regulations governing the organization and the exercise of the profession in question;3.7. the individual has the freedom to conduct his activity directly by hiring personnel or in collaboration with third parties, according to legal provisions”
The legal definitions were introduced in the Fiscal Code that became applicable in 2016 and have been used in order to determine employee or Independent Contractor status ever since. As a result of being regulated as distinct activities by fiscal law they have different legal regimes and they are submitted to different tax regimes.
Dependent activities, meaning those arising from an employment relationship, are subject to special regulations of employment law, while independent activities carried out by individual contractors are - as a rule - subject to the general provisions of civil law. In order to perform dependent activities an individual employment agreement between employer and employee must be concluded according to the Romanian Labour Code, while independent activities are provided on the basis of civil agreements concluded in the general conditions stipulated by the Romanian Civil Code. Usually the agreements concluded by Independent Contractors are service providing agreements. Also, independent activities can be performed on the basis of specific professional agreements such as legal assistance agreements specific to lawyers .
Individual employment agreements are extensively regulated by the Romanian Labour Code, which provides a framework of strict rules on the conclusion, content, enforcement, amendment, suspension and termination of such agreements, while independent activities can be provided by individual contractors under a variety of civil agreements, some of which enjoy a special regulation in the Romanian Civil Code - such as the mandate, others just observing common rules stated in the Romanian Civil Code. Romanian legislation does not regulate a special agreement under which the independent activities are carried out. However, as mentioned above, it is common practice to use the general term of “service providing agreements” when referring to the legal basis on which independent activities are provided by individuals.
Employment status is acquired by individuals only by entering into an individual employment agreement that must be concluded in writing in order to be valid. The individual employment agreement must be registered in the electronic registry that is handled by the labour authorities that monitor and control the correct application of employment law, prior to the beginning of the dependent activity. The existence of an individual employment agreement validly concluded is what distinguishes at first the legal status of employees to the legal status of individual contractors. Even the criteria introduced by the fiscal legal definition for the independent activities point to the fact that they have to be analysed while taking into consideration the content of the agreements the individuals conduct in order to perform the specific activity.
Both individual employment and civil agreements, under which independent activities are provided by individuals, are subject to the general principle of mutual consent involving an agreement between the two contracting parties – the individual providing the activity, both dependent or independent, and the beneficiary. However, for the employment agreement there are minimal legal limitations under which the parties cannot negotiate certain terms, such as the guaranteed minimum wage or the minimum number of days of annual leave enjoyed by employees, while in civil agreements any clauses can be negotiated without restrictions other than those imposed by general civil legislation on prohibited clauses in any type of civil agreements - such as the prohibition for the inclusion of clauses that are a fraud under the law, or immoral clauses. For specific independent professions there can also be legal provisions on the minimum content of the agreements, but usually the clauses that are mandatory are different from the ones in the employment agreements. Since only these general restrictions apply to civil agreements the discussion on the simulation of an employment relationship by concluding a civil agreement, in order to avoid the legal limitation imposed by employment law arises. In these cases, the re-characterization of the civil agreement as an individual employment agreement and the establishment of the existence of a simulation must be made by the courts.
In order to limit these attempts to avoid the legal limitation imposed by employment law, individual contractors that provide specific independent activities are subject to prior authorization under strict regulations. In such cases if the agreements are concluded with unauthorized individuals that provide activities for a beneficiary authorities can find that this conduct constitutes unlawfully receiving individuals for work, a conduct sanctioned as an administrative offence (contravention) according to national law.
In fact, the only legal definition of the individual contractor generated by transposing Directive 89/391/EEC into national law by Government Decision No. 300/2006, referring to the work performed on permanent or temporary sites, it qualifies them as “any person authorized to carry out a professional activity independently and assume contractual duty to the beneficiary ... to achieve ... works for which they are authorized”.
A separate category of individuals that provide independent activities for a beneficiary is those of the liberal professionals or freelancers – for example health professionals, lawyers, notaries, experts, mediators, etc. Usually these professions have independent regulations and they are organized according to their own statutes. Given the fact that each liberal profession is exercised under different conditions, for each of them a regime was regulated for the registration, authorization, effective performance of work, membership of professional bodies, their contributions under pension schemes, the possibility to provide the specific activity under the liberal profession status or as an employee (as in the medical staff case). The liberal professionals usually provide their activity on the basis of a collaboration agreement regulated by the same statutes.
The employees are conducting their activity in a subordinated relationship with the employer, while the individual contractor is engaged in a civil legal relationship with the beneficiary of the activity, which is characterized by the equality of the parties. Employees carry out their work for the benefit of the employer who assumes the risks of the activity performed for them, while the independent contractor bears the risk of the contract under common law and criteria that distinguishes the independent activities from the dependent activities.
Regarding the remuneration of the activity provided, the employees are legally entitled to receive a salary for their work, while the individual contractors will negotiate the remuneration for the activity that they perform. A special mention must be made of the fact that the work performed under a full-time individual employment agreement is entitled to a minimum compensation for the employees established by government decision – i.e. a minimum gross salary per economy guaranteed for payment (minimum wage). A lower remuneration of an employee cannot be agreed upon, even if both parties consent to it. On the other hand, individual contractors do not receive a guaranteed minimum income, even in the situation in which they are providing an activity comparable to full-time employment. For some independent activities legal previsions establish minimum limits for the remuneration of at least part of the individual contractor’s activities.
b. General Differences in Tax Treatment
As noted at the beginning of this analysis, the tax treatment of the two categories of individuals providing dependent or independent activity is regulated differently. Regarding income tax, whether the income is a result of a dependent activity based on an individual employment agreement or the income is a result of an independent activity provided by an individual contractor, the Romanian fiscal system establishes a unique 10% income. The tax regime for the two categories differs regarding the manner in which the income tax is withheld and remitted by the two categories of individuals. The income tax of 10%, for employees is calculated, withheld and paid to the fiscal authorities by employers, while independent contractors must declare income subject to income tax, owing advance payment of income tax or final payments of income tax, according to the fiscal treatment of their choice.
Both the employees and the independent contractors are responsible for the social contributions for the income they receive for the activity they provide, with the same difference in payment of social contributions, with the employer withholding them from the gross income of each employee and redirecting the amounts to the social contributions budget, while the independent contractors pay the due amounts directly. Over the years sustained efforts have been made in order to equalize the quotas owed by the employees and the individual contractors and at this time the fiscal regime is terms of due tax and social contributions is comparable, with the exception of the contribution to the health fund that depends on the level of the income of the independent contractors. The only additional cost for the employer when engaging an individual in an employment relationship is a contribution of 2,5% of the total income of employees paid to a dedicated fund. Due to the similarities in fiscal regime, the Companies are less interested in engaging individuals as independent contractors for cost management purposes.
Regarding persons exercising liberal professions, most of these professions have organized their own pension systems, and professionals are no longer required to contribute to the public pension system. There are also liberal professions for which there is no organized personal pension system; these professionals are contributing to the public pension system, usually by conducting a contract with the entitled authority.
c. Differences in Benefit Entitlement
Contributing to the medical system in similar ways, both the employees and the individual contractors are medically insured, meaning that they will receive equal treatment in the public medical system (free emergency treatment, low payments in case of hospitalization, compensations for certain type of medication etc.). However, individual contractors will not benefit from paid medical leave, since this is a compensation that is recognized only for employees. If they want to benefit from medical leave indemnity covered by the state, independent contractors can contract this service directly from the health authorities and pay additional amounts as health contributions.
Both employees and individual contractors benefit from parental (maternal and/or paternal) leave compensation according to their previous income, with the exception of the medical maternal leave that is also recognized only for female employees, unless the independent contractor contracts this service as mentioned above.
Only employees benefit from unemployment compensations on termination of their employment and from incentives provided by the Government in order to encourage them to find work outside their geographical area or to relocate. Compensations and active measures after collective dismissals are also recognized only for employees.
Both employees and independent contractors contribute to the pension fund and can benefit from pension rights based on their contributions. As stated, some professions have a distinct pension system and the professionals will contribute and benefit from that distinct pension system.
Social protection measures for employees are recognized by law. These measures include employees’ health and safety, working conditions for women and young people, establishing a minimum wage, daily and weekly mandatory rest time, paid annual leave, work performed in special conditions, training, and other specific situations. This general recognition of social protection rights has its basis in the constitutional regulation, regulations governing each of these issues being alternatively established. Individual contractors do not enjoy legal protection on these rights and will negotiate in accordance with the principle of mutual consent the conditions under which they will provide their activities.
Though both the employment agreements and civil agreements under which the individual contractors provide their activities involve a negotiation between the parties, for the individual employment agreements, the Romanian Labour Code provides a number of essential clauses that need to be necessarily included in all these agreements, while the content of civil agreements under which individual contractors perform independent activities is not regulated.
An important aspect for the activities performed by employees is that the working program is regulated and a number of rests periods and benefits for working overtime are guaranteed. Also, there are strict regulations on work performed during the night and work performed during the holidays. For the individual contractors these rights are not guaranteed, meaning that there are no legal provisions regulating their daily rest, their weekly rest, overtime rewarded with time off or extra pay, just as there are no rules in place for the activity conducted during the night or during holidays. This situation may open the possibility of abuses committed by beneficiaries of the independent activities that may require the contractors to work on short deadlines or require an amount of activity that forces the independent contractor to work continuously for a long period of time. Not benefiting from the legal protection of these minimum rights, individual contractors must negotiate their civil agreements in such a manner as to avoid taking an excessive workload for a short period of time, or accepting tasks that imply working extensively by night time without proper rest time.
Another legally recognized right for employees is the right to paid leave. The Romanian Labor Code establishes a minimum number of days of annual leave that employees may benefit from for their work, with the possibility of negotiating a higher number of days of annual leave by individual negotiation, or collective negotiation, at each employer’s level, while usually independent contractors are paid only for the time they perform the independent activity. Usually civil agreements are concluded for a determined period of time, or for a specific campaign and have no provisions on periods of time in which the contractors are paid the specified amount of money for that period without any activity being conducted during the specific period – similar to a paid leave. As for the right of sick leave, as stated even if the independent contractors are contributing to the public health system, there are no regulations stating the conditions in which the contractors may not perform the activities they were contracted for by the beneficiary due to health reasons. Independent contractors do not benefit from paid sick leave, but can contract this service or include in their civil agreements clauses regarding taking time of for medical reasons.
d. Differences in Protection from Termination
There are differences in the legal treatment in case of termination of the two types of agreements - individual employment agreements and civil agreements under which the independent contractor provides activities for a beneficiary. The termination of the agreements by mutual consent of the two parties is always possible in both types of agreements.
Regarding the termination of the agreement at the sole initiative of the person providing the activity, the employees have the legally recognized right to resign, subject to a notice period that benefits the employer. There are legal provisions stating the maximum notice period, but notice periods can be negotiated to a lower level. The employee can resign without notice only in cases when the employer does not observe its contractual obligations. In the case of the individual contractors, they can denounce a civil agreement only in accordance with the common law or in the conditions negotiated in the civil agreement they negotiated with the beneficiary of their activity. If no notice period was negotiated in the civil agreemet, considering the activity provided by an independent contractor as having a successive character, in accordance with the Romanian Civil Code, in case of termination of the civil agreement at the contractor’s initiative, they must provide a "reasonable" notice, in the absence of express contractual provisions on this matter.
The most significant differences in the two types of agreement termination can be observed in the case of termination of the contracts at the initiative of the beneficiary of the activity. The beneficiary may initiate termination of the civil agreement, in a similar, symmetrical way that the individual contractors providing independent activities can, according to common law, or to the negotiated provisions of the civil agreement, with a reasonable notice period as previously mentioned. As for the employer, they can have the initiative of the individual employment termination for their employees only in the cases stated by the Romanian Labor Code. Thus, the employers can dismiss their employees for reasons regarding the employee’s person, if the employee has committed a serious or repeated disciplinary offense(s), if the employee is subject to preventive arrest or house arrest for a period exceeding 30 days, or is found to have a physical and/or mental inability to perform specific work activities as well as in the case of professional unfitness of the employee. The employer can also dismiss employees for reasons not related to the employee’s person in case of motivated dissolution of the work position, in which case the dismissal can be individual or collective. Termination of the individual employment agreements by the employer in situations other than those covered by the Romanian Labor Code is not possible.
Another important issue related to the termination of agreements at the initiative of the beneficiary is the handling of disputes that may arise from abusive denunciation of the agreement. Independent contractors, if they consider that the beneficiary has abusively terminated the civil agreement, can only use actions based on common law and such disputes fall under the jurisdiction of judges that handle general civil litigation. As being submitted to common law, most of these disputes are assigned to lower courts, under the criteria of the value of the matter. As for the dismissed employees, the Romanian Labor Code provides a separate section on control and punishment of unlawful dismissals. As a result of these special provisions, the annulment of dismissal measures falls under the jurisdiction of specialized judges at higher courts (tribunals in first instance and Courts of Appeal when the initial court decision is challenged). There are also special rules of procedure regarding labour disputes, including overturning the legal burden of proof, so that the employer is the one that must prove the legality and validity of the dismissal, even if the claim is initiated by the employee. These exceptions to common law are a consequence of the subordination relationship between employer and employee, which generates the need for additional protections to employees that are considered to be at a disadvantage.
Regarding the restoration of the anterior situation – restitutio in integrum, as a result of a court ruling finding the unfairness of termination by the employer, the employee is provided with the legal right to be reintegrated (upon demand) and the right to receive damages equal to all the financial rights indexed, actualized and updated and all other rights that they would have received if he had not been dismissed, while for the independent contractors only common law provisions apply in terms of covering any damages.
The labour law provides a number of special cases of rightful termination of the individual employment agreement, while civil contracts follow the common law rules for the rightful termination of agreements. Some cases of rightful termination of agreements operate in both individual employment and civil agreements, such as the occurrence of the death of the individual provider of the activity – employee or independent contractor, or the death of the beneficiary – if the beneficiary is an individual, or the completion of the period for which the agreement was concluded. On the other hand, there are some special cases of rightful termination of the individual employment agreement, cases that do not apply to civil agreements. One such case is the rightful termination of the individual employment agreement, in the event of a simultaneous fulfilment of standard age and minimum period of contribution conditions in the public pension system. While independent contractors contribute – as a rule – to the public pension system, the civil agreements under which they provide their activity are not terminated at the date of the simultaneous fulfilment of the two conditions for retirement. Independent contractors are entitled to pension on demand, and the retirement does not have any effect on the existence of the civil agreement. For certain categories of professionals – such as lawyers – that contribute to their own pension system, if they retire under their statute provisions, they no longer have the right to fully practice their profession.
Rules on collective dismissal and the protection of individuals in case of collective dismissal only apply to employees. This is the case, not only because the legal provisions provide the legal frame only for the employees, but also because the individual contractors negotiate and conclude civil agreements on their own not as a collective of professionals providing a specific activity. If specific professionals are organized in a type of associative manner they will no longer act as individuals (independent contractors).
e. Local Limitations on Use of Independent Contractors
In some specific industries and also in the public services there are some limitations in the use of independent contractors for specific activities. For example, in ports operations the employers can only use the work of employees that are subject to specific registration and authorization at the port’s authorities. Also in public services the public institution can only use the work of public servants (employees with a special Statute) or employees for the main activity, with the possibility of contracting under civil law only for specific areas, such as lawyers for legal matters.
f. Other Ramifications of Classification
Some of the independent professions have special Statues that limit the activity of the professionals to only one type of activity. For example, a lawyer as an independent professional cannot perform work under an employment contract (aside from a few exceptions, such as teaching activities in universities). That is not the case for the employees that can usually perform work (without limitations on what kind of activity they perform) for more than one employer without limitations except for the fact that the schedule of one employment agreement cannot overlap with the schedule(s) for other employment agreement(s).
g. Leased or Seconded Employees
Romanian law does not recognize the leasing of employees, but a similar mechanism is used when work through a temporary work agent is used. In the case of temporary assigned employees or seconded employees there is no direct agreement between the beneficiary of the activity and the employees, meaning that the employees don’t enter into any type of agreement with the beneficiary, civil or otherwise. A contractual relationship exists between the initial employer and the beneficiary, while the employees continue the employment with the initial employer.
Individual contractors have the liberty to conduct civil agreements with any beneficiary meaning that they will have contractual agreements with all the beneficiaries. Individual contractors cannot be leased, used as temporary employees or seconded since they are not subordinated to any of their contractual partners.
h. Regulations of the Different Categories of Contracts
As stated above for the employment agreements there are legal provisions on the minimum content and their form. Parties must negotiate at least the minimum clauses as stated by law having the possibility to add additional clauses according to their negotiation. For the civil agreements there are only few general rules that apply, giving the parties a wider range of possibilities when negotiating such agreements. For some specific independent professions there are regulated agreements that independent professionals need to use.
An alternative for beneficiaries that do not want to enter individual employment agreements or civil agreements directly with independent contractors, is entering into the so-called "service providing contracts" with other entities that will provide personnel to the beneficiary for determined periods of time, entities that act as temporary work agents. The personnel provided will not gain the employee status at the beneficiary company and will not be in any contractual agreement within the individuals performing the activity and the beneficiary. A direct contractual relationship is established between the beneficiary and the entity that provides the personnel. The staff is paid by the entity that provides the personnel, while the beneficiary pays any negotiated amounts for the services provided by the entity. Temporary work agents can only act in this capacity if they are properly registered with the authorities.
The personnel not being hired by the beneficiary, the latter is not bound by specific legal provisions of labour law, but by the contractual provisions that were negotiated with the entity, which provided the personnel and the general provisions of civil law common to all contractual relationships. If the personnel is employed by the entity that contracted with the beneficiary, all special labour law provisions will apply between the personnel and their employer.
In some areas, however, to avoid the use of under-qualified personnel for work under special conditions and in important fields that require rendering tasks with a high degree of risk by individuals that may not enjoy the special protection of employees, legal provisions prohibit service providing contracts for the activities the beneficiary is legally authorized to perform.
For those aspects regarding individual employment agreements and employment relationships in general, not specifically regulated by labour law, the rules of common law will be used as well, as a result of the fact that the employment agreement is considered to be a variety of civil agreements.
