1. Legal Framework Differentiating Employees from Independent Contractors
a. Factors that Determine Who is an Employee and Who is an Independent Contractor
The difference between an employee and an independent contractor in Sweden is based on whether or not the person performing a work task is determined to be an “employee” according to Employment Protection Act (Sw. “lagen om anställningsskydd”). Similar definitions are relevant for tax treatment and benefit entitlements. The legal concept of the term “employee” is peremptory and the meaning is determined by case law. According to case law, an overall assessment of the objective circumstances has to be made in each individual case. The following factors are usually considered to be characteristic of the existence of an employment relationship between a company and a person:
• the work is performed by a single person. The person is not entitled to independently hire helpers.
• the company is responsible for providing the work equipment.
• the person is bound by specific directives and instructions issued by the company.
• the person is obliged to perform work when the company requires.
• the remuneration for the work performed consists of a guaranteed salary (at least partly).
• the company compensates the person for direct expenses (e.g. business journeys, entertainment).
• the relationship can be described as a long lasting legal relationship.
• the person is prevented from performing similar work for someone else.
• the person is equal to an employee, both socially and economically.
The opposite conditions indicate a relationship of an independent contractor and a company. If the person performing work for the company previously has been employed by the company, it is normally required that an actual change of the working conditions is at hand in order for the person to be considered as an independent contractor. As such, it is normally not possible for a former employee to continue to perform exactly the same working tasks as an independent contractor.
Even if a consultancy agreement formally has been entered into by a legal person, such as a limited liability company or other, there is a risk that the agreement is seen as a contract of employment between the underlying physical person and the company. However, if the agreement has been entered into by a limited liability company (“Sw. aktiebolag”) this constitutes a factor that substantially indicates that no employment relationship is at hand. Further, if the consultant that is party to a consultancy agreement is registered for F tax in Sweden, i.e. liable for the payment of taxes and social security contributions for performed work, such a factor normally indicates that the relationship is in fact a consultancy relationship. However, if it can be proven that the aim of the agreement is to evade mandatory law, such a factor could strongly suggest that an employment relationship is in fact at hand.
b. General Differences in Tax Treatment
Someone who pays compensation for performed work is obligated to deduct preliminary taxes from the compensation. This applies for physical as well as legal persons. If an independent contractor is registered for F tax this entails that the contractor is responsible for his or her own preliminary tax deductions.
As regards contributions for social security (“Sw. arbetsgivaravgifter”), such shall only be paid in the case of compensation for work performed by physical persons. Work that en-tails a right to receive salary can never be performed by legal persons. If an independent contractor is registered for F tax this entails that he or she is responsible for the social security contributions.
Consequently, a company is obliged to pay social security contributions for its employees and to withdraw preliminary income taxes on the remuneration paid. Further, in spite of what is stated above regarding F tax, a hiring company can be responsible for taxes and social security for a contractor if the approved F tax registration is revoked. Further, the hiring company can be responsible for taxes and social security contributions if it is ob-vious that the work is performed under such circumstances that the person performing the work is to be considered an as employee and the company has not reported this do the Swedish Tax Agency (Sw. “Skatteverket”). In such case the Tax Agency can declare that the hiring company and the consultant shall be jointly liable to pay social security contributions.
c. Differences in Benefit Entitlement
The existence of an employment relationship imposes obligations on the employing company to pay vacation benefits, sick pay, overtime compensation etc. while an inde-pendent contractor is responsible for paying or covering such benefits.
d. Differences in Protection from Termination
Independent contractors are not protected from termination – their rights related to termination are solely based on what is agreed between the parties.
As regards employees, there is extensive protective legislation laid out in the Employ-ment Protection Act. A dismissal must be based on objective grounds. Objective grounds are not defined by statute or case law, but can be either for objective reasons or subjec-tive personal reasons. Objective reasons are dismissals based on redundancy, re-organi-zation or the economic situation of the employer, while subjective personal reasons are all dismissals that relate to the employee personally, such as the employee’s conduct or performance.
An overall assessment of all the factors involved must be made when determining whether objective grounds for dismissal are at hand. The employer has the burden of proof in this regard and it can be quite difficult to present sufficient evidence to support a dismissal based on personal reasons. For instance, in a situation when an employee is not performing as well as the employer demands, the employer has an obligation to provide support to the employee in order to help him/her to improve.
A dismissal with notice will never be considered based on objective grounds if there were other alternatives available to the employer, such as relocating the employee elsewhere within the business. Further, the employer must observe certain rules set out in the Em-ployment Protection Act when serving a notice of dismissal to an employee.
The procedure for dismissing employees due to subjective reasons is laid down in the Employment Protection Act and varies to some extent depending on whether the dis-missal is due to objective reasons or subjective personal reasons. Prior to dismissing an
employee due to objective reasons such as redundancy, the employer may be obliged to conduct consultations under the Co-Determination Act (“Sw. lagen om medbestäm-mande i arbetslivet”) if the employer is bound by a collective bargaining agreement or if
the employee is a member of a trade union.
e. Local Limitations on Use of Independent Contractors
There are no statutory limitations on the use of independent contractors. However, a trade union may, under certain circumstances and if the company is bound by a collective bargaining agreement, have a right to consultations with the hiring company before it engages the independent contractor. Further, the trade union may have a right of veto if the company’s planned action is in conflict with what is generally accepted within the applicable collective bargaining agreement’s area.
f. Other Ramifications of Classification
In principle, it is irrelevant whether the person is referred to as an employee or a consul-tant in the agreement. Instead it is the degree of independence from the hiring company, which is decisive.
g. Leased or Seconded Employees
The use of temporary work agencies is regulated in the Hiring out of Temporary Staff Act (Sw: lagen om uthyrning av arbetstagare”). The temporary work agency is obligated
to, during the period of the leasing of an employee to a client company, to ensure the employee the fundamental working conditions and terms of employment (regarding sal-ary, working hours, overtime, breaks, holidays etc.) that applies for the client company according to applicable collective bargaining agreements or other binding general rules. Further, it is prohibited for the agencies to stop the employee from taking up employ-ment with the client company. The client company is obliged to inform the temporary worker regarding any vacant positions that may be available at the client company. The temporary work agency as well as the client company can be liable to pay damages to the employee for violations of the aforementioned act. Furthermore, an agreement that violates the employee’s rights according to this act is invalid. However, it is possible to deviate from certain parts of the act by a central collective bargaining agreement.
h. Regulations of the Different Categories of Contracts
The different groups of contracts are defined by mandatory legislation in regards to em-ployment law, tax law and social benefits law. If an individual is not considered to be an “employee”, the relationship is regulated by the general civil law.