Disguised employment relationship

Definition of disguised employment relationship
A disguised employment relationship is where the relationship between the worker and the employer is outwardly portrayed as something other than what it is, with the intention of nullifying or reducing the protection afforded to employees or avoiding the payment of taxes and contributions .

Definition & elements of employment relationship

To determine whether or not there is a disguised employment relationship, it is necessary to look at the definition of an employment relationship.  The definition of an employment relationship is given in Article 4(1) of the Employment relationship Act [1]. It provides that an employment relationship is a relationship between an employee and an employer in which the employee voluntarily engages in an organized work process of the employer and performs work therein for remuneration, personally and on a continuous basis, under the direction and supervision of the employer. Thus, the following essential elements of an employment relationship follow from the statutory definition:

• voluntary involvement in an organized process of the employer,
• the performance of work for remuneration,
• the personal performance of work,
• continuous performance of work,
• the performance of work under the direction and control of the employer (subordination).

Prohibition of work under a civil law contract and presumption of the existence of an employment relationship

Article 13(2) of the Employment Relationship Act also lays down the general rule that work may not be performed on the basis of civil law contract if the elements of an employment relationship exist.

Article 18 of the Employment Relationship Act further provides that, in the event of a dispute as to the existence of an employment relationship between an employee and an employer, there is a presumption that an employment relationship exists if the elements of an employment relationship exist.

This means that if the parties have concluded a civil law contract despite the existence of the elements of an employment relationship, there is a disguised employment relationship. In this case, in the event of a dispute, the court will assess the actual substance of the agreement between the parties and not the contractual agreement. The court will therefore assess whether or not the elements of an employment relationship exist.

Subordination as the most important defining element of the employment relationship

The most important defining element of an employment relationship is subordination. The criteria on the basis of which subordination is assessed are:

• Commitment to instructions - Commitment to instructions is the first and most common criterion. These are instructions that are substantively derived from the specific employment relationship, ie instructions that relate to the performance of the work, eg the performance and manner of work, the location and scope of work, the order of individual tasks, the selection and consumption of materials, and are unilateral and binding on the worker.
• Disciplinary liability - Disciplinary liability is an important element of subordination and constitutes an instrument for the employer to take action against an employee for breach of his/her work obligations.
• Induction - Induction means the employer's activity of introducing the worker to the work of a particular job. The recognition of a more prominent role for worker involvement in the work process is important in order to broaden the concept of personal subordination. In particular, the distinct vertical organizational scheme is increasingly loosened, meaning that workers are increasingly independent and autonomous in their work. Through the criterion of integration into the work process, even more independent and autonomous workers are covered by the sphere of labor law.
• Ownership of the means of production - Ownership of the means of production is a precondition which essentially places the worker in a subordinate position and on the basis of which the personal subordination of the worker develops.
• Tacit authority - Tacit authority indicates the existence of subordination through clues, even in apparently autonomous workers. Subordination is manifested in the worker's attachment to the hours of work, the place of work, the rules of conduct established by the employer, and in dependence in economic terms (ownership of the means of production by the employer).
• The performance of activities on behalf of the employer and the non-responsibility for business risk are the result of subordination; the worker's activities are directed towards the employer's economic interests and it is therefore the employer who bears the business risk.

Indicators of the existence of an employment relationship according to ILO Recommendation No. 198

It is also important to take into account ILO Recommendation No. 198. Unlike the traditional elements of an employment relationship, the Recommendation lists a number of indicators of the existence of an employment relationship, since in today's context the traditional definitional elements of an employment relationship are not sufficient to assess the existence of an employment relationship.  Indicators of the existence of an employment relationship may include:

• the fact that works is:
  • under the direction and supervision of the other contracting party,
  • the integration of the worker into the organization of the undertaking,
  • solely or mainly for the benefit of another person,
  • by the worker personally,
  • at a fixed time and place of work determined by the other party to the contract,
  • for a fixed period of work and its continuity,
  • the availability of the person performing the work is required,
  • the other party to the contract is required to provide certain tools, materials or appliances for the work,
• and that the following shall be provided:
  • periodic remuneration for the work which constitutes the sole or main source of income of the person performing the work,
  • provisions for board, lodging or transport,
  • entitlement to weekly rest and annual leave,
  • reimbursement of travel expenses, and
  • the non-liability of the worker for business risk.

Defining elements of the employment relationship in case law

The following defining elements appear in case law.

• "[. . . ] it is particularly important to emphasize the element of the continuous performance of work under the direction and control of the employer (the so-called direct authority of the employer), since the employment relationship differs from other legal relationships primarily in the degree of personal dependence by which a person is bound to perform a particular work." [2]
• "In addition, other indications may also point to the existence of an employment relationship, eg the posting of a vacancy, the provision by the other party of tools and other aids for the work, and the fact that the work is carried out within certain working hours, in working premises designated by the other contracting party, etc." [3]
• " [. . . ] it follows that the applicant was subject to the same working regime as a regular employee, had the same, if not a greater, workload, had the same obligations to report absences, to obtain a license, performed her work continuously, could not choose her flights and days off, etc., in short, she was voluntarily included in the employer's organized work process and, in return for remuneration, personally and continuously performed her work under the employer's instructions and supervision." [4] 
• ''[. . . ] it is unjustified in asserting the existence of an employment relationship, since not all the elements of an employment relationship existed during the period at issue, in particular not a sufficient degree of directive authority on the part of the defendant as employer. The applicant was not involved in an organized working process, was not strictly bound by her employer's orders, was free to exercise her so-called absence at any time, was free to work to a lesser or greater extent and was free to agree on the content of her work." [5]
• "It is not irrelevant the amount of work the plaintiff did, sometimes less, sometimes more (in accordance with her wishes), or not at all during her study commitments. The above shows that the applicant was completely autonomous, not bound by the defendant's instructions as to the content of her work, the place and time of her work, the disposition of her working time, the choice of her work, which is what is known as the employer's directive power of no consequence whatsoever [ the applicant voluntarily entered into the employment process, was paid a certain remuneration for her work, and that the social charges were paid by the defendant, and that she personally carried out the work, but in the Court of Appeal's view, in the present case , there is neither a directive authority on the part of the employer indicating a subordinate relationship on the part of the applicant in the sense of an employment relationship, nor a way of working in which she agreed with the defendant to do zero or more work in a given period, taking into account her studies or other personal interests and commitments. Finally, the applicant also cooperated with other users of her services throughout the period of her cooperation." [6]
• "He performs work under the direction and ongoing supervision of the Respondent, in the same manner as regular employees, on the Respondent's premises and with the Respondent's working facilities. He must keep a record of his attendance at work and is not free to shape his work and working hours. She works for remuneration, which she receives monthly, and she has joined the defendant's organized work process voluntarily and in the same way as a regular employee that the relationship between the parties had all the elements of an employment relationship, [. [7]
• "[. . . ] the witness testified that the plaintiff performs all the work of the job of specialist journalist, including researching content and supporting the production of programs (although she performs this work infrequently, which is not decisive for the assessment of the existence of the elements of an employment relationship), and that, like a regular employee, she does not prepare work reports, but only reports on the hours worked , that she had to record her attendance, ask for leave and, if absent for health reasons, inform the defendant so that a replacement could be found manner as a regular employee, under the instructions and on-going supervision of the Respondent, on the Respondent's premises and with the Respondent's working means, that she must record her attendance at work and is not free to shape her working time, that she performs her work for remuneration which she receives on a monthly basis, and that she is voluntarily involved in the defendant's organized work process, the Court of First Instance correctly held that all the elements of an employment relationship exist [. . . ]." [8]
• "The plaintiff could not set his own working hours, he had to follow the defendant's timetable. If he could not come to work, he had to find a replacement. He did the work personally. He was an equal member of the assistance center and had to attend training courses, as he could not do the work without the knowledge he had acquired. The costs of the training were borne by the defendant. The applicant's work was monitored and evaluated in the same way as that of other employees dealt with even the most difficult cases. He had annual interviews with his superiors like other employees. He was paid regularly for his work according to the amount of work done and with the defendant's working means. He was required to give advance notice of absence for annual leave and to coordinate the replacement with his colleagues [. mail. The complainant could not decide for himself how, when and where to work." [9] 

Differences between employee and self-employed status

Knowing the difference between the status of sole proprietor (i.e., s.p.) and that of an employee is also important for identifying a disguised employment relationship.  Sole trader:

• owns his/her own business, i.e. provides the economic basis for operating on the market (materials, equipment, premises),
• bears the business risk,
• plans and organizes his/her work independently, including in terms of quantity and length,
• unless otherwise agreed, the work may be carried out for the client by another person instead of the sole proprietor; i.e. subcontracting,
• provide services to several clients at the same time,
• negotiates the price of his work.

This clearly implies that the work of sole proprietor is independent. Personal subordination is essential for dependent work. Economic dependence alone, without personal subordination, is not sufficient to establish an employment relationship.

In the light of the case law of the Supreme Court [10], it may be noted that the courts take into account the parties' will as to the contractual basis as an important element in assessing the existence of an employment relationship, in particular when the contractor claims that he wishes to perform the work through the status of an independent entrepreneur, as opposed to the person simply agreeing to such a status.

Legal consequences of a disguised employment relationship

An individual who believes that he is working under a disguised employment relationship has the right to notify the employer of infringement in writing and to require the employer to remedy the infringement or to comply with its obligation. The employer must remedy the infringement within 8 working days of service of the request to remedy the infringement. This applies as long as the relationship between the parties continues. If the relationship is terminated, the individual must apply directly to the court and file a lawsuit within 30 days of the termination of the relationship.

Notifying the employer of infringement is also a good opportunity for the parties to resolve the dispute out of court by concluding an out-of-court settlement in which they settle their obligations arising out of disguised employment relationship. This way, the dispute can be resolved quickly and at a significantly lower cost. 

If the employer does not remedy the breach or an out-of-court settlement is not reached, the person, performing work under disguised employment relationship has the right to file a lawsuit for a declaration of an employment relationship and recognition of all rights arising from the employment relationship. If it is established that there is in fact a disguised employment relationship, the court will order the employer to enroll employee to compulsory insurance, to calculate and pay the relevant taxes and contributions on the monthly income already paid, to calculate and pay the annual leave allowance, reimbursement for meals and transport costs, all with interest.

Allowing to perform work under the disguised employment has serious both legal and financial consequences. If you are in any doubt as to whether or not a particular cooperation with a natural person as a co-contractor can be validly carried out under a civil law contract, please contact us. Our legal experts have extensive experience in contract and employment law and will be happy to assist you in regulating your contractual relationship in accordance with applicable laws.

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[1] Employment Relationship Act (ZDR-1), Official Gazette of the Republic of Slovenia, No 21/13
[2] Supreme Court of the Republic of Slovenia, Decision VIII Ips 35/2008, 10.02.2009
[3] Supreme Court of the Republic of Slovenia, Decision VIII Ips 35/2008, 10.02.2009
[4] Supreme Court of the Republic of Slovenia, Judgment VIII Ips 16/2015, 08.06.2015
[5] Higher Labor and Social Court of the Republic of Slovenia , Judgment Pdp 829/2017, 07.02.2018
[6] Higher Labor and Social Court of the Republic of Slovenia, Judgment Pdp 829/2017, 07.02.2018
[7] Higher Labor and Social Court of the Republic of Slovenia, Judgment Pdp 687/2015, 10.12.2015
[8] Higher Labor and Social Court of the Republic of Slovenia, Judgment Pdp 687/2015, 0.12.2015
[9] Higher Labor and Social Court of the Republic of Slovenia, Judgment and Decision Pdp 352 /2018, 20.12.2018
[10] Supreme Court of the Republic of Slovenia, Decision VIII Ips 337/2006, 15.01.2008