"Misclassifying independent contractors can be costly for employers"
Using freelance contractors may seem at first glance simple and flexible, but in certain situations, it can prove very costly for employers, explains employment law specialist and attorney Oliver Bermejo.
When a working arrangement has been formally agreed on the basis of self-employment, but the reality is in fact that of an employment relationship, this is referred to as “false self-employment”. Oliver Bermejo explains the risks and potentially serious consequences for businesses arising from such a situation, and how to prevent them.
How is false self-employment defined in Switzerland? Is it true that this term is not defined by law?
Oliver Bermejo: Yes, that's right; there is no legal definition in Switzerland. False self-employment refers to a situation in which a person provides services under a private-law contract, most commonly a mandate agreement or a contract for work and services, as a purported independent contractor, while in reality being economically and organizationally dependent on the client and assuming no entrepreneurial risk. What matters is not how the contract is labelled, but how the relationship operates in practice. This is consistent with the established case law of the Swiss Federal Supreme Court. If, upon examining the substance of the contractual relationship, a compensation office or court concludes that the characteristics of an employment relationship predominate, the relationship will be reclassified accordingly.
Why can this distinction sometimes be difficult for companies to establish?
Bermejo: In practice, it can be difficult to make a legally reliable assessment in advance because of the wide variety of situations encountered in business life, even though guidance tools such as the guidelines on determining salary are available. The distinction is particularly challenging in consulting activities, especially since the law governing mandates, much like employment law, provides for a degree of hierarchical subordination. In such cases, the key distinguishing factors are the extent of hierarchical control and the level of integration into the client’s organization and work processes.
What risks does an employer face when using false self-employed contractors?
Bermejo: The financial risk can be substantial. From a social security perspective, the party deemed to be the employer is retroactively liable for all contributions, including both the employer’s and the employee’s shares. The limitation period is five years. In the case of contracts spanning several years, this can easily result in back payments amounting to tens or even hundreds of thousands of Swiss francs. If the assets of a legal entity are insufficient, the responsible corporate officers may, under certain conditions, be held personally liable. For example, if a misclassified contractor has an accident resulting in disability and is not adequately insured, the employer may be required to compensate the resulting losses. Under employment law, additional claims may arise relating to paid vacation entitlements, continued payment of salary during illness or accident, overtime compensation, compensation for work performed outside normal working hours, and potentially damages for unfair dismissal. These claims are also subject to a five-year limitation period.
What rights can a falsely self-employed contractor claim if their status is reclassified?
Bermejo: Once the relationship is reclassified, the individual retroactively acquires all employee rights that are not time-barred. In practical terms, this includes retroactive payment of social security contributions, paid vacation of at least four weeks per year, continued payment of salary during illness or accident, compensation for overtime and work performed outside normal working hours, potential retroactive affiliation to a pension fund, and statutory protection against dismissal. The right to terminate at any time, which exists under mandate law, no longer applies. Instead, the notice periods set out in employment law or the employment contract become applicable..
Do you have any advice for avoiding these risks?
Bermejo: Before entering into a contract, companies should carefully assess the specific situation against the criteria developed through case law and the guidelines relating to determining salary. An AHV registration certificate issued to a service provider only confirms their general self-employed status. It does not determine their status within a specific contractual relationship. Where doubts remain, it is advisable to obtain the necessary insurance coverage and, as a precaution, reduce the contractor’s fees by an amount corresponding to the employee’s social security contributions, retaining that amount until a clear assessment is available. In addition, the contractual terms and the actual working arrangements must be aligned. What matters for the assessment is the reality of the relationship, not the wording of the contract.
For example, a company that contractually labels a freelancer as self-employed but, in practice, integrates them into its organization, lists them on the company website, provides them with a company email address and business cards, and subjects them to instructions and fixed working hours will find it difficult to argue that the relationship is not one of employment. Finally, assignments should, where possible, be awarded to a legal entity with a genuine market presence. This significantly reduces the risk, as the arrangement is formally structured as a business-to-business (B2B) relationship. However, caution is still required when dealing with single-person companies: depending on their structure, this alone may not be sufficient to avoid reclassification.
