B2B Contracts in Europe: How to Hire Contractors and Avoid Employee Misclassification Risks

Business-to-business (or B2B) contracts are integral to any company operating in the modern globalized world. Each transaction of materials or services must be appropriately documented and relevant taxes paid. Otherwise, a company can incur various legal and financial issues.

In this article, we will provide an overview of B2B contract law in the EU and explain how companies can hire B2B contractors without breaking the law. From IT services to delivery – learn how to stay compliant under French, German, Spanish, Italian and British law.

An overview of legal obligations for B2B contracts in the EU

Broadly speaking, B2B contracts in the European Union are governed by the national laws of the member-states. In the case of cross-border agreements, Rome I Regulation (which doesn’t apply to Denmark) should be used to determine the law of which country applies.

There are also various EU regulations and directives aimed at helping businesses navigate various legal obligations. EU regulations overrule national laws, while its directives describe goals. Countries are free to decide how they will achieve the goals set by directives.

Thus, EU businesses must follow the European Contract Rules and European Civil and Commercial Laws.

Another document to consider is the Principles of European Contract Law (PECL). A commission of 22 legal experts from all EU countries created this set of model rules to harmonize the contract law of the EU and its member states.

There are disagreements about whether a standard European Contract Law and European Civil Code should be adopted. In the meantime, the EU passed several directives affecting contract development, including the Unfair Contract Terms Directive. Examples of unfair contract clauses described by the directive are:

– irrevocably binding a party to terms with which they didn’t have the opportunity to get acquainted properly;

– enabling a party to unilaterally change contract terms (including the contract of employment changes) without a valid reason described in that contract;

– obliging one party to fulfil all their obligations when the other party did not, etc.

Important B2B contract notions in European countries

General principles of contract law and requirements for commercial contracts are similar across EU countries. Let us address several essential terms, notions and standards that have slightly different meanings in various countries.

1. The duty of good faith

This is the demand for all parties to behave honestly and fairly, be transparent and cooperative. It typically applies to all contracts and is required in France, Germany, Spain, Italy and many other countries. In Germany, the duty of good faith extends to pre-contractual negotiations. In the UK, good faith applies not to all commercial contracts but to relational contracts, which require long-term trust and cooperation (e.g. franchise agreements and joint ventures).

2. Entire agreement clause

This contractual provision states that the parties are only responsible for the agreement’s content and are not liable for any statements or representations made before signing the contract. Without this clause, statements made during negotiations might be considered additional terms.

However, even if this clause is included, the German court can use pre-contractual documents to interpret ambiguous clauses. Under Spanish legislation, this clause would not prevent a court from interpreting a contract in accordance with previous documents, contacts or statements.

3. Breach of contract

In Spain and France, the party responsible for breach of contract must compensate all direct losses to the innocent party.

In Germany, the guilty party must offset all the losses, including indirect ones, such as the loss of profit, goodwill, etc.

In the UK, like in Germany, the innocent party can demand direct and indirect losses compensation. However, in the UK, it is customary to set a limit on indirect losses in a contract.

A new EU directive – significant changes to contract employment law

On the 2nd of February 2023, the European Parliament voted in favour of amendments to the Platform Work Directive. Considering the widespread support for the directive, it is likely to be adopted in 2024. This legislation aims to protect the rights of those working for platforms such as Upwork, Uber or Bolt by reclassifying them as company employees instead of contractors or self-employed individuals. Contract of employment rights include guaranteed paid holidays and rest time, minimum wage, pension rights, parental leave, health and safety protection, as well as benefits related to unemployment, sickness, healthcare, work-related accidents and occupational diseases.

However, critics argue that the new legislation will make hiring a contractor in the EU unfeasible. Moreover, working as a subcontractor under the staff augmentation or AOR/EOR model might be impossible.

If the directive is successful, contract employment in the UK will probably follow suit.

Hiring employees overseas is an option to avoid potential complications related to the new law. Non-EU contractors working under staff augmentation or managed services model offer many benefits, including a better value-for-money ratio. If you are interested in contracting IT experts, please consider Softkit.

B2B contracts in the IT sector

B2B contracts are increasingly important for the IT (ICT) sector. Whether ordering tech services from a dedicated agency, purchasing customised software or hiring a contractor, B2B is the way to go.

B2B relations in the tech sector offer the following benefits:

1. Ability to pay your IT experts a higher net salary

With traditional employment, you must pay various social security contributions and additional taxes. With B2B contracts, you can pass these savings to your employees. Moreover, offering a higher net salary will make you more competitive in the job market.

2. Find in-demand experts with ease

When looking for remote contractors, you can consider candidates from other countries. And with B2B contracts, hiring from abroad is a breeze – there is no need to make work visas or engage in other bureaucratic nuisances.

3. Flexibility

B2B contracts allow you to determine the duration of cooperation. If needed, you can prolong the contract. This is much more convenient than firing an employee and paying them severance compensation.

4. Save money

You can save money by hiring contractors from countries with a lower cost of living. For example, hiring a mid-level developer from Ukraine is two times cheaper than hiring the same expert in the UK on average.

The best ways to hire contractors in the EU

There are several options for employing a contractor from the EU.

1. Creating a company or opening a subsidiary

If you are outside the EU but want to hire local experts, you can consider opening an entity in the target country. If you intend to sell your services in the EU, this is an excellent idea, as it will make distribution easier. Moreover, local experts will help you better understand your target audience.

In general, foreign companies can engage EU freelancers, but you must comply with the laws of your country and relevant cross-border payment regulations.

2. Using the services of a temporary employment agency

You can engage workers from a temporary employment agency if you need short-term services. Remember that you must provide them with the same conditions as permanent staff, including pay, duration of working time, holidays, etc.

3. Working with a Professional Employer Organization (PEO)

A PEO is an establishment that acts as your workers’ employer in the eyes of the law. They take care of payroll, benefits and other HR-related issues. You manage your employees’ tasks and schedules. The downside is that your worker would be an employee rather than a contractor, and you will have to bear the costs of their social security contributions.

Examples of PEOs are OysterHR for France, Velocity Global and EuroDev for Germany, Factorial and HCM Deck for Spain, TMF Group and Globalization Partners for Italy and Shield GEO for the UK.

4. Using a freelance platform

Freelance platforms, like Upwork and Fiverr, are popular with contractors working remotely from Europe.

5. Hiring an independent contractor

The next option is hiring an independent contractor directly. Without various contract job recruiters acting as your intermediary, you and your contractor will have more freedom to negotiate.

Contract employment law in France

France has adopted some of the strictest contract employment laws in the EU to protect employees and prevent tax evasion. French “auto-entrepreneurs” or self-employed individuals can work for companies, but they must follow several requirements:

– Working on tasks independently;

– Receiving payment per task;

– Having flexible working hours;

– Not having a subordination relationship with the client’s employees.

Otherwise, a contractor can be reclassified as a company employee.

Avoiding “Disguised unemployment”

“Salariat déguisé”, or disguised employee, is the term used to describe individuals hired officially as contractors who work under similar conditions as regular employees. French Labor Code prohibits disguised employment and using the services of disguised employees directly or through an intermediary.

In such a situation, the judge can reclassify a service contract as an employment contract, making the client/employer liable for administrative and criminal penalties. Thus criminal penalties include a fine of 45,000 EUR or 3 year-imprisonment for individuals (e.g. company representatives) and a fine of up to 225,000 EUR for legal entities (for the company itself).

To avoid being declared your contractor’s “employer”, make sure that

– Your hired contractors don’t have a defined schedule;

– You are paying contractors for tasks completed, not time spent;

– Contractors don’t have a specified place in the company hierarchy.

– No B2B recruitment contracts require a person to work with your company exclusively.

Independent consultants and contractors are less likely to be identified as your employees if they have more than one client, work remotely and don’t use company equipment.

Uber to pay 17 million EUR in damages

On the 20th of January 2023, the French court ordered Uber to pay around 17 million EUR as compensation to 139 drivers. The decision came after years of litigation. In 2020, the French Supreme Court ruled that Uber drivers should be considered company employees instead of contractors. Factors that influenced the decision included:

– Uber was using geolocation to monitor the location and number of kilometres spent by drivers;

– Workers could not freely choose their clients or fares;

– The company had the power to impose sanctions on the drivers.

If you hire an overseas company, ensure their employees performing the tasks are outside France. Otherwise, you might be liable for subcontractor taxes, such as their URSSAF debts.

H2 Contract employment law in Germany

Employment and service contracts in Germany are regulated by sections 611a and 611 of the German Civil Code (Ger. Bürgerliches Gesetzbuch; BGB).

German laws prohibit “Scheinselbstständigkeit” – false self-employment. Several institutions can challenge the status of your worker – the Labour Court at the worker’s request, the German Pension Insurance Association as a part of their audit and health insurance companies to determine whether social security contributions must have been paid.

Similarly to French law, those institutions would consider actual working conditions, not just paperwork, to determine whether a person is your employee or a contractor. Thus, signs of regular employment include:

– Absence of entrepreneurial risk;

– Requirements to follow client instructions;

– Integration in the client’s business operations;

– Working on client’s premises;

– Close cooperation with or representation of regular company employees.

Employing a contractor who should have been classified as a regular staff member is risky. In case of reclassification, the employer must pay all the missing taxes and a fine of up to 100,000 EUR. There is also a risk of imprisonment for up to 5 years.

Hiring contractors overseas can be less dangerous since German laws don’t apply to freelancers and contractors located abroad. If you are considering contracting an IT service provider, Softkit is a good choice – we have vast experience cooperating with German businesses.

Contract employment law in Spain

In Spain, labour courts use two historical documents – the Act 20/2007 on self-employed work and the Workers’ Statute regulating employment relationships to determine whether labourers are contractors or employees.

If a labour or contract employment law violation is suspected, the Spanish Inspectorate of Work can start an investigation. Factors that indicate employment are:

– The employer organises how the worker receives remuneration;

– The worker provides services on behalf of the company and can be identified as related to the company (via public means or logos);

– The worker has to follow instructions of the company’s staff and comply with specific standards;

– The worker does not reject services, earns a steady income and is economically dependent on the company.

Similarly to France and Germany, Spain imposes heavy penalties for employment-type contractors. A company would have to pay all missing social security contributions and a fine – depending on the situation, either a set fine between 3,126 and 10,000 EUR per employee or 50 and 100% of the missing contributions plus a 20% surcharge.

Amazon and Glovo to pay major fines over labour law violations

Since 2018, there have been over 30 court hearings over the alleged labour law violations in Spain. Most lawsuits involved courier companies: Amazon, Glovo, Take Eat Easy, Deliveroo, etc. In the majority of cases, courts ruled in favour of plaintiffs, reclassifying self-employed persons as company employees.

Thus, on the 3rd of February, the Madrid labour court ruled that 2,166 workers hired by Amazon must be considered company employees, not contractors. One reason is that the company required delivery drivers to use its Amazon Flex app for scheduling and payments, meaning Amazon had control over work conditions and remuneration.

Glovo - a Spanish food-delivery company operating in 25 countries worldwide, was fined twice by Spanish courts for violating labour laws. In September 2022, Glovo was fined nearly 80 million EUR and in January 2023, just four months later – another 62 million EUR.

Contract employment law in Italy

In Italy, there are three types of workers on the employee-to-contractor scale. Thus, depending on the type of client-contractor relationship, a worker can be a subordinate employee, a self-employed person or a para-subordinated worker. The latter is also known as a collaborative worker, a semi-subordinated worker or “co.co.co.” (short for “contract for continuative and coordinated services”).

Subordinated employees have more benefits. The contract of employment rights include minimum wage, paid holidays, sick and parental leaves. Moreover, employee dismissal is usually more expensive than contract employment termination since employees should receive severance pay equal to an annual salary divided by 13.5.

When deciding between a service contract vs an employee contract for your workers, consider whether you will have the power to control how they do their tasks. Subordination and limiting workers’ autonomy are the main signs of employment. Self-employed and co.co.cos carry out their tasks autonomously. Although, with semi-subordinate, there is a greater degree of coordination.

Remember that there are three main criteria by which regulators might determine that you are a person’s employer and not a client:

1. Time criterion: collaboration exceeds 8 months (241 days) for 2 years, even if not consecutive.

2. Turnover criterion: at least 80% of income that a person received for the last two years is from the same client.

3. Organisational criterion: the worker has a fixed working place at the client’s office or must work at the established working hours.

If at least two of these criteria are met, a self-employed person can be reclassified as an employee. Several groups are excluded from this rule, including registered professionals, like contractor lawyers or doctors. Other signs of employment are the following:

– The worker is not responsible for organising their business;

– The worker does not face financial risks;

– There is a fixed schedule for a worker to follow;

– Remuneration is based on working hours alone;

– The worker uses equipment provided by the employer;

– The worker must notify the employer of their absence.

The Italian Institute for Social Security Contributions (INPS) and the labour court can investigate whether a client-contractor relationship must have been classified as subordinate employment. In case of reclassification, the employer must pay all missing taxes, salary differences based on relevant NLCA (National Collective Labour Agreement) provisions and various fines that might apply.

Economic dependence: preventing abuse in B2B contracts

Unlike in some other countries on our list, in Italy, economic dependence cannot be a decisive factor in declaring a worker an employee. Around 8% of self-employed Italians are economically or otherwise dependent on a client.

In 2022, Italy adopted amendments to its competition law to prevent the abuse of economic dependency. Now, if an Italian is working for a digital platform, financial dependence is assumed – the platform can try to prove its absence in court if necessary. Second, legislators introduced a non-exhaustive list of abusive practices, such as:

– Not providing enough information on the scope or quality of services required;

– Requesting excessive unilateral services not justified by the nature of the performed activity;

– Inhibiting or hindering the use of different service providers (like simultaneously working for several platforms), etc.

Contract employment in the UK

The UK is not a part of the EU anymore. Therefore its legislation and directives do not apply.

Similarly to Italy, there are 3 types of labourers on the employee-to-contractor scale – a self-employed person, a worker and an employee. Each group has different rights. Self-employed people have rights against discrimination. Workers’ additional rights are: receiving the National Minimum Wage, protection under working time legislation (including the right to a minimum of 5.6 weeks of paid holiday per year) and the right to receive employer pension contributions (under auto-enrolment legislation). Contract of employment rights include all of the above, plus maternity leave, family leave, the right to request a statutory redundancy payment and compensation in case of unfair dismissal. Employers also should withhold and pay employees’ taxes and National Insurance Contributions (NICs) and their NICs for each employee.

To determine whether a service contract or an employment contract is necessary, ask yourself these questions:

1. What control do I have over how my contractor performs services?

2. Is one party obliged to provide work and another to accept it?

3. Is a labourer obliged to perform work personally, or can they subcontract it?

Most people engaged in the gig economy are workers – they do casual or irregular work. Employees’ work is strictly controlled, and they must follow all reasonable company rules and policies, adhering to a schedule, dress code, communication guidelines and other standards.

Institutions that can challenge a person’s employment status include Her Majesty’s Revenue and Customs (HMRC) and the Government Pension Regulator. A court or employment tribunal (called “industrial tribunal” in Northern Ireland) makes a final decision.

Penalties for labourer misclassification are determined on case-to-case bases since the UK has a common law legal system. An employee can be awarded their rights retrospectively – there was a case in 2017 in which an employer had to compensate paid vacation time for 14 years of employment. Moreover, an employer would likely be liable for pension, social contribution and tax back payments.

How to hire overseas workers? Contract employment in Ukraine

Hiring from the EU comes with many challenges, including high costs and various legal risks. Hence, hiring employees overseas is a widespread practice among EU businesses.

Thus, Ukraine has become a premiere destination in Europe for contracting IT experts. The Ukrainian IT sector is growing fast despite the war. Between 2017 and 2021, it increased by 158% percent – a tie with Ireland for the highest growth in Europe. And by October 2022, the industry has exceeded pre-war levels.

There are three main ways of hiring Ukrainian tech experts:

1. Hiring via freelance platforms

There are more than 500,000 Ukrainian contractors for hire on freelance platforms like Upwork and Fiverr. If you are interested in short-time cooperation, freelance platforms are a good option.

2. Working with an outsourcing/staff augmentation agency

Another option is working with a dedicated outsourcing or staff augmentation agency. Benefits include access to a broader talent pool, industry expertise and the ability to scale operations up or down as needed. You can find a suitable agency via dedicated platforms like Clutch.co.

3. Opening an office in Ukraine

If you have in mind long-term cooperation with Ukrainian experts, opening a company or a subsidiary in Ukraine can be a good idea. We recommend offering employees an option to work remotely, giving them more flexibility.

More than 110 international giants have established Research & Development (R&D) centres in Ukraine, including Google, Microsoft, Samsung, Siemens, Boeing, Oracle, Payoneer Reddit, BlaBlaCar, Ericsson, Lyft, and Glovo.

Benefits of hiring Ukrainian experts

1. High Quality

There is a reason why tech giants like Google, Microsoft and Samsung have offices in Ukraine. The quality of tech services in Ukraine is terrific.

Another proof of the sector’s quality is the ever-increasing number of Ukrainian unicorn companies, including Grammarly, GitLab, People.ai, Preply, RefaceAI and others.

2. Very reasonable price

The low cost of living, low taxes and high numbers of skilled experts mean that prices in Ukraine are very reasonable compared to other countries, offering candidates for overseas contracting jobs. Thus, junior developers in Ukraine are about three times cheaper than in the UK, mid-level developers are twice more affordable and seniors are 30% less expensive on average.

3. The tech industry is booming

The Ukrainian tech industry is thriving. One of the reasons is the high number of IT graduates – Ukraine produces 53% more graduates than France, 70% more than the UK and around 5 times more than Italy.

4. Favourable tax regime

To attract investors, Ukraine adopted various tax benefits and incentives. Thus, at the beginning of February 2022, Diia City was launched, praised by V. Zelenskyy as “one of the best tax and legal regimes on the planet”.

If you happen to require IT services, consider Softkit. We are experienced in providing high-quality tech services to EU businesses under B2B contracts.

Conclusion

In summary, EU businesses must follow the union's regulations and national laws when entering B2B agreements. Regarding contractor laws, each country has somewhat different standards and regulations. Generally, contractors must be free to operate their business how they see fit. If their client closely regulates their activities, they can be reclassified by the court as their employer. This will likely entail compensations and fines.

We advise you to consult a contractor lawyer if you intend to hire a contractor. If you consider employing a remote contractor, hiring from abroad is a wise move – it can bring you better value for your money and shield you from many legal risks.