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

Business-to-business (or B2B) contracts are essential for many companies. Businesses must document each transaction of materials or services. And they must pay taxes. Otherwise, a company can face legal and financial issues.

In this article, we will

– provide an overview of B2B contract law in the EU,

– explain how to hire self-employed staff without breaking the law,

– explore the peculiarities of French, German, Spanish, Italian and British law,

– look at examples from different industries, including IT services and delivery.

An overview of legal obligations for B2B contracts in the EU

In the European Union, laws of the member-states govern B2B contracts. For cross-border agreements, Rome I Regulation determines the law of which country applies. Denmark is an exception here.

The EU also has various regulations and directives. They help businesses navigate the legal system. EU regulations overrule national laws. The directives describe goals. Countries are free to decide how to achieve those goals.

EU businesses must follow

– The European Contract Rules and

– European Civil and Commercial Laws.

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

The EU passed several directives on contract development. One of them is the Unfair Contract Terms Directive. Examples of unfair contract clauses described by the document are:

– If someone didn't have an opportunity to read terms, it is unfair to force them to follow those terms;

– No one should be able to change contract terms single-handedly. This includes the contract of employment changes;

– If one party didn't carry out their part of the agreement, it is unfair to ask the other party to carry out theirs.

Important B2B contract notions in European countries

All EU countries have similar

– general principles of contract law and

– requirements for commercial contracts.

But several terms, notions and standards differ in various countries. Let us discuss them.

1. The duty of good faith

This is the demand for everyone to be honest, fair, transparent and cooperative. France, Germany, Spain and Italy demand it for all contracts. In Germany, the duty of good faith applies to pre-contractual negotiations.

In the UK, good faith applies only to relational contracts. Those need long-term trust and cooperation. Examples are franchise agreements and joint ventures.

2. Entire agreement clause

This clause says that the parties are only responsible for the agreement’s content. They are not liable for statements made before signing the contract. Without this clause, a court can consider statements made during negotiations as extra terms.

But, a German court can still use pre-contractual documents to clarify ambiguous clauses.

For Spanish courts, this clause doesn’t make much difference. They interpret contracts considering previous documents and statements.

3. Breach of contract

In Spain and France, the responsible party must pay for all direct losses.

In Germany, the guilty party must offset all the losses. This includes indirect ones, such as the loss of profit or goodwill.

In the UK, the innocent party can demand compensation for direct and indirect losses. But, in the UK, businesses usually set a limit on indirect losses in their contracts.

A new EU directive – significant changes to contract employment law

The European Parliament voted in favour of changes to the Platform Work Directive. Voting took place on the 2nd of February, 2023. There is widespread support for this directive. Legislators will likely adopt it in 2024.

The goal of the document is to protect the rights of people working for platforms. Examples of platforms are Upwork, Uber and Bolt. Now, they work as self-employed individuals or contractors. The directive will reclassify them as company employees.

This is a big deal. The contract of employment rights include

– guaranteed paid holidays and rest time,

– minimum wage,

– pension rights,

– parental leave,

– health and safety protection,

– unemployment benefits,

– healthcare benefits and

– benefits related to occupational diseases and work-related accidents.

But, critics say that this will make hiring a contractor in the EU impractical. Also, many people use staff augmentation or AOR/EOR models. The new laws can make working as a subcontractor impossible.

Hiring employees overseas helps avoid potential complications related to the new law. Non-EU contractors working under the staff augmentation model offer many benefits. For example, they bring a better value-for-money ratio. If you are considering contracting IT experts, Softkit is an excellent choice.

B2B contracts in the IT sector

B2B contracts are important for the IT (ICT) sector. B2B contracts are great for

– ordering tech services from dedicated agencies,

– purchasing customised software and

– hiring contractors.

B2B contracts in the tech sector offer the following benefits:

1. The ability to pay your IT experts a higher net salary

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

2. Find in-demand experts with ease

Foreign candidates make excellent contractors for hire. And a large talent pool means that it is easy to find an in-demand expert.

Also, with B2B contracts, hiring from abroad is a breeze. There is no need for work visas or other bureaucracy.

3. Flexibility

With B2B contracts, you can determine the duration of cooperation. If needed, parties can extend the contract. This is better 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 developer from Ukraine is twice cheaper than from the UK. This is assuming an equal level of expertise.

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 open an entity in the target country. This is an excellent idea if you want to sell services in the EU. It will make distribution easier. Also, local experts will help you better understand your target audience.

Foreign companies can hire EU freelancers. But they must follow country laws and cross-border payment regulations.

2. Using the services of a temporary employment agency

For short-term services, you can hire workers from a temporary employment agency. But you must provide the same conditions as for permanent staff. This includes pay, working hours, 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. 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 remote contractors.

5. Hiring an independent contractor

The next option is hiring an independent contractor directly. The lack of intermediaries, like contract job recruiters, can be great. You and a contractor have more freedom to negotiate.

H2 Contract employment law in France

France has strict contract employment laws. Their goal is to protect employees and prevent tax evasion.

The French call self-employed individuals “auto-entrepreneurs”. Self-employed people can work for companies. But they must follow several requirements:

– Working on tasks independently;

– Getting paid for tasks, not time;

– Having flexible working hours;

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

Otherwise, a court can reclassify a contractor as a company employee.

Avoiding “Disguised unemployment”

“Salariat déguisé” is a French term. It is translated as “disguised salary.” This means hiring contractors to work under the conditions of regular employees. The French Labor Code prohibits it. Using such services directly or through an intermediary is illegal. The judge can reclassify a service contract as an employment contract. This means administrative and criminal penalties for the client/employer. The company representatives face a fine of 45,000 EUR or 3-year imprisonment. The company itself will have to pay a fine of up to 225,000 EUR. To avoid this, make sure that

– Your hired contractors don’t have a schedule;

– You are paying contractors for tasks, not time;

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

– No B2B recruitment contracts demand a person to work only with your company.

Independent consultants and contractors should

– have more than one client,

– preferably work online and

– don’t use company equipment.

Uber to pay 17 million EUR in damages

The French court ordered Uber to pay 17 million EUR as compensation to 139 drivers. The court made the decision on the 20th of January, 2023, after years of litigation. In 2020, the court ruled that Uber drivers are company employees, not contractors. Factors that influenced the decision included:

– Uber was tracking the location and number of kilometres spent by drivers. They were using geolocation technology;

– Workers could not choose their clients or fares;

– The company could impose sanctions on the drivers.

Are you from a French company? If you hire an overseas company, make sure that the workers are outside France. Otherwise, you must pay subcontractor taxes, such as URSSAF debts.

H2 Contract employment law in Germany

Germans call their Civil Code “Bürgerliches Gesetzbuch”. The short version is “BGB”. Sections 611a and 611 regulate employment and service contracts.

German laws prohibit “Scheinselbstständigkeit”. This is 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.

– Health insurance companies to determine whether you had to pay social security contributions.

Similarly to French law, those institutions consider actual working conditions, not paperwork. This helps them determine whether a person is your employee or a contractor. Signs of regular employment include:

– No entrepreneurial risk;

– Demands to follow client instructions;

– Integration in the client’s business operations;

– Working on client’s territory;

– Close cooperation with regular company employees.

Employing a contractor who works as a regular staff member is risky. If uncovered, 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 is less dangerous. German laws don’t apply to freelancers and contractors located abroad.

If you are considering contracting IT experts, Softkit is a great choice. We have vast experience helping 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.

These documents help determine whether labourers are contractors or employees.

The Spanish Inspectorate of Work explores violations of contract employment law. Factors that show employment are:

– The employer organises how the worker receives payment;

– The worker provides services on behalf of the company. People can identify them as related to the company. For example, via social media or logos;

– The worker has to follow specific instructions and standards;

– The worker does not reject services. They earn a steady income and are economically dependent on the company.

Spain has heavy fines for employment-type contractors. Thus, a company must pay all missing social security contributions and a fine. It can be a set fine between 3,126 and 10,000 EUR per employee. Or it can be 50 and 100% of the missing contributions plus a 20% surcharge.

Amazon and Glovo to pay major fines

Since 2018, there have been over 30 court hearings about possible labour law violations in Spain. Most lawsuits involved courier companies. For example, Amazon, Glovo, Take Eat Easy and Deliveroo. In the majority of cases, courts reclassified self-employed persons as company employees.

Thus, the Madrid labour court stated that 2,166 Amazon workers hired are company employees. This was on the 3rd of February. One reason is that the company demanded drivers to use its Amazon Flex app. They used it for scheduling and payments. This means that Amazon had control over work conditions and payment.

Glovo is a Spanish food-delivery company. It operates in 25 countries worldwide. Spanish courts fined it twice for violating labour laws. In September 2022, Glovo was fined nearly 80 million EUR. In January 2023 – another 62 million EUR.

Contract employment law in Italy

In Italy, there are three types of workers on the employee-to-contractor scale. Depending on the type of client-contractor relationship, a worker can be

– a subordinate employee,

– a self-employed person or

– a para-subordinated worker.

People also call the third type collaborative workers. Another term is a semi-subordinated worker or “co.co.co.” This is 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.

Also, firing an employee is more expensive than contract employment termination. Employees should receive severance pay equal to an annual salary divided by 13.5.

So, how to decide between a service contract vs an employee contract? Consider whether you will have the power to control how your employees 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.

There are three main criteria that signify employment in Italy:

1. Time

Cooperation exceeds 8 months (241 days) for 2 years, even if not consecutive.

2. Turnover

At least 80% of income that a person received for the last two years is from the same client.

3. Organisation

The worker has a fixed working place at the client’s office. Or they must work at certain working hours.

A court can reclassify a person as your employee if they meet at least two of these criteria.

These rules don’t apply to registered professionals. Examples are 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;

– They have a fixed schedule;

– Payment depends on working hours alone;

– The worker uses equipment provided by the employer;

– The worker must notify the employer of their absence.

Two institutions can investigate whether a contractor relationship is really subordinate employment. These are:

– the labour court and

– the Italian Institute for Social Security Contributions (INPS).

In case of reclassification, the employer must pay

– all missing taxes,

– salary differences. These are based on NLCA (National Collective Labour Agreement) provisions and

– various fines.

Economic dependence: preventing abuse in B2B contracts

In Italy, economic dependence does not necessarily mean that a worker is 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. They aim to prevent the abuse of economic dependency. Now, courts assume that Italians who work for digital platforms depend on them financially. The platform can try to prove the opposite. Legislators also introduced a list of abusive practices, such as:

– Not giving enough information on the amount or quality of requested services;

– Requesting services not justified by the nature of the activity;

– Preventing the use of different service providers. For example, working for several platforms.

Contract employment in the UK

The UK is not a part of the EU anymore. So, its legislation does not apply.

Like Italy, the UK has 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 a right not to be discriminated against. Workers’ extra rights are:

– receiving the National Minimum Wage,

– protection under working time legislation. This includes 5.6 weeks of paid holiday per year,

– the right to receive pension contributions. This is under auto-enrolment legislation,

The contract of employment rights include all above, plus

– maternity leave,

– family leave,

– the right to request a statutory redundancy payment and

– compensation in case of unfair dismissal.

Employers also must withhold and pay

– employees’ taxes,

– employees’ National Insurance Contributions (NICs) and

– their NICs for each employee.

So, should you choose a service contract or employment? To decide, ask yourself these questions:

1. Do I control how my contractor performs services?

2. Do I have to provide work? Does the contractor have to accept it?

3. Does a labourer have to perform work in person? Can they subcontract it?

Most people in the gig economy are workers. They do casual or irregular work.

Employees must follow all reasonable company rules and policies. This includes a schedule, a 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 makes a final decision. In Northern Ireland, people call it an “industrial tribunal”.

Courts set fines for labourer misclassification on case-to-case bases. This is because the UK has a common law legal system.

A court can award an employee their rights retrospectively. There was a case in which an employer had to compensate for paid vacation time for 14 years. Also, 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 challenges. This includes high costs and legal risks. Hence, hiring employees overseas is popular among EU businesses.

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. This is 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. Popular platforms are Upwork and Fiverr. If you need short-time cooperation, this is 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 broad talent pool,

– industry expertise and

– the ability to scale operations up or down as needed.

You can find a suitable agency via dedicated websites like Clutch.co.

3. Opening an office in Ukraine

Do you need a long-term cooperation with Ukrainian experts? Then, opening a company or a subsidiary in Ukraine is a good idea. We recommend offering employees an option to work online. It gives them more flexibility.

More than 110 international giants established Research & Development (R&D) centres in Ukraine. They include

– Google,

– Microsoft,

– Samsung,

– Siemens,

– Boeing,

– Oracle,

– Payoneer,

– Reddit,

– BlaBlaCar,

– Ericsson,

– Lyft, and

– Glovo.

Benefits of hiring Ukrainian experts

Ukraine is one of the best countries for hiring contractors. Here is why:

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.

Let's discuss another proof of the sector’s quality. It is the ever-increasing number of Ukrainian unicorn companies. Examples are Grammarly, GitLab, People.ai, Preply and RefaceAI.

2. Very reasonable prices

Ukrainian experts charge very reasonable prices for their services. For example, 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.

The main reasons are

– the low cost of living,

– low taxes and

– high numbers of skilled professionals.

Thus, many EU companies hire Ukrainian candidates for overseas contracting jobs.

3. The tech industry is booming

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

4. Favourable tax regime

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

If you need IT services, consider Softkit. We have vast experience providing tech services to EU businesses under B2B contracts.

Conclusion

In summary, EU businesses must follow the union's regulations. They also must observe national laws when entering B2B agreements.

Each country has somewhat different contractor laws. Generally, contractors must be free to operate their business how they see fit. Their clients shouldn't try to regulate their activities. Otherwise, a court can designate them as their employer. This means huge fines.

If you want to hire a contractor, talk to a contractor lawyer first. If you need a remote contractor, hiring from abroad is a wise move. It brings you better value for your money. And it shields you from many legal risks.