Sham self-employment : definition and repercussions

As a self-employed person, have you landed a big job that takes you almost full-time and ensures you a regular and sustainable source of income?  Great, right?  In itself this is not a problem unless... you run the risk of being labelled a sham self-employed person as a result and therefore of being reclassified as an employee vis-à-vis your client. The penalties for such a form of social fraud are certainly not mild...

Where is the difference between a self-employed person and a sham self-employed person?

A self-employed person is a natural person who practices his profession without the commitment of an employment contract or status and therefore does not work under the authority of the employer. Sham self-employment can occur with both a company and a sole trader.
If there is a clear hierarchical relationship between you and the employer, then you are not truly autonomous and your cooperation can be interpreted as false self-employment. This will result in your contract being reclassified as an employment contract.

Sham self-employment: why is it prohibited?

Sham self-employment is prohibited for two reasons:  to protect the self-employed person from being abused by an employer and to avoid social fraud.

The main advantage for the employer:

• He avoids social security contributions due in the context of salaried employment 
• He does not need to fulfil the obligations associated with an employment contract (especially provisions protecting employees)

The disadvantages for you as a self-employed person: 

• Your employer can terminate your contract overnight, without entitling you to notice or termination compensation.
• You cannot fall back on minimum wage scales.
• If you fall ill or are temporarily disabled, you are not entitled to guaranteed pay.

To avoid being considered an employee with the incorrect status, please read this article.

What are the criteria to determine whether you are self-employed or not?

Admittedly, the line between the term "self-employed" and "sham self-employed" is a thin one, and one that is easily transgressed. However, with a well-founded and official cooperation contract, you will avoid a lot of discussions, regardless of whether you work as a company or sole trader (self employed natural person). 

The Employment Relations Act of 2006 established 4 criteria that determine whether a person is self-employed or a regular employee : 

• The will of the parties to cooperate on an independent basis. The will to work as a self-employed person is the starting point for assessing whether or not there is sham self-employment. However, "will" is a vague concept. In practice, this "will" means that you and your employer choose a particular status, in this case the social status of an independent cooperation. Make sure that the cooperation agreement states very clearly that one party undertakes to the other party, the employer, to perform a certain job at a certain price.  

• The freedom of working hours: being self-employed, you are free to plan your working hours and/or your holidays as you wish. However, if your employer asks you to be available within a certain time period, requires you to justify illness or get holiday approved in advance, there is a good chance that the social inspectorate will start to suspect sham self-employment.

• The freedom to organise your work: are you free to decide how to do the job? If there is a precise definition of duties linked to decisions made by a hierarchical superior, this indicates a relationship of subordination. This cannot be the case between an employer and a self-employed person. As a self-employed person, you decide how to carry out that job and only the end result counts.

• The ability to exercise hierarchical control: Does your employer demand systematic and comprehensive reporting on your progress? This implies employer authority and may indicate an employment relationship.

In short, everything depends on whether or not you work under your employer's authority. If you are able to provide sufficient evidence of your independent status, then there is no problem. But beware, a contract alone is not enough: independent cooperation must also be evidenced by the facts. If the latter does not reflect the contract, you may still be in trouble. 

Sectoral differences

Sham self-employment is rampant in certain sectors (agriculture and horticulture, cleaning, construction, security and transport). Labour courts have therefore been applying even stricter rules since 2013.  There is now a list of 9 criteria for these sectors and if at least half of the criteria below apply in your case, the sham self-employment alarm bell will go off:

• There is a financial or economic risk attached to your contribution to the business (for example, you have invested in it or agreements have been made around participation in its profits).
• You have a say in how the company spends financial resources.
• You have a say in the company's purchasing policy.
• You help set the company's pricing policy.
• You have somehow entered into a result-based commitment.
• You do not employ your own staff or you cannot hire people on your own initiative.
• You do not have the freedom to take on other employers as a self-employed person or you only have one employer.
• You have a guarantee from the company where you work that you will receive a fixed compensation or regular income.
• Your work resources (work space, car, computer, mobile phone, office equipment etc.) belong to the company you work for.

While this concerns a rebuttable presumption, you can always try to prove them wrong. However, the presumption does not apply when closely related family members work together in a so-called "family employment relationship". A familial working relationship is a partnership with relatives by blood and marriage up to the third degree, legally cohabiting, or with one that they own more than 50%.

What are the implications for each party?

Sham self-employment is social fraud and will be severely punished. The National Social Security Office (NSSO) checks that certain self-employed people are not in fact sham self-employed.
If that is the case with you, the cooperation contract you had with your employer will be reclassified from self-employed to employee.  In effect, the cooperation contract is converted into an employment contract.

a)    Re-qualification as an employer.

• The National Social Security Office will knock on the employer's door to pay undue employer and employee contributions, retroactive to 3 years in advance, or even 7, in case of fraud.
• On top of that, negligence interest may accrue as well as a one-off lump sum penalty of 10%.
• The tax authorities can claim the overdue withholding tax and there may also be a surcharge or fine on top of that.
• Other sanctions and fines are also possible. Even prison time cannot be ruled out.

b)    For you as a self-employed person

• Re-qualification as an employee.
• The VAT authorities can dispute all your VAT deductions for invoices.
• The tax authorities may come calling on you for outstanding payroll withholding tax.
• You are now bound by the company's employment regulations.
• You will have to respect the company's working hours and notice periods.
•  To take holidays, you will have to ask (and get) permission from your employer.
• You can recover social security contributions you paid in error, but there is a limitation period.

A re-qualification of a self-employed cooperation to an employment contract often also involves a lot of regulations, this time in favour of the self-employed person:

• Legal action for back wages if the compensation paid was significantly lower than the statutory minimum wage.
• An ordinance to pay single and double overdue holiday pay.
• An ordinance to pay overdue holiday allowance.
• An ordinance to pay arrears of the thirteenth month.

How to determine sham self-employed in practice?

If the employment relationship is unclear, you can turn to the Commission for the Regulation of the Employment Relationship of the Federal Public Service Social Security. This commission checks and decides whether sham self-employment is the case. Once the Commission makes a decision, this decision is binding on both the NSSO, RSO and you as a (sham) self-employed person. Checking this is all the more advisable if you were previously working as an employee of your client.
A concrete example of how this Commission assesses possible sham self-employment can be found on the Liantis website.

Tips for your cooperation contract

Drafting an "independent cooperation contract" is powerful evidence against a suspicion of sham self-employment.
As already evident from previous paragraphs, you should avoid any appearance of a relationship of authority.
Key components that are best included are:

• The parties (who, company form, address, etc.). The objective is to clearly indicate that the cooperation is not conducted in an employer-employee relationship. 
• Description of the object of the contract: describe in global terms the services that will be provided (do not go into detail about the tasks or draw up a job description).
• Compensation for services rendered: clearly state your prices (hourly rate, daily rate or project rate). Be sure to discuss here which arrangements apply in case of extra hours worked, until which date your rate applies, which relocations are/are not included in your rate. 
• The duration of the cooperation: definite or indefinite duration, possible extensions, etc.
• Termination clauses: who can terminate the contract, what notice period applies etc. Be aware : it is advisable not to include a notice regime that would be parallel to the regime applicable to employees, in order not to give the tax authorities and the NSSO additional arguments to invoke the problem of sham self-employed person.
• Clauses: beware of an exclusivity clause: a self-employed person usually works for several employers. However, it is perfectly normal to add other clauses such as confidentiality clause, non-competition clause (don't work for the competitor), non-solicitation clause (don't poach staff) and the protection of property rights, copyright (who owns the result).
• Consider possible liability claims: State clearly what you mean by serious misconduct, negligence or breach of contract. How will potential damages be compensated? What are the consequences in case of non-compliance or early termination of the contract?
• Invoicing: Make sure your invoices have clear payment terms/payment deadlines and specify how disputes will be handled.
• Last but not least : 
  • Don't mention anything about issues specific to an employment contract such as working time arrangements, holiday pay, leave or holiday days, accountability in case of illness, rigid duties and performance review.
  • Do not speak of salary but of "fee" or "honorarium".
  • Buy your own work materials: don't take IT or work materials from your employer but buy a laptop or work shoes yourself and deduct them as expenses.
  • Do not create an e-mail address or business card in the company's name. Need to anyway? Then at least mention your external status. 
  • Mention your professional liability insurance references in the cooperation agreement.
  • That agreement must, of course, be signed by both parties.

If necessary, turn to your payroll services provider or Chamber of Commerce to obtain a sample cooperation contract or seek advice from a lawyer. Do so before starting employment!