What the customer needs to know about light entrepreneurship – Aspects about the labor law

Light entrepreneurship is a way of doing business in which the person performing the work bills the customer through a billing service company or a billing co-op. An estimated 50,000 people work as light entrepreneurs, more than 60 percent of them performing occasional work, according to a survey commissioned by Sitra and the Eezy cooperative in 2016 (pdf in Finnish). Typical sectors include construction, various clerical work and creative work.

Light entrepreneurship activity involves two contractual relationships: A contract between the light entrepreneur and the billing service company, and a contract between the entrepreneur and the customer who is ordering the work.

However, light entrepreneurship has not been defined in Finnish legislation, from which perspective the work is performed either as an employee in an employment relationship or as a proprietary business operation without any intermediate forms.

Make a preliminary assessment before making the contract decision

For the customer, it is essential to avoid a situation in which the work performance that is intended to be a contractor relationship is suddenly considered an employment relationship or the use of temporary labor. This could have far-reaching impacts on, e.g., application of the Act on Cooperation within Undertakings, occupational safety obligations, prerequisites to terminate the contract for the work performance, or the possibility to hire workers in general.

The growth in the popularity of light entrepreneurship and the increase in the outsourcing of work tasks increase the possibilities for disagreements. The customer would be wise to assess the labor legislation aspects related to the commissioning of the work already prior to making the subcontracting decision. A preliminary assessment can reduce risks that the buying of the work performance from an entrepreneur could subsequently be deemed an employment relationship. The contractor relationship and agreement must be drafted in such a way that the labor law aspects are taken into consideration in the best possible way and that they correspond to the intent of the parties.

Employment relationship or subcontract?

In an employment relationship the employee commits to work for the employer under the employer’s management and supervision for a salary or other compensation. Fulfillment of the essential elements of employment relationship is always based on overall assessment. Entrepreneurship refers to the bearing of financial risk, independence, the possibility to carry out assignments also for other parties, and the paying of compensation in a form other than a salary. The line between an employment relationship and working as an independent entrepreneur has been assessed in case-law multiple times in recent years.

Light entrepreneurship is perceived as operating as an entrepreneur, but it can also be interpreted as an employment relationship if the essential elements of an employment relationship are fulfilled. The Labor Council assessed the matter a few years ago in its statement and decided that it wasn’t an employment relationship between the billing co-op and the light entrepreneur nor between the light entrepreneur and the customer ordering the work.

According to the Labor Council, the essential elements of an employment relationship weren’t fulfilled between the billing co-op and the light entrepreneur because the billing co-op didn’t have the management and supervisory power over the work. Nor was it a matter of personnel leasing; instead, it was an agreement through which the light entrepreneur outsourced the billing for the performed assignments to the co-op. The decision was concluded in spite of the fact that, according to the billing service co-op’s user terms, registering with the service created an employment relationship between the billing co-op and the light entrepreneur.

Nor were all the essential elements of employment relationship fulfilled in the relationship between the light entrepreneur and the customer ordering the work. For example, the customer didn’t have the statutory non-wage withholding obligation belonging to the employer. Based on the overall assessment, the Labor Council didn’t consider this as an employment relationship either.

From the taxation perspective, the assessment of the existence of an employment relationship is independent and it is not similar to a labor law assessment. In recent years the tax administration’s policy interpretations have with increasing frequency leaned towards compensation more often than before being interpreted as reimbursement for work, i.e. entrepreneurial income.

Are the essential elements of an employment relationship fulfilled?

Unequivocal guidelines on fulfillment of the essential elements of an employment relationship can’t be given, but at least the following factors have been given weight:

• Does the order involve a specific limited assignment or an unlimited work performance?
• Who has management and supervisory power over the work?
• In which form and to whom is compensation paid?
• Does the contactor have the right to perform work for other parties?
• Which party takes care of the supplies, insurance and statutory payments?

The assessment of the employment relationship is based on case-by-case examination, but consideration of these factors in the contractor agreement reduces the risks of the contractor relationship being considered as an employment relationship with the customer ordering the work.