Opinion article by Theodor Artenie and Oana Piticas, NOERR
The Covid-19 pandemic has forced us to adapt to many new things, among them a shift to remote work. Unsurprisingly, remote work or, as Forbes has described it, “a gift born in tragedy”, has proved to be not only possible and efficient, but also attractive, especially for certain industries. In two simple words, remote work has easily become a freelance accelerator. And we believe it is here to stay.
Nonetheless, seeing how the Romanian tax authorities deal with freelancers, questions arise for companies, especially large ones, as to how and if they should transition (at least partially) from an employment culture to a freelance culture. We know how challenging these issues can be, and we are here to shed light on the legal and tax aspects to consider during this transition period. At Noerr, we make it a priority to support our clients in their decision making process and help them adjust as smoothly as possible. Here are the three main areas to consider:
#1 Your internal guidelines will have to be adjusted
Companies invest a lot of time, money and effort into setting up a compliant and functional work environment and establishing rules regarding their relationships with their employees in the form of complex internal guidelines and policies. However, freelancers require special attention, and what has worked so far might not prove to be as efficient or even possible in the future.
We have listened to CEOs and owners of companies in order to understand what their expectations are, what they fear and what adjustments need to be made in order to accommodate freelancers and remote work in the most effective way. And one thing is clear: special circumstances require special rules. We are here to walk you through this challenging process and help you benefit from our experience.
#2 Tax implications are key
Although remote work might seem similar to freelancing in some ways, employees who work from home and freelancers are not one and the same. In fact, they are subject to two completely different legal and tax regimes. And how they relate to the company itself is also very different.
It is important not to fall into the trap of structuring a work force based solely on tax considerations. It is well-known that employment agreements entail a very heavy tax burden (roughly 44% of gross income), whereas freelance agreements are subject to a much lower tax burden, depending on how the agreements are structured. For this reason, it is always tempting for employers and employees alike to move towards this form of collaboration.
On the other hand, when conducting audits, tax authorities pay close attention to freelance agreements and more often than not, they reclassify them as employment agreements for the purposes of levying income tax and social contributions. Naturally, the appropriate tax assessments are issued to the would-be employers who find themselves compelled to pay considerable amounts of back taxes plus late-payment penalties and interest, which amount to a staggering 36.5% per year of delay .
To decide whether to reclassify a freelance agreement as an employment agreement (strictly for tax purposes), the tax authorities usually employ one of two legal instruments: a set of seven criteria to determine if a relationship is dependent or independent or the general “substance over form” principle, which dictates that the relationship should be analyzed in terms of its economic substance rather than its legal form.
#3 Company liability
Remote work and freelancing are still regarded as “off-limits” by many CEOs, mainly because of a perceived decrease in control over the activity of those who are not under their direct supervision and in their line of sight, as well as due to the tax risk described above. And this is completely understandable: data protection, the worrying increase in BEC (Business Email Compromise) fraud cases and the prospect of a crippling tax assessment are not topics to be treated lightly. However, implementing appropriate technical solutions (which we now know exist) and being aware of any potential risks this shift to freelancing might bring to the table are a good starting point.
We therefore believe that freelance arrangements should not be ruled out and dismissed from the outset. Instead, we believe a more balanced approach should be adopted, in which each particular set of circumstances is judged on its own merits, and companies put in place a clear set of rules and procedures to allow them to use the services of freelancers if they have the business reasons to do so. Reaping a tax benefit should be the last thing on everyone’s mind.
In other words, companies, especially those in relevant fields of business (e.g. insurance, IT, real estate, private medical care, entertainment) should consider and then document why they need a freelancer and not an employee for a specific task or mission, analyze the exact circumstances in which the professionals are to do their work (the assets used, risks taken, nature of the activity, form of remuneration, etc.) and design a contractual framework that is suitable for this form of collaboration and which properly reflects the economic substance of the freelance arrangement.