Entrepreneur or employee? Characteristics of an employment relationship

PAM has handled many disputes where a worker demanding their pay has been denied by the opposing party on the basis of them not being in an employment relationship. 

A clear line must be drawn between employment and entrepreneurship (self-employment) because establishing the employment relationship is a basic requirement for labour laws to apply and protect the worker. Labour laws only apply to employment relationships. 

The Employment Contracts Act defines the employment contract in section 1 of chapter 1. To paraphrase, the Employment Contracts Act applies to agreements (“employment contracts”) by which an employee or employees as a crew or team personally agree to work for their employer under the employer’s management and supervision in exchange for pay or other compensation. 

Five basic features of an employment relationship 

The above gives us the following five basic features of an employment relationship: 

1. an agreement 
2. working
3. working for someone else
4. working for compensation
5. working under someone’s management and supervision (known as direktio-oikeus, the employer’s right to direct work). 

The Employment Contracts Act’s definition of “employment contract” is mandatory legislation. This means that the parties to an employment contract or a collective agreement cannot legally agree that the Employment Contracts Act does not apply to an agreement with these features. 

Contractual relationship and working 

Employment contracts are a free-form legal act, no specific form is required. Accordingly, chapter 1, section 3 of the Employment Contracts Act allows for verbal, written, and electronic employment contracts. A tacit agreement (understood without being stated) is also possible. If an employer allows an employee to work for them, this is considered a tacit employment contract. 

In their employment contract, the worker, the actual, natural person, agrees to do the work. An employment contract concerns the doing of work, not its results. Working may be active or passive in nature – posing as a model, for example. Contracts that only concern the work’s results are generally considered entrepreneur contracts, not employment contracts. 

The personal nature of the obligation to work is stated in chapter 1, section 7 of the Employment Contracts Act: the parties to an employment contract may not transfer their contractual rights or obligations to a third party without the consent of the other party. This means workers cannot transfer their obligation to work to a third party without the employer’s permission. 

Working for an employer 

An employment contract is an agreement that concerns working for an employer. A requirement of the employment relationship is that the work must benefit the employer directly. If the work benefits the worker – if you are building a house for your own family, for example – this cannot be considered an employment contract and there can be no employer obligations. In legal practice, this characteristic of employment relationships has mostly been a point of consideration when judging whether the work of a person working at a company was performed as a co-owner or based on their employment contract. 

Working for compensation 

Employment relationships include the worker’s right to compensation for their work. This typically means money, but compensation may also include fringe benefits in addition to monetary pay. In order to be considered valid, the worker’s compensation must have financial value to the recipient. 

Although compensation is one of the basic features of an employment relationship, the law does not require a specific agreement about its payment. The Employment Contracts Act includes the presumption of compensation. According to the Employment Contracts Act, the law applies even without an agreement over compensation if the facts show that the work was not intended to be done without compensation. 

In case the work’s compensation is disputed, the employer is responsible for proving that no compensation was expected for the work. The amount of agreed compensation may influence the interpretation of whether the work was to be done in an employment relationship or as an independent entrepreneur (self-employment). If the compensation is significantly higher than the common level of compensation for the work in question, this may be taken to indicate entrepreneurship. 

Working under the employer’s management and supervision 

In practice, the employer’s right to direct the work by management and supervision is the most important feature, because it is ultimately used to judge the existence of the employment relationship. 

The right to direct work includes the right to manage and supervise workers. The existence of detailed instructions and directions has not been required for this feature to exist. 

In legal practice, the fact that the right to manage and supervise work exists has been considered sufficient meet the definition of this feature of employment relationships. For example, the work of specialists may often be so independent that their employer has limited opportunities for physical management and supervision, but this does not change the fact that the right exists, and hence even largely independent work may still constitute an employment relationship. 

Real case: salesperson or entrepreneur? 

A case was brought to PAM where a person was working as a shopkeeper in a small specialised shop in a shopping centre. The shopkeeper’s pay only included commissions. The shopkeeper claimed back pay from their employer for four years, a total of €36,000. The shopkeeper filed their claim because they had noticed that the pay of a worker who had worked on the shopkeeper’s days off had been deducted from the shopkeeper’s commissions. The employer denied the claim and argued that theirs was a verbal entrepreneur contract and therefore not an employment relationship. This would have made the shopkeeper unable to receive the pay they claimed. Because no solution was found by negotiation, the case was taken to court. 

The shopkeeper argued to the district court that no entrepreneur contract had been made between them and their employer, and they had no desire to work as an entrepreneur. In addition, they pointed out that they did not decide the shop’s business hours, their own hours, or the pricing of the products. The employer was also able to direct the work. The shopkeeper was obligated to act according to instructions, and they had been specifically instructed on where to order their goods and at what prices. 

In court, the employer told a completely different story. According to the employer, the shopkeeper had never committed to working for the employer under the employer’s management and supervision. The shopkeeper had decided how to organise the sales, including business hours, their own working hours as an entrepreneur, product pricing, and the hiring, schedules, and pay of assistants. In total, 11 witnesses were heard by the court about the nature of the shopkeeper’s work. 

The district court decided that none of the evidence supported the possibility of entrepreneurship having been brought up with the shopkeeper. Nothing about the case even suggested that the shopkeeper had been looking to operate as an entrepreneur. 

The witness’ testimonials supported the view that the shopkeeper had never understood their position to be that of an entrepreneur, even handing over their tax card to the employer. The testimonials also indicated that the shopkeeper’s working hours were decided according to the shopping centre’s opening hours. The employer was unable to prove in court that the shopkeeper had any way to deviate from the shop’s standard business hours without permission. The testimonials further supported the fact that the shopkeeper had no independent authority to decide the prices of products because lists of product prices had always been sent to the shop. 

Based on the evidence presented to the court, there was little actual supervision of the shopkeeper. However, the employer had exercised their right of supervision by dictating the shop’s business hours and therefore the shopkeeper’s working hours. Furthermore, the employer had exercised their right of supervision by instructing the pricing and ordering of products. 

Based on this overall assessment, the district court decided that the shopkeeper had indeed worked in an employment relationship and was entitled to the pay they had claimed. The employer appealed the judgement, but withdrew their appeal before the court of appeal could consider it. The district court’s decision therefore remained in force. 

Overall consideration is required 

We have discussed the basic features of an employment relationship above. For an employment relationship to exist, according to the Employment Contracts Act, all of these basic features must exist. In borderline cases, the decision how to apply the labour laws requires considering the facts as a whole. 

An employment relationship requires that the work is done under circumstances and conditions that place the worker in a position without independence of the employer’s management and supervision. While the matter may appear simple, rather complicated disagreements may arise, of which the above legal case is a good example. 

Today, there is an increasing need to define the line between employment and enterprise for questions of social security as well: occupational pensions, unemployment security, health insurance, and so on. 

This article was first published in the PAMplus magazine in April 2017. 
Author: Henry Vähtäri, PAM legal counsel 

Useful links 

• Employment Contracts Act (pdf) 
• Tax Administration: Am I an Employee or an Entrepreneur? 

See also 

• Self-employment – how will it affect my social security?