Independent Contractors & Employment Guidelines in Denmark
Contractor length allowance
There is no limitation to how long independent contractors can engage with companies in Denmark. However, contractors must be registered as \\\"business owners\\\" with the Danish Business and Tax authorities.
Fixed-term contract limitation
In Denmark, employers are free to agree on fixed-term contracts with employees. However, fixed-term contracts can only be renewed once. If the fixed-term employment is renewed more than once that must be reasonably justified.
The employment terms for a fixed-term employee must not be less favourable compared to permanently employed employees, if the discrimination is justified in the fixed-term relationship only, and there are no objective reasons.
What makes someone an employee
There is no general employment act distinguishing employees from contractors in Denmark. However, there are three main elements to an employment contract that have a big impact on differentiating the two types of workers. 1. Personal work. 2. Remuneration. 3. Relationship of authority, which is the most significant element out of the three.
Independent contractors do not work under the authority of an employer, which is characterized by a lack of subordination. That means that if an employer exercises authority over the employee, that is seen as an employment relationship.
The main elements the Danish court will analyse to decide on an employee classification are:
- If the worker carrying out work is in a subordinate position and takes instructions and works under supervision
- Does the worker have an obligation to execute the agreed work
- Who is responsible for the result of the work performed
- If the worker carries out work for more than one client
- Does the worker fulfil their work obligations regularly, using the same methods of work as ordinary employees employed by the contractor This includes cases where the individual has fixed working hours, makes use of working tools owned or facilitated by the client, makes use of the company\\\'s canteen facilities, and participates in social activities available to employees
- Does the worker accrue holidays, abide by notice periods or work fixed hours
- Can the worker delegate the job to someone else
- Does the worker bear the responsibility of financial risk when performing their job
- Is the worker registered as an independent business with the Danish Business Authority
Employee vs Contractor
Employees and contractors are treated differently in many circumstances in Denmark. For instance, contractors are responsible for reporting and paying their own taxes including VAT (if the services performed are subject to VAT) to the tax authorities, while employees have taxes withheld at source by the employer and do not pay VAT. Moreover, contractors have to file a detailed annual tax account. In contrast, employees only file a summary tax return form, as the employer is in charge of reporting all the relevant information relating to the employment. The income tax level for the individual is the same regardless of working as a contractor or an employee, if the contractor is working as an individual and not through a company. Individual contractors can benefit from certain tax breaks and deductions of business-related costs. It is common in Denmark that contractors work through a (limited liable) company, and hence the taxation level differs from the taxation level of employees.
On top of that, contractors are not entitled to specific benefits, including termination and business closure protection, while employees are entitled to holiday, sickness, maternity and paternity pay and protection against dismissal or company bankruptcy.
Penalties for misclassification in Denmark
Payment to employees in the form of fines ranges from DKK 10,000 for minor violations to 20 weeks\\\' salary for serious violations such as not supplying an employment contract. In addition, the employer will be obliged to pay taxes retrospectively.
In addition, the misclassified employee may be entitled to:
- The notice periods under the Danish Salaried Employees Act, holiday payments and other benefits such as maternity pay retrospectively
- Compensation for restrictive covenants (if any)
- Salary during sickness and maternity or paternity leave (also retrospectively)
- Salary during holidays (also retrospectively)