Independent Contractors & Employment Guidelines in Lithuania
Contract length allowance
There is no time limitation on the use of genuine independent contractors.
Fixed-term employment contract limitation
Fixed-term employment contracts cannot exceed more than two years. However, if the job functions of the employee change, the contract can be for up to five years. The term can also be increased if the employee is substituting an absent employee (e.g., during maternity leave).
No more than 20% of a company’s staff can be on fixed-term contracts if the position in question is continuous (e.g., manager, accountant, etc.).
An employment contract has to be concluded with the company’s managing director (of the branch, representative office).
What makes someone an employee
An individual is considered an employee when the following circumstances are true in their relationship with the company:
- The company dictates what, when, and how the job must be done.
- The company and the individual have a subordination relationship.
- The company remunerates the individual regularly.
- The company ensures statutory benefits such as a pension, health insurance, or paid leave.
- The company supervises the individual’s work.
- The company imposes internal company rules on the individual.
Independent contractors are free to decide when and how work is performed, and companies (clients) cannot dictate what and how work is done, including the use of other individuals to perform the tasks.
Employee vs contractor
Employees receive an employment contract that stipulates the working conditions, always honouring at least the minimum that is imposed under the Lithuanian Labour Code. This means that employees are entitled to paid vacation, maternity, paternity, parental, and sick leave. Moreover, employers must respect the statutory maximum working hours and the rest breaks and must have a valid reason to terminate an employment contract, including severance pay and a notice period. In addition, employers are responsible for withholding employees’ social security and income tax contributions.
Independent contractors, on the other hand, are self-employed, and the company is seen as their customer. Contractors are responsible for the payment of their taxes and benefits. Contracts can be terminated following the contract\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\'s provisions or the provisions laid down in the Civil Code of the Republic of Lithuania. They do not create the obligation for the company to provide severance pay.
From the employer’s perspective, the company has more control over an individual who is an employee when it comes to confidentiality and intellectual property. If there is an agreement in place, employees are not allowed to set up competition or poach staff, while contractors have the freedom to act as they wish (unless agreed otherwise on the contract).
Penalties for misclassification in Lithuania
Companies disguising an employment relationship and making it appear like a relationship with independent contractors are liable to the following:
- An administrative penalty of €868 – €2,896 per misclassification on the first instance (Repeated violations increase the fine to €2,896 – €5,792 per misclassification.)
- Converting the contractor into an employee immediately and providing them with the mandatory benefits
- Backpaying the employee for all the work performed that was not correctly accounted for (the period of misclassification)
If the company is found responsible for misclassifying the employment relationship, it may face other negative consequences such as restrictions of participating in public procurement or receiving state subsidies.