Companies doing business in Norway face unique challenges, especially regarding the classification of workers as employees or subcontractors. Understanding these distinctions is crucial for compliance with Norwegian laws and for successful operations in Norway. Correctly classifying individuals as employees or subcontractors is crucial, as misclassification can lead to significant risks and liabilities.
The primary approach is to hire employees, which aligns with the main rule in Norway. However, there is also the alternative of engaging subcontractors to perform specific parts of the work, offering flexibility in managing project tasks and providing an effective solution for addressing needs for specialized skills and expertise. This blog provides an overview of the risks and liabilities associated with the misclassification of subcontractors, considering regulatory and legal developments in Norway over the past years.
Whether you are setting up a new venture in Norway or managing ongoing projects, distinguishing between employees and subcontractors is essential to maintain compliance within the Norwegian legal framework.
For independent contractors, the terms of the engagement are solely governed by the agreement between the contractor and the principal, and the Working Environment Act does not apply.
If the workers are classified as employees, they will, among other things, be entitled to working hour limitations, holiday and holiday pay, and pension benefits. There will also be regulations concerning health and safety compliance and stricter rules for termination.
Also read: What you need to know about Norwegian labor law
The distinction between employees and subcontractors is outlined in the law:
An employee shall mean anyone who performs work for and is subordinate to another. When determining this, emphasis shall be placed on, among other things, whether the person in question makes their personal labor available on an ongoing basis, and whether the person in question is subordinate through management, leadership, and control. It shall be assumed that an employment relationship exists unless the client shows it to be highly probable that an independent contractual relationship exists.
In 2023, the legislation introduced a presumption in favor of an employment relationship in cases of uncertainty. This new presumption establishes a burden of proof for the employer or principal company when distinguishing between employment and independent contractor relationships.
Norwegian courts have previously assessed the distinction between contracting and hiring.
Generally, it is considered a subcontractor agreement when:
Several risks must be considered when classifying workers as employees or subcontractors, as misclassification can lead to significant financial and legal consequences for the company.
One significant risk is that misclassified employees may claim permanent employment, requiring the company to comply with employer responsibilities outlined in the Working Environment Act.
Also read: Why contract classification is key to staying compliant in Norway
In a recent Supreme Court case, HR-2024-2368-A, the court addressed the financial implications of misclassifying employees as subcontractors. The court ruled that such employees are entitled to compensation for overtime, holiday pay, and other benefits in accordance with labor regulations. The calculation of these payments should be based on actual work performed, with hours exceeding legal limits counted as overtime. The court stated that deductions had to be made to avoid overcompensation if the amounts already paid fully or partially compensated for the claims made. Such deductions would depend on a specific assessment in each individual case, and the burden of proof for overcompensation rested with the employer.
Additionally, the court clarified that vacation pay claims are not subject to the statute of limitations, allowing them to accumulate if the employee was unable to take vacation due to misclassification.
Another Supreme Court case, HR-2023-1637-A, highlighted that misclassified employees have the right to pension savings from the employer, although this right is subject to a statute of limitations under Norwegian rules.
These rulings emphasize the importance of accurate classification to avoid substantial financial liabilities, including back payments for overtime, pension benefits, and holiday pay. Furthermore, the recent dates of these rulings indicate that this is a highly relevant and current issue in Norwegian labor law.
Misclassification also poses significant tax implications.
Subcontractors’ income is typically reported as “business income” rather than “wage income,” affecting tax calculations and reporting. Incorrect classification can lead to mandatory reclassification of income by tax authorities, resulting in additional tax liabilities and the imposition of “additional tax penalties” for both the employee/subcontractor and the company.
Different authorities may evaluate classification differently. Labor authorities focus on subordination and control, while tax authorities emphasize risk and responsibility for work output. To avoid conflicting conclusions, it is crucial to conduct thorough assessments that consider both employment and tax regulations.
At Magnus Legal, we understand the complexities and challenges that these regulatory changes present for foreign companies doing business in Norway.
Our team has successfully assisted numerous foreign companies and sole proprietorships in appealing to the Norwegian tax authorities regarding misclassifications and the resulting tax issues. We understand that each case is unique and provide tailored assessments to address your needs.
To avoid complications, it is crucial to ensure correct classification from the outset. Proper classification ensures compliance with tax regulations and mitigates the risk of financial penalties and legal disputes. Our experienced legal team is ready to guide you through these issues, ensuring compliance and safeguarding your business interests.
To help you better understand these important topics, we are hosting a free webinar on February 18th. This session will cover the intricacies of employee and subcontractor classification, recent legal developments, and practical steps to ensure compliance.