Self-Employed and Independent Contractors: Mitigating Legal Risks in Belarus

1) What are the main legal risks for companies arising from misclassification of self-employed individuals and independent contractors?

Incorrect qualification of legal relations (substitution of employment relationships with civil-law contracts) may lead to reclassification as actual employment relationships, which entails violations of labor and tax law.

Violation of tax law will be considered as a form of conducting a business transaction not justified by economic or other reasons (subparagraph 5, paragraph 2 of the Resolution of the Council of Ministers of the Republic of Belarus No. 465 dated 15.07.2022 “On the peculiarities of evaluating certain business transactions”).

This may result in administrative or criminal liability for non-payment of personal income tax and social contributions, as well as the accrual of penalties on the unpaid amounts.

For reference: for criminal liability to apply, the amount of unpaid tax must be approximately USD 55,000, and USD 40,000 for social contributions.

Violation of labor legislation arises from the interpretation of “employment relationships.” It entails the following risks for the company:

• Possible inspections by the Labor Inspection Department;
• Issuance of an order to the employer to conclude an employment contract, pay compensation for moral damages, and for unused leave;
• In the event of termination of a civil-law contract and reclassification as actual employment relationships, there is a risk of recovery of compensation for forced downtime;
• Liability of the company’s director may be incurred in the form of administrative responsibility.

2) How can companies structure contracts with independent contractors to reduce the risk of reclassification as employment relationships?

Regulatory authorities assess not only the current contract but also previous relations with the individual (if any). In this regard, several recommendations for structuring contracts can be proposed:

• Differentiation between the services/work performed by the individual compared to those previously performed under an employment relationship;
• Avoidance of formalistic contracts (absence of acts, invoices, or detailed description of services/work);
• Clear definition of the assignment and exclusion of prolonged work that may have the characteristics of an employment relationship;
• Exclusion of the contractor’s obligation to comply with the company’s internal regulations applicable to employees, including familiarization with them (e.g., bonus policy, internal labor rules);
• Clear distinction in the contract between the contractor’s and the company’s expenses (if any).

When entering into any contract with a contractor, it is necessary to assess the economic rationale for the conclusion of the contract.

3) To what extent does actual working practice outweigh contractual wording when assessing employment status?

When determining employee status and the existence of actual employment relationships, regulatory authorities always analyze the work actually performed through surveys of the workers themselves, their colleagues, and counterparties. 

In the case of a discrepancy between the work actually performed and the documentation, priority is given to the former.

4) What tax, social security, and pension liabilities may arise for businesses if an independent contractor is reclassified as an employee?

Upon establishing actual employment relationships, tax authorities adjust the tax base for personal income tax, mandatory social contributions to the Social Protection Fund, as well as penalties on these payments.

If the amount of unpaid tax reaches approximately USD 55,000 and USD 40,000 for social contributions, criminal liability applies to the company’s director. If the unpaid amount is lower, the director may incur administrative liability.

5) How do courts and regulators treat long-term cooperation with the same independent contractor, and when does duration become a red flag?

Legislation and practice do not establish an exact period that may be considered a “red flag” when dealing with a contractor. However, several criteria may, in combination, be regarded as such:

• The contractor was previously an employee of the company performing similar functions to those now carried out as a contractor;
• The contractor’s remuneration is several times higher than their previous salary for comparable functions;
• The contractor does not work with other companies;
• The contractor performs work that is not one-off but of a prolonged nature, characteristic of employment relationships.

6) What additional legal risks arise when engaging self-employed individuals or independent contractors on a cross-border basis?

The risk of engaging self-employed individuals and independent contractors in cross-border projects is associated with recognition of a permanent establishment of the Belarusian organization under the tax legislation of the country of registration.

The engagement of Belarusian contractors by foreign organizations creates a risk of recognizing a permanent establishment of the foreign organization under Belarusian law. To establish this fact, an analysis is conducted of the activities of the self-employed individual or independent contractor in Belarus in terms of their efforts to generate profit for the foreign company in Belarus.

7) What compliance tools, internal policies, or audits can companies implement to proactively mitigate misclassification risks?

As compliance tools, it is recommended to include the following:

• Analysis of the work/services to be performed by the contractor in terms of duration and the presence of characteristics of employment relationships;
• Analysis of any prior employment relationships with the contractor and their duties under those employment relationships;
• Analysis of the contract in terms of work schedule, reporting, work procedures, assignment formulation, and the contractor’s positioning;
• Specification that the contractor is not obliged to comply with the company’s internal regulations applicable to employees;
• Analysis of the contractor’s remuneration and its correlation with payments due to employees, such as bonuses and incentive payments;
• Requesting information from the contractor regarding other contractors they work with;
• Exclusion of promotion or advertising of the contractor by the company;
• Ensuring that the contractor is not represented as an employee before counterparties or employees.

Author: Polina Sachava