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

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

The Labor Code of Turkmenistan regulates relations arising between an employer and an employee formalized under an employment contract and guarantees such employees labor rights and social protections.

The concept of “self-employed persons” is not directly established in the legislation of Turkmenistan as an independent legal status. Part 1 of Article 29 of the Code of Turkmenistan on Social Protection of the Population determines which periods of activity carried out by self-employed individuals and persons providing professional services are included in employment record for pension purposes. Other references to “self-employed persons” as a legal category or separate legal status are absent from Turkmenistan legislation.

In legal practice, however, self-employed persons are understood as natural persons who independently carry out activities without entering into employment relationships, receive income directly from the results of their activities, and independently fulfill tax and other obligations. Such persons, including self-employed individuals and independent contractors, fall under civil law regulation rather than labor legislation.

In the event of improper classification of relationships with self-employed individuals and independent contractors, companies may face the following risks:

• If the actual terms of interaction between the company and an individual correspond to the characteristics of an employment relationship (for example: subordination to internal work regulations, continuous supervision and management by the company, receipt of regular remuneration determined by the employer, compliance with a job description, i.e., performance of functions similar to those of an in-house employee), then, in the event of a dispute, the courts may reclassify the civil law agreement as an employment contract and recognize the individual as an employee. Such reclassification would result in the company being required to calculate and pay all employer-related obligations, including statutory social benefits, vacation pay, sick leave payments, and other mandatory compensation.
• Reclassification of the relationship as employment would also entail the necessity to fulfill relevant tax, social security, and pension obligations (see answer 5).

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

To reduce the risk of reclassification of relations with independent contractors into employment relations, companies should structure contractual relations in accordance with the CCT governing contracts for work and contracts for paid services, taking into account their distinction from labor relations.

Under Article 10 of the LCT, labor relations are understood as relations based on an agreement between an employee and an employer for the personal performance by the employee, for remuneration, of a labor function, with subordination to internal labor rules and with the employer ensuring working conditions provided by labor legislation, an employment contract, and collective agreements.

Independent contractors are engaged under contracts for work or contracts for paid services. Under Article 667 of the CCT, the subject of a contract for work is the performance of specific work with the achievement of a concrete result for which the customer pays agreed remuneration. Under Article 703 of the CCT, under a contract for paid services the contractor undertakes, at the customer’s request, to provide services (perform certain actions or activities), and the customer undertakes to pay for such services. Accordingly, such contracts must expressly stipulate that the contractor’s obligations are result-oriented rather than process-oriented, distinguishing them from employment relations.

Contract terms must not contain references to internal labor regulations, working time regimes, work schedules, or job descriptions. The contractor must retain independence in organizing their activities. Under Articles 670 and 671 of the CCT, unless otherwise provided by law or contract, the contractor has the right not to perform work personally and may engage subcontractors with the customer’s consent, which further confirms the civil-law nature of the relationship.

Special importance is attached to payment provisions. Under Article 681 of the CCT, remuneration is paid upon acceptance of the completed work (services) or a part thereof. Therefore, it is recommended to avoid provisions on regular fixed (monthly) payments characteristic of wages and instead provide for payment upon acceptance of results or stages based on acts of completed work (services rendered).

Additionally, contracts should allocate risks in accordance with Article 685 of the Civil Code of Turkmenistan, under which the contractor bears the risk of accidental loss or deterioration of work results until acceptance by the customer. It is also advisable to expressly state that responsibility for work safety lies with the contractor, in line with Article 692 of the Code, emphasizing the contractor’s independent status.

Where work is performed using the contractor’s materials, it is recommended to include provisions under Article 679 of the CCT, pursuant to which the contractor transfers not only the work result but also ownership thereof to the customer. Such provisions further confirm the property-result nature of contractor relations.

In addition, companies should also avoid providing contractors with permanent workplaces, equipment, or tools typical of employment relations.

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

When determining whether a natural person is an employee or an independent contractor, priority is given to the actual conditions of work performance rather than merely the formal provisions of the contract. This approach directly follows from the norms of the LCT and the principles of its application.

Under the second paragraph of Part 1 of Article 15 of the LCT, the actual admission of a person to work with the knowledge or instruction of the employer, regardless of proper execution of an employment contract, constitutes grounds for the emergence of labor relations. Thus, the legislator directly recognizes that labor relations may arise based on the nature of the actual interaction of the parties, and not on the form or name of the contract.

In resolving disputes, authorities assess the substance and essence of the legal relationship. If a person in fact performs work personally, on a permanent basis, in the interests of the company, under its management and control, with subordination to established working hours and internal labor rules, such relations are by their nature labor relations. The existence of a civil law contract does not preclude recognition of labor relations.

Additionally, Part 4 of Article 2 of the LCT establishes the principle of priority of labor legislation in the event of contradictions with other regulatory legal acts or contractual provisions that reduce the level of employees’ rights and guarantees. This means that where a civil law agreement in fact substitutes an employment relationship and deprives an individual of statutory labor protections, the provisions of the Labor Code shall apply.

Accordingly, where there is a discrepancy between the contractual terms and the actual organization of work, priority is given to the substantive nature of the relationship. This may result in the reclassification of a civil law relationship as an employment relationship, with all ensuing legal consequences for the company.

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

Reclassification of relations with a contractor as labor relations means that the enterprise is required to fulfill all employer obligations for the entire period of the actual relationship. This includes the payment of taxes, pension and social contributions, as well as the provision of statutory guarantees and compensations to the employee in accordance with the legislation of Turkmenistan.

Tax Obligations

The enterprise is obliged to calculate and withhold personal income tax in the manner established for wages, namely at the rate of 10% of the employee’s income, if during the term of the civil law contract the enterprise did not withhold such tax, assuming that it was not acting as a tax agent. This also applies to contributions that the enterprise was required to withhold from the individual.

Pension and Social Obligations

The employer is required to pay mandatory pension contributions for the employee for the entire period of their actual work. In particular, pension contributions are payable in the amount of 20% of the employee’s salary. In addition, the employer is obliged to grant and compensate labor and social guarantees provided for by the Labor Code of Turkmenistan, including paid annual leave, payments for periods of temporary incapacity for work, and other compensatory payments that were not provided to the employee due to the incorrect qualification of the relationship.

Employer’s Liability

The reclassification of relations may also result in the imposition of administrative liability on the officials of the enterprise in accordance with the Code of Turkmenistan on Administrative Offenses. Such liability may arise for violations of labor legislation, as well as for the late calculation and payment of taxes and other mandatory payments, regardless of the form of ownership of the enterprise.

Thus, the reclassification of a contractor as an employee in Turkmenistan may lead to significant financial and legal consequences for a business, as the enterprise bears employer liability for past periods, including tax, pension, and social obligations, as well as liability before supervisory and regulatory authorities.

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

Under the legislation of Turkmenistan, long-term cooperation between enterprises and the same contractor does not constitute a violation and does not, in itself, result in the transformation of civil law relations into employment relations. The laws of Turkmenistan do not establish statutory maximum terms for civil law contracts.

At the same time, in practice, the duration of contractual relations is relevant primarily for tax qualification purposes. As a general rule, cooperation exceeding three months is treated as an indicator of the systematic nature of an individual’s activities, which affects the taxation of income depending on the type of activity carried out. Such an assessment does not in itself lead to the reclassification of the relationship as employment.

However, in the event of a dispute regarding the reclassification of a civil law relationship as a labor relationship, the courts will also take into account the duration of the cooperation, together with other factual indicators, such as subordination, the nature of the functions performed, the regularity of payments, and the degree of the contractor’s independence. The duration of the relationship alone is not a decisive factor; however, when combined with other characteristics of a labor relationship, it may be treated as “red flag.”

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

Labor relationships with foreign nationals in Turkmenistan are governed by the same principles as labor relationships with citizens of Turkmenistan; however, they have specific features set forth in the Tax Code of Turkmenistan and the Law of Turkmenistan “On Migration.” Reclassification of civil law relationships into labor relationships may entail additional risks, the most significant of which are tax and migration-related risks:

1. Risk of Double Taxation. In the absence of properly structured contractual arrangements and payment mechanisms, the income of a foreign contractor may be subject to taxation both in Turkmenistan (at the source of payment) and in the contractor’s country of tax residence. In the event of reclassification of the relationship as employment, the company may be deemed a tax agent and, therefore, be obliged to withhold income tax from the employee’s salary. In order to mitigate this risk and apply the provisions of international double taxation avoidance treaties, the foreign contractor must provide a tax residency certificate officially confirming their tax resident status in the relevant jurisdiction.

2. Migration Risk. If a foreign national is engaged as an “independent contractor” but in practice complies with a fixed work schedule and is subject to office rules, such activity may be recognized as unlawful employment. Pursuant to the Law of Turkmenistan “On Migration,” foreign nationals are entitled to carry out employment activities in the territory of Turkmenistan only upon obtaining the relevant permit. A violation of migration legislation requirements, as well as inconsistency between the actual activity performed and the declared purpose of entry, in accordance with the Law of Turkmenistan “On Migration,” may result in visa cancellation and removal (deportation) of the foreign national from the country, and may also lead to administrative liability for the contracting company.

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

In order to mitigate the risks of incorrect qualification of relationships with individuals (self-employed persons / independent contractors), enterprises may implement a set of compliance tools aimed at distinguishing labor relations from civil law relations, as well as at monitoring the actual conditions of cooperation.

In practice, the following tools are applied in Turkmenistan:

1. Development and approval of an internal policy on the engagement of contractors and self-employed individuals. Such a policy sets out the criteria for the admissibility of civil law relationships, a list of indicators of labor relations, and the procedure for selecting the appropriate form of engagement with individuals. The existence of a unified internal document ensures a consistent approach within the enterprise and reduces the risk of the formal use of civil law contracts. Clear regulation of these issues allows for a substantial minimization of the risk of reclassification.

2. Development and use of standard civil law contracts. The use of such contracts, prepared in compliance with the requirements of civil legislation and excluding elements characteristic of labor relations (such as a fixed working schedule, subordination to internal work rules, and the performance of job-specific functions), contributes to reducing the risk of reclassification. It is recommended that such contracts be regularly reviewed in light of legislative amendments and the practices of supervisory and regulatory authorities.

3. Training of enterprise personnel. Increasing the awareness of employees involved in the engagement and management of contractors (including HR personnel, accounting staff, and department heads) regarding the differences between labor and civil law relationships helps reduce the risk of inadvertently creating, in practice, indicators of labor relations.

Author: Ikbal Said Alauddin, Lachin Amandurdiyeva, Gulenar Akmyradova