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

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

According to Article 11 of the Labor Code of the Republic of Uzbekistan, concluding civil contracts that actually regulate labor relations between an employee and an employer is prohibited. 

The employer faces administrative liability for refusing to formalize the employment relationship in accordance with Article 49 of the Code of Administrative Liability and there is a risk of additional taxes being assessed for the entire period of employment under the civil contract (unified social tax and pension payments), as well as periodic periods of unused vacations, sick leave, and other labor benefits.

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

To mitigate the risk of reclassification in Uzbekistan, the subject matter of the contract should be formulated as a specific result (for example, “developed software” or “prepared report”), rather than as the performance of a regular job function associated with a particular position. The contract should expressly confirm the contractor’s economic and operational independence, including the absence of subordination to internal labor regulations, the right to determine working time and methods, and, where possible, the use of the contractor’s own technical resources. It is important to exclude any provisions indicating control by the client/employer, such as disciplinary liability, fixed working hours, etc.

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

When determining the status of an employee, priority is given not to the text of the contract, but to the actual working conditions. The legal qualification of relations is determined not by the title of the contract, but by its actual content and actual application. According to Resolution No. 26 of the Plenum of the Supreme Court of the Republic of Uzbekistan dated 20 November 2023, the conclusion of a civil law contract with an individual which, in substance, regulates relations based on an agreement between an employee and an employer for the personal performance by the employee, for remuneration, of a labor function, subject to the employee’s subordination to internal labor rules and with the employer providing working conditions stipulated by labor legislation and other labor-related legal acts, shall result in such relations being recognized by a court as individual employment relations. 

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

The company will be recognized as a tax agent. If a self-employed individual paid social tax or a fixed tax independently, such payments are not automatically credited against the employee’s personal income tax (PIT) in the event of reclassification. There are also tax obligations for the payment (additional assessment) of social tax. According to Article 403 of the Tax Code, the object of social taxation is the employer's expenses on employee salaries. The tax is paid by the employer and certain categories of individuals.

Social and pension obligations. Under an employment contract, the employer makes mandatory funded pension contributions monthly by reducing the amount of personal income tax accrued in accordance with the Law of the Republic of Uzbekistan "On the Funded Pension Provision of Citizens" dated 02.12. 2004, No. 702-II. In the event of reclassification, the business must make an additional mandatory pension contribution.

In addition to the taxes themselves, the company may also incur liability for late payment (penalties and fines).

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

The courts’ position on the reclassification of an agreement with an independent contractor (a civil contract) is reflected in Resolution No. 26 of the Plenum of the Supreme Court of the Republic of Uzbekistan “On the Practice of Court Application of Legislation Governing the Termination of Employment Contracts” dated 20.11.2023. When determining the nature of the contract, courts consider the presence of mandatory employment contract terms stipulated by the Labor Code in the text of the civil contract and during its execution, such as the place of work, position according to the staffing schedule, work in a specific profession, specialty with qualifications, start date, terms of remuneration, work and rest schedule, and other conditions.

Therefore, long-term cooperation with the same contractor alone does not constitute a red flag. Judges and regulators consider not only the duration of the cooperation but also a variety of other factors that may lead to the reclassification of the contract. Legislation and practice do not establish maximum terms for such contracts. The main criterion for regulators and courts is the nature of the relationship.

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

Legal risks are connected to the reclassification of the contract which lead to penalties and repayment of abovementioned taxes. However, contracts on a cross - border basis might face risks of double taxation, IP ownership, payment terms and visa/ permits. Also, another risk is related to work permits. Independent contractors will be required to obtain work permits to reside, stay and work under employment contract in the Republic of Uzbekistan. 

Risks could arise also in relation to IP issues under contract if there are mandatory requirements of the host country on IP.

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

Companies are recommended to establish internal policies that regulate issues of legal review and drafting of contracts to avoid misclassification. Drafting of sample contracts is recommended too, but with avoidance of job descriptions or schedules and other terms which might resemble labour contract. They should include terms on independent status of contractor, tax obligations, IP, deliverables - based payment structure and dispute resolution. In case of cross - border provisions jurisdiction and applicable law should be specified.  Furthermore, there should be clear project descriptions, deliverables and KPIs that demonstrate independence of contractors. To mitigate further risks high - risk contractors should be converted into formal employees if their work resembles employment. Overall, long-term contracts should be regularly reviewed to ensure the absence of risks. 

Author: Javokhir Urinov, Sitora Kozimjanova