Supposedly self-employed service providers (e.g., freelancers, contractors or subcontractors) in Switzerland are often in fact so-called “fictitiously self-employed persons”. As a result, the actual employer does not pay any social security contributions and there is a risk that the fictitiously self-employed person will not be covered by social protection for workers. If the fictitious nature of the self-employment is revealed, the employer faces various obligations, some of which are applied retroactively. But when is there fictitious self-employment and what are the legal consequences?
When is there an employment relationship or respectively fictitious self-employment? In practice, the distinction between normal employment and self-employment is important because of the different legal consequences. Therefore, it is necessary to examine, on the basis of economic circumstances, whether a service provider is actually self-employed or whether there is in fact an employment or similar relationship with all the rights and obligations associated with it.
Among others, the following criteria indicate an employment relationship: The service provider (1) does not have to provide a work result or a success, but rather a work performance on time; (2) is integrated into the work organization of the contractual partner; (3) is bound by the instructions of the contractual partner, that is, he does not act autonomously; (4) cannot move freely on the market, e.g. conclude contracts himself; (5) operates on a regular basis and essentially only for one (main) contractual partner (and is thus economically dependent on it); (6) is not paid on a flat rate but per hour; (7) is subordinated to the contractual partner, that is, it must not only be accountable, but the contractual partner can control the performance; (8) bears no entrepreneurial risk; (9) gets his working equipment provided by the contractual partner; and (10) has a need for protection.
These criteria provide only indications as to whether an employment or similar relationship exists. The decisive factor is whether a service provider is “economically dependent” on a contractual partner. The greater the dependency of the service provider on the contractual partner, the more likely an employment relationship or a fictitious self-employment, respectively, is assumed. In general, the dependency on the contractual partner must be so intense that the application of the protection rules provided under labour law is justified. It is important to note: Not the designation of a contractual relationship by the parties, but the actual co-operation is significant.
According to a widespread concept of Swiss law, individual protection rules provided under labour law (e.g., protection against dismissal, continuation of salary payments in case of sickness, paid holiday, work reference, lowerliability standard, etc.) should be applied, at least by analogy, to fictitiously self-employed persons. The “employer” is therefore at risk of being confronted with substantial financial claims by a fictitiously self-employed person that were not budgeted for or are not insured.
When a foreign service provider works in Switzerland for a limited period of time, the Swiss Federal Posted Workers Act (PWA) and its related ordinance apply. Upon request by the authorities, the supposedly self-employed Chinese service provider has to prove his self-employment and provide copies of relevant documents in an official language of Switzerland (e.g., work permit and service contract).
If the foreign service provider is qualified as an employee by Swiss authorities, his employer faces several duties under the PWA. An employer based abroad who sends an employee to Switzerland to work for a limited period of time, shall guarantee the minimum employment and salary conditions in Switzerland (e.g., minimum pay, working hours, health protection, non-discrimination, etc.). In case of violations of his duties according to the PWA, the employer can be punished with administrative sanctions (e.g., fines or exclusion from the Swiss market for one to five years, public list, etc.) or criminal sanctions such as fines up to CHF 1 million, and seizure of assets such as unlawful earnings.
On 19 July 2017, the Social Security Treaty between the States of China and Switzerland came into force. It basically states that an employee sent by his employer in one state to work in the other state is subject to the social security regulations of the former during the first 72 calendar months. Afterwards he is generally subject to the social security regulations of the state he was sent to. The competent authority has to issue a certificate of posting which has to be submitted to the authorities of the state where the employer applies for exemption of social security contributions. In Switzerland, these exemptions only apply to Old-Age and Survivors’ insurance (AHV) and disability insurance (IV), and not to accident insurance, for example.
If a fictitiously self-employed person has registered with Swiss social security, he appears as self-employed and pays, at least, his social security contributions. If the fictitious nature of the self-employment is then discovered by the authorities during a payroll control and the fictitiously self-employed person is deemed a dependent employee, the missing social security contributions can be claimed from the actual employer for up to five preceding years. Accident insurance contributions must also be paid retrospectively and penal premiums may be charged. In addition, the employee must be connected to the occupational pension fund, provided that he is not already registered independently.
If a fictitiously self-employed person is not enrolled in a social security scheme, both the fictitiously self-employed person and the actual employer can also be prosecuted for violating the penal provisions on undeclared work.
For these reasons, it is advisable for companies which have unclear employment situations to verify them and to resolve any uncertainties before sending service providers to Switzerland.