Contractors’ Lawsuits for Recognition of Employment Relationship: Changing the Rules of the Game

One of the possible forms of engagement between parties is the provision of services by one party to another as an independent contractor (or in colloquial terms, a freelancer). This type of engagement is not particularly favored by labor courts, which tend, as a matter of policy, to find that engagement with a contractor is, for all intents and purposes, an employment relationship (also known as “misclassification”). Every now and then, labor courts establish new rules with respect to misclassification suits, and the manner in which employment rights should be retroactively calculated and paid to an independent contractor who was actually an employee.

In a recent precedent, the National Labor Court set a new standard for categorizing the nature of the relationship between the parties and calculating entitlement to unpaid benefits in cases in which a court deems an independent contractor an employee.

The ruling and the new calculation method constitute, in our opinion, a clear warning sign from the National Labor Court against contracting with employees in the guise of an independent contractor. Now more than ever, it is important to ensure that an agreement with an independent contractor truly reflects the relationship and the facts on the ground. Accordingly, and in an effort to prevent possible misclassification claims, the initiative for engaging with an independent contractor as such (rather than via employment) should be the contractor’s (not the beneficiary’s), the compensation paid to the contractor must be significantly higher than the salary paid to regular employees, and  the contractual structure between the parties must meet specific requirements set forth by the National Labor Court. 

In misclassification cases, insofar as the court concludes that an independent contractor was actually an employee, the rights and benefits to which the employee would have been entitled, had they been correctly classified as such, must be calculated. Following said calculation, the employee may receive both monetary and non-monetary remedies. This calculation is carried out in two phases.

The First Phase: Monetary Remedy

The difference between rights and benefits that the employee would have been paid had they been correctly classified as an employee, and the consideration that said individual was paid as an independent contractor, is calculated. If the employer manages to prove an alternative salary to which the independent contractor would have been entitled as an employee, the employee will be entitled to the difference between the cost of employment (i.e., salary plus any social benefits) and the consideration they received as an independent contractor. Should the employer fail to prove an alternative salary, the employee’s rights will be calculated based on the consideration received. Therefore, we recommend that service provider agreements contain a clause designating the alternative salary, should an independent contractor file a misclassification suit and demand payment of salary and social benefits.

The Second Phase: Non-Monetary Remedy

The court may grant additional compensation, at its discretion, based on the individual circumstances of each case. There is a presumption that non-monetary compensation should be imposed upon the employer, and that it is upon the employer to rebut this presumption. When granting said remedy, the court considers, inter alia, the extent to which each party has acted in good faith and the significance of the rights denied due to misclassification (certain benefits the employer granted employees, job security, opportunity for advancement, etc.).

Source: barlaw.co.il