Can the activities of a private entrepreneur (FOP) be recognized as labor relations?

When can regulatory authorities recognize the activities of an individual entrepreneur as labor relations?

Regulatory authorities may consider the activities of an individual entrepreneur to be an employment relationship if the signed “contract with an individual entrepreneur” has the classic characteristics of hired labor, as established by the labor code and judicial practice.

The main characteristics of an employment relationship are:

• A fixed schedule, performing tasks as directed by a manager, and compliance with the company’s work rules (time sheets, instructions) – a basic feature of an employment contract.
• Lack of independence in choosing how to perform the work – the entrepreneur does not hire assistants or subcontractors.
• Regular payment even in the absence of results – monthly payments similar to advances and salaries, without acts of acceptance and transfer of work or services.
• The amount of remuneration is based on the staff rate (for example, “35,000 UAH per month + bonus”) – a typical salary formulation without a price for a specific result and/or volume of services provided.
• Unlimited term of the relationship – the contract is concluded “until full performance,” but is renewed for years, while the scope of work/services is not specified.
• Job qualification – the contract specifies a “position” from the Classification of Professions (accountant, cashier, driver, etc.) – according to court practice, courts recognize such relationships as labor relations (Resolution of the Supreme Court of Ukraine in case No. 0840/3691/18).
• Single customer – the source of >75% of the individual entrepreneur’s income is cooperation with one counterparty, as a result of which there will be no “business” distribution of customers in the tax reporting.

How can this be detected?

Checking employers to see if there’s a hidden employment relationship between the client and the individual entrepreneur is mainly done by the State Labor Service of Ukraine together with the State Tax Service of Ukraine.
First, the State Labor Service of Ukraine and the State Tax Service of Ukraine analyze their databases and data collected by the Pension Fund to identify entrepreneurs who have been receiving all their income from one customer for a long time and paying only the minimum social security contributions. The reason for the inspection is often a complaint from the employee themselves, an anonymous call to the hotline, or an analytical signal from the internal systems of the regulatory authorities.
The inspection is carried out without warning.The State Labor Service inspectors inspect the office, record the presence of the individual entrepreneur at the workplace according to the schedule, review time sheets, the presence of corporate badges, vacation schedules, and request reports on work performed. Meanwhile, tax authorities check the bank statements of the customer company, in particular whether there are two identical payments each month, whether the individual entrepreneur incurs expenses typical of an independent business, and whether the addresses of the entrepreneur and the company’s office match.
It is important to note that failure to allow an inspection visit to identify unregistered employees is punishable by a fine of 16 minimum wages.
If such signs are found, the State Labor Service recognizes the relationship as an employment relationship, draws up a report and issues a prescription.

Consequences of detection

The result of recognizing relations with an individual entrepreneur as labor relations is the additional assessment of personal income tax, military tax, and social security contributions. Separate financial penalties are imposed:

• enterprises/individual entrepreneurs in groups 1-3 of the single tax receive only a warning, while enterprises/individual entrepreneurs in the IV group of the single tax or the general taxation system will receive a fine of 10 times the minimum wage established at the time of the violation (from 01.01.2025 – 80 thousand UAH).
• repeated violation regarding the actual admission of an employee to work without concluding an employment contract within 2 years – 30 minimum wages.

How to regulate relations with individual entrepreneurs to reduce the risk of them being recognized as employees?

To minimize cases of reclassification of contracts with sole proprietors as employment contracts, it is important to avoid wording that indicates a relationship between an employer and an employee. When formalizing cooperation with an individual entrepreneur:

• conclude a contract for the performance of work/provision of services, according to which the work/services will be one-time or periodic;
• outline the scope of work, deadlines, rights, and obligations of the parties;
• do not forget about the individual entrepreneur’s freedom to choose the time and method of performing the work, without a standard 9:00 a.m. to 6:00 p.m. schedule and without being subject to the customer’s internal rules (specify in the contract that the individual entrepreneur uses their own equipment);
• after achieving the result, sign the relevant acts, on the basis of which the individual entrepreneur will be paid (at the same time, payments should not be made on fixed days);
• time sheets, job descriptions, schedules, sick leave, and vacations do not apply.

Conclusions

When choosing a model of cooperation with an individual entrepreneur, it is important to clearly distinguish between civil law relations with an individual entrepreneur and with an employee. This will help avoid: inspections by the State Labor Service and tax authorities, reclassification of relations as labor relations, additional tax liabilities, and financial penalties.