Covert employment in Spain: an invisible phenomenon.

Current situation of "plusvalía municipal” tax in Spain.

Covert employment in Spain: an invisible phenomenon

By Juan Carlos Lombardia

1. What is a covert employment relationship?

A covert employment relationship—commonly known as false self-employment—refers to a professional who is registered as self-employed, and who is providing services to a company under a commercial service agreement; but, the real nature of the relationship is that of employer-employee.

In this respect, what differentiates a “real” self-employed professional and a “false” one is that, in the case of the one in false self-employment, there is nothing that distinguishes them from employees who are working for the company under an employment contract, and registered as active in the Spanish Social Security General Regime.

An important principle regarding this point is that of the “primacy of reality”. This means that what is set out in signed contracts is not important. What actually matters is the reality of the legal relationship.

Consequently, a person can be registered as self-employed and have signed a commercial agreement, but, if they are actually fulfilling the requirements to be considered an employee, then they will be deemed to be an employee, and not self-employed.

2. What are the main elements that determine whether someone is in false self-employment?

The following list of practical questions can be used to identify whether someone is in covert employment:

• Does the self-employed professional work exclusively for one company?
• Is the self-employed professional subject to the power of company management in the same way as company employees?
• Does the self-employed professional perform their duties using materials provided by the company?
• Does the self-employed professional have to comply with specific working hours and holiday periods that are decided based on the company’s rules and at its discretion?
• Does the self-employed professional perform their work in person, at the company work centre?
• Does the self-employed professional issue monthly invoices for identical amounts, regardless of the volume or difficulty of their work?

If the answers to these questions are all yes, then it is very likely that the person is in covert employment. To be able to identify whether the relationship in question is one of employment, or a commercial relationship, it is necessary to see whether the typical features or characteristics of employment arise. These are: non-involvement of the employee—primarily regarding risks and profits—, subordination or dependence, volition and remuneration, all of which appear in the definition of an ordinary employment relationship established in the Spanish Workers’ Statute.

In this respect, an employee can be distinguished from a self-employed professional based on the following criteria:

An employee receives a periodic salary for the work they do, and performs their activities within the scope of the organisation and under company management. Moreover, it is the company that organises the work and provides the customers. The company is also the one to decide working hours and days, and to provide the work centre and the tools needed to perform the tasks.

In short, the employee works under the orders of company management, and assumes no risks of any type. Neither do they have any share in the direct profits from the activity.

On the other hand, self-employed professionals perform their work on a habitual basis, but decide their own hours, and how to organise their time and tasks. They may contract employees to work under them. Furthermore, a self-employed person performs their work using their own means and materials. Finally, if someone is self-employed, then they assume the risk derived from their activities. They have no set or periodic income. Instead, their income depends on the work they do.

3. What are the risks and consequences for the company if it engages workers in false self-employment?

Companies are typically unaware of the extent of their liability in situations involving workers in false self-employment. In the majority of cases, this can lead to serious contingencies.

The legal situation that arises when there is a covert employment relationship is called “evasion”. Its censure by the Social Courts is encompassed by one of the most elemental principles regarding the general effectiveness of contracts and legal acts.

It is therefore not surprising that the Spanish Inspectorate of Labour and Social Security is playing a role in this matter. According to sources from this agency, it is discovering a large number of contracts involving evasion of the law, in numerous activity sectors.

If a company has signed a contract with someone who is in false self-employment, it may, generally speaking, find it is facing the following contingencies:

• The person in false self-employment can file a complaint before the Social Courts to request that the employment relationship be recognised as ordinary permanent employment.
• If the relationship is recognised as being one of employer-employee, and if the company terminates the commercial contract, then it will have to pay the person in false self-employment compensation corresponding to unfair dismissal.
• Settlement of the Social Security contributions for the employee in an illegal situation. In this regard, Social Security can claim contributions for the last four years (the maximum term for retroactive penalties).
• Possible penalties imposed pursuant to the criteria established in the Spanish Law on Social Security Offences and Penalties (LISOS), which consist of a fine equivalent to 100% to 150% of the unpaid contributions.
• Possible penalties regarding employment, since the company will not have registered the employee as active in the Social Security General Regime. This breach can lead to an economic fine of between 3,126 euros and 10,000 euros.

For all these reasons, we strongly recommend that businesses perform an analysis of the risks involved in taking on self-employed professionals to provide regular services to the company, to identify whether there are any risks associated with covert employment relationships.

Current situation of "plusvalía municipal” tax in Spain

By David Capitán

On 11 May, the Spanish Constitutional Court declared the unconstitutionality of the state regulation on the Tax on the Increase in the Value of Urban Land (hereinafter, the tax), regulated pursuant to Legislative Royal Decree 2/2004 (Revised Text of the Law Regulating Local Tax Authorities, Spanish acronym TRLRHL), known in Spain as Plusvalía Municipal. Formally, the Constitutional Court had issued verdicts regarding only regional regulations on the tax, approved in Guipúzcoa and Álava.

The Court resolved the issue raised by Judicial Review Court No. 1 of Jerez de la Frontera, which deemed that Article 107 of the TRLRHL (regarding the tax base) was breaching the principle of economic capacity, provided for in Article 31 of the Spanish Constitution, in scenarios where Local Councils were requesting payment of the tax even though the value of the land had not increased. The Court also extended this unconstitutionality to include Article 110.4 of the TRLRHL (method of identifying the tax base), which prevented Local Councils from considering a value increase other than the one resulting from the formula established by Law.

The Court has established that the current method of calculating the tax in scenarios involving the transfer of urban land is unconstitutional and, consequently, it cannot be applied by Local Councils. This verdict means that the current situation of the tax is uncertain, since it is based on the articles declared to be unconstitutional for identifying the amount due and the tax base—Articles 107 and 110.4 of the TRLHL, respectively. To resolve this situation, the legislator will have to establish a new mechanism to enable Local Councils to identify whether or not there has been an increase in value, before requesting payment of the tax.

As far as payers of this tax are concerned, they will find themselves in one of the three scenarios described below, depending on the date when transfer of the urban land took place.

1. Transfers after Judgement of the Constitutional Court of 11 May 2017 where the taxpayer made a profit.

In this scenario, the tax will be fully enforceable when the test applied by the corresponding Local Council identifies that there has been an increase in the value of the land, and the tax base resulting from the calculation formula cannot be questioned.

2. Transfers after Judgement of the Constitutional Court of 11 May 2017 where the taxpayer made a loss.

In this scenario, and until the legislator approves regulations that specify how Local Councils are to identify whether there has been an increase in value, taxpayers can use any evidence permitted by Law to prove that there has not been an increase in the value of the land transferred and, consequently, that the tax is not due.

3. Transfers before Judgement of the Constitutional Court of 11 May 2017.

Taxpayers who paid the tax even though they incurred a loss in the transfer of urban land will find themselves in one of the following scenarios:

1. Scenario 1: the Local Council charged the taxpayer the tax and there was no appeal or, there being an appeal, there was an administrative resolution or court judgement that dismissed it. In this scenario, payment of the tax is final and it cannot be reviewed.

2. Scenario 2: the Local Council charged the taxpayer the tax and there was an appeal, with a final judgement dismissing the appeal, but there was a claim that the tax was unconstitutional. In this scenario, the taxpayer may commence public authority liability proceedings.

3. Scenario 3: self-assessment submitted by the taxpayer pursuant to the corresponding municipal order. In this event, the taxpayer may request rectification of their self-assessment within a maximum term of four years starting from the deadline for submitting this self-assessment. In this rectification, the taxpayer may request application of the Judgement of the Constitutional Court.

Conclusion

The Judgement of the Constitutional Court of 11 May 2017 generates uncertainty for Local Councils regarding the enforceability of the Tax on the Increase in the Value of Urban Land. It means the legislator will have to establish a new mechanism to make it possible to determine whether or not the tax is actually due, so Local Councils can request it only in transfers of urban land where the taxpayer makes a profit.