Hiring-out of labour

Hiring-out of labour has received increasing attention in the Danish business sector – for good reason. Many employers face challenges in attracting and retaining qualified labour. Hiring-out labour allows companies to hire labour from other countries, such as Poland or Romania, on flexible terms. This not only helps to address temporary capacity issues but also brings new expertise and diversity to the organization.

Although it may seem simple and straightforward, it is important for you as a Danish employer to consider whether the arrangement can be defined as “hiring-out of labour”. When assessing the relationship it is therefore important to determine reality and not formality. Simply having drafted a “labour hire contract” does not automatically constitute hiring-out of labour in reality.

What is hiring-out of labour?

Hiring-out labour is an arrangement whereby employers can hire employees from other companies that specialize in supplying labour resources. This practice enables Danish companies to maintain flexibility and efficiency without committing to permanent hires.

For hiring-out of labour to be established, the following conditions must be fulfilled:

1. The foreign employees are made available to a Danish company under a contract between the Danish company and the foreign company.
2. The Danish company pays the foreign company for the hire of the employee for work performed in Denmark.
3. The foreign company remunerates the employee.

The work performed must constitute an integrated part of the company’s operation, meaning its core activity. For example, a hotel hiring a receptionist or a contracting firm hiring a bricklayer. However, it would not be considered an integrated part of the operation if a farmer hires a carpenter to build a barn, as this is not central to the farmer’s core activity.

In some cases the work is an integrated part of the operation yet does not constitute firing-out of labour. This may occur if the service provided to the Danish company can be regarded as an integrated service in both companies—for instance, if a foreign contracting company hires-out a bricklayer to a Danish contracting company. Whether this constitutes hiring-out of labour must be determined according to additional criteria.

If most of these additional criteria lean toward the Danish company, it is likely hiring-out of labour. If they lean toward the foreign company, it is likely not hiring-out of labour.

Criteria:

• Who has the right to instruct the individual on how to carry out the work?
• Who controls and is responsible for the location at which  the work is carried out?
• Has the formal employer directly invoiced the entity receiving the service for the remuneration to the person?
• Who provides the necessary work tools and materials?
• Who decides how many people will perform the work and their qualifications?
• Who selects the person to perform the work and has the right to terminate the contract?
• Who has the right to impose sanctions related to the person’s work?
• Who determines the person’s working hours and holidays?

Furthermore, the arrangement is not considered hiring-out of labour if the service has been permanently outsourced. Determining whether outsourcing is permanent is subject to assessment on a case-by-case basis. However, the service must be outsourced for a long period of time. In practice, a six-month outsourcing period will generally not suffice, whereas a 5–6-year period would typically be considered permanent outsourcing.

Advantages and Disadvantages of Labour Hire

Advantages

• Flexibility
• Economic benefits
• Swift access to labour
• Cost savings
• Labour on demand
• Testing labour before possible permanent hire
• Avoidance of lengthy recruitment processes—and thereby reduction of hiring mistakes or similar
• Tax advantages

Disadvantages

• Difficulty achieving consistency
• Risk of instability
• Potential negative impact on motivation and engagement
• Lack of control over employee development
• Tax disadvantages if the arrangement is not, in reality, hiring-out of labour

Who is liable for taxes?

The Danish employer must withhold income tax (“A-skat”) and labour market contributions (AM-bidrag) for employees—regardless of whether the relationship is considered an employment relationship or hiring-out of labour. If the Danish company fails to fulfill its obligation to withhold tax and contributions, the company becomes liable for payment of the missing amount. Furthermore, the employees are also liable for any unpaid tax and contributions, meaning the Danish company and the employees are jointly liable.

It is a good idea to include the names of the employees and the breakdown of wages when reporting til the Danish Tax Agency.

Please note that even if hiring-out of labour applies, individual employees may choose to be taxed using a Danish tax card (“skattekort”) instead of being taxed under the Hiring-out of labour rules. Whether this is advantageous depends on a specific assessment.

Hulgaard Advokater recommends…

If there is doubt as to whether Hiring-out of labour rules apply, Hulgaard Advokater recommends that tax cards for the foreign employees are obtained in Denmark. The reason is that if the Danish Tax Agency finds that the arrangement does not constitute Hiring-out of labour, but rather an employment relationship, the Danish company would be liable for payroll tax (8 % labour market contribution and 55 % income tax), unless tax cards have been obtained for the employees.

Do you need assistance?

Hulgaard Advokater has specialized advisors and attorneys who can assist you – whether you are involved in a tax dispute with the Danish Tax Agency regarding whether the arrangement constitutes  hiring-out of labour or not, or you need your case or contract assessed. Contact Business Law Attorney Trainee Selina Musa (sm@hulgaardadvokater.dk) or Attorney Lars Lauge Nielsen (lln@hulgaardadvokater.dk).

Remember!
The Register for Foreign Service Providers (RUT) is the official Danish register for foreign service providers. When foreign service providers perform temporary work in Denmark, this must be registered with RUT. The notification to RUT must be submitted before work begins. The Danish company and the foreign company are jointly responsible for registration. There are certain situations in which registration is not legally required, but as a precaution, we recommend that the registration be completed nonetheless. Failure to notify may result in a fine.