Very common in our neighboring countries and subject to a specific legal framework, employment through umbrella company (or wage portage) is not yet very widespread in Switzerland. However, this new type of employment contract has many advantages. Inspired by the practice of self-employed workers, in terms of flexibility and independence, umbrella company also offers the same social protection as the employment law grants to classic employees. However, only the status of employees or self-employed workers are legally recognized in Switzerland and there are no specific legal provisions for contractors and little jurisprudence, which can lead to a reclassification as an independent activity. Explanations.

 

 

What is the legal framework of employment through an umbrella company?

Between the status of the employee and the self-employed status, the umbrella employment is legally considered as a tripartite relationship which combines two existing contracts:

  • On the one hand, a classic employment contract between the contractor employee and the “umbrella company”;
  • And on the other hand, a service contract between the client company and the “umbrella company”.

The relationship between the "contractor employee" and the "umbrella company" is assimilated to a classic employment relationship, even if the employee benefits from a relative autonomy in his missions. This contract combines four essential elements of an employment contract:

  1. Work service

  2. Salary

  3. Working duration

  4. Subordination relationship

However, the subordination criteria must be put into perspective regarding executives in liberal professions or with managerial functions. In such cases, the independence of the consultant is de facto much greater, and the subordination relationship is essentially organizational. In such a case, the acceptance of the business risk by the employer is an argument in favor of the employment contract: the worker renounces to take part in the labor market as a self-employed worker assuming the economic risk and leaves the exploitation of his services to a third party, in return for a guaranteed salary (TF ruling 4A_200/2015 of 3 September 2015). This is the case of a consultant who has a certain degree of independence, but does not take any economic risks, receiving an income, which may be variable but is guaranteed.

However, a decision of March 28, 2017 of the Chamber of Labor Relations of the Court of Justice of the Canton of Geneva qualified the contract between an employee and an umbrella company as a "simulated employment contract" because the subordination relationship was not sufficiently established, and no salary was paid to the consultant.

The main risk of this type of relationship is therefore the legal insecurity resulting from the case-by-case qualification of the situations by both administrative and legal authorities.

In accordance with the swiss labor law, it is important to establish the framework of the relationship beforehand and to stipulate the working conditions under which the missions will be carried out in an agreement (nature of the services, expected salary, working time, vacations, duration of the contract and a subordination relationship).

 

 

What are the advantages of freelance work?

Freeing yourself from the legal, accounting, and administrative requirements related to the creation of a new company are the main advantages of this contract. The choice of this solution enables professionals to outsource the management of all these issues to a single company called the “umbrella company” and to be immediately available for the implementation of their professional activity.

Among the range of services offered by these umbrella companies, we can find :

  • Management of all social obligations
  • Deduction of social contributions and their payment to the various organizations
  • Deduction of the tax at source
  • Billing of the clients
  • Treatment of accounting
  • Assistance in immigration matters
  • etc.

From a legal point of view, the professional will be considered as the equivalent of an employee of the umbrella company. To manage all aspects of this working relationship, these companies will generally take a commission of about 5 to 10% on the total fees received by the worker.

This solution offers the advantage of security to start a new professional activity without risk or the need to test the viability of a project, while benefiting from the guarantees offered by the swiss labor law and the legal assistance of a specialized company.

This new type of contract is also a guarantee of freedom and diversification for managers in professional transition. It enables them to choose their missions but also to offer their expertise to various companies and to operate in a wide variety of sectors.

Nowadays, the practice of freelance work interests a very wide range of profiles and professions: IT, marketing, communication, or human resources sectors, it was initially a solution for experienced senior wishing to maintain an activity at retirement age or to ensure a complementary income. Today, it has been extended to a diversified panel of experts who are still working and who benefit from a recognized professional experience and a sufficient autonomy to develop their own portfolio of clients.

The consultant will have the choice to find his missions and his clients, but it’s common for some umbrella companies to help in the research of prospects and provide the access to their network of companies. He is autonomous in the exercise of his missions and the negotiation of his services with the companies. He determines with the company the scope, the duration, the terms of the missions and the amount of the service before the beginning of the mission. The umbrella company can also offer support to the consultant in negotiations with the companies.

Consultants sometimes choose this solution to offer their services internationally on short-term assignments and to invoice their foreign clients in a simple manner. They can then opt for the status of seconded worker or expatriate. The umbrella company will then take care of all the administrative aspects of this relationship.

This contract is also a tool for optimizing and rationalizing costs for both consultants and client companies. On the one hand, the worker entrusts his administrative tasks to a single company, allowing him to focus his time exclusively to his core business. On the other hand, client companies have a tool that allows them to hire quickly and flexibly, without the constraints of the recruitment process as well as the availability of an operational professional immediately.

In times of limited employment, this is an interesting opportunity for companies seeking to control their budget and sometimes reluctant to hire new staff in-house. Using outsourced services of a consultant can also be a solution for companies whose activity does not require the creation of a permanent in-house job.

 

 

What social security coverage for consultants?

Within the framework of freelance work, the company affiliates the consultant to the social security system, operating as the consultant's employer. The consultants will therefore contribute to the different social insurances as an ordinary employee and will also be able to benefit from all the social protections that the regulation grants them.

This includes: AVS, AI, unemployment insurance, LPP occupational benefits, professional and non-professional accident insurance, vacations, 13th salary and insurance for loss of earnings due to illness (from the 3rd day of illness) unlike self-employed workers who have no unemployment cover, no obligation to take out accident insurance and no compulsory occupational pension plan.

However, the payment of the employee's and the employer's social contributions is the exclusive responsibility of the employee, the "umbrella structure" operating only as an intermediary. Nevertheless, the deduction of these contributions is allowed in the consultant’s tax return.

Nonetheless, be careful, because even if, in terms of unemployment insurance, the consultant benefits from the same guarantees as an employee, the AVS compensation funds reserve the right to refuse payment of unemployment benefits if it is established that there is no relationship of subordination between the consultant and the client company or the umbrella company, and that he does not carry any economic risk. He will be considered as a self-employed worker and will not be able to claim the social coverage of employee.

Indeed, an employment contract is not concluded if the only motive of the parties is to subject the consultant to the social insurance regime reserved for employees (Le portage salarial : analyse en droit du travail et des assurances sociales suisses, in : Jusletter 22 octobre 2012, n. 6; PORTMANN/NEDI, Neue Arbeitsformen - Crowdwork, Portage Salarial une Employee Sharing, in: Tatsachen - Verfahren - Vollstreckung Festschrift für Isaak Meier, Zurich 2015 p. 538 and 39).

Indeed, the compensation funds take the existence of an employment contract as a basis for qualifying the consultant as an employee. However, in the event of a dispute between the consultant and the employer or if the consultant becomes self-employed afterwards, the nature of the activities carried out could be analyzed and the employee could be reclassified as self-employed. The compensation funds may therefore have to analyze the affiliation of the employee according to the concrete circumstances.

 

 

Therefore, it is very important to define all the conditions of the relationship beforehand to benefit from the right to unemployment at the end of the contract.

In terms of retirement benefits, umbrella companies usually offer different "pension packages" that the consultant chooses depending to the coverage he wants. The LPP contribution rate will vary according to this choice.

 

What is salary the salary of a consultant?

This working relationship provides many advantages. The consultant continues to benefit from the employee status and therefore receive a "minimum monthly wage" in accordance with the practices of the professional category of the employee and the basic swiss labor regulations.

All the usual social contributions and the management fees will be deducted from the consultant's gross pay, also the provisions for indemnities (such as paid vacations for example) and the withholding tax for taxpayers who do not meet the required conditions for filing an ordinary tax return in Switzerland.

In case of interruption of the activity over one or several weeks, the employee will be eligible to a compensation allowance and will also be able to receive his/her overtime balance - unpaid vacations.

Finally, the umbrella company is required to respect the applicable regulations regarding working hours. Overtime hours, exceeding the contractual or the legal working hours, must either be compensated or paid to the employee. The minimum number of vacation days will be between 20 and 25 working days depending on the age of the employee.

 

 

What is the taxation of a consultant?

Considered as an employee from a legal and social point of view, the same is also true for tax purposes. Consequently, the remuneration earned from the activity of consultant will be considered as an income from a dependent activity.

From a practical point of view, the consultant will have to file an ordinary tax return every year if he/she is a Swiss citizen, has a C permit or has taxable assets in Switzerland. If he does not meet these conditions, he will simply be subjected to tax at source every month, with the possibility of requesting a tax adjustment the following year.

The consultant who is required to file a tax return will have to report all his/her income, including incidental allowances, indemnities, or commissions of any kind.

At the same time, the consultant is entitled to claim all the standard deductions just like classic employees, such as deductions relating to the buybacks of Pillar 2 and contributions to occupational pension funds (3rd pillar) or deductions related to professional expenses (travel expenses, meals, professional equipment, etc.). The choice of the deduction of the actual professional expenses is allowed if the total amount of the expenses exceeds the lump-sum fixed by the authorities and if the employee provides all the supporting documents.

As for the compensation funds, we cannot exclude that in case of change of situation or litigation, the tax authorities will proceed to an analysis of the circumstances in order to tax the net income as a self-employed activity rather than as an employee.

 

Our recommendations

Behind its attractive aspect and the numerous offered advantages, freelance work is still a very recent practice in Switzerland and consequently, the legal framework of this activity remains uncertain on many points.

To avoid any risk of requalification of the employment relationship as a self-employed activity by the social security institutions or the tax authorities, it is preferable to establish in advance the framework of the relationship and to stipulate the working conditions under which the missions will be carried out in an agreement:

  1. Nature of the services
  2. Expected salary
  3. Due date of of the salary
  4. Terms and conditions of reimbursement of professional expenses
  5. Amount of management fees
  6. Working hours
  7. Vacations
  8. Duration of the contract
  9. Nature of the subordination relationship.

Author(s)

Yasmine Cherdouda
Yasmine Cherdouda

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