Companies that want to expand their operations to Spain can expect to find a wealth of opportunities in terms of talent and specialized labor. With a young population centralized in large urban areas, the gig economy in Spain is strong. However, when it comes time to pay independent contractors in Spain, you have to follow certain guidelines to remain legally compliant.
With a robust system of regulations surrounding contractor hiring, payment, and compliance, making mistakes at any step of the process can be fatal for businesses. That’s why this article explains how to quickly and safely engage and pay contractors.
The Difference Between an Employee and Contractors in Spain
Put simply, contractors and employees in Spain differ by the type of agreement with a company. Employees sign an employment contract, either fixed-term or indefinite. In contrast, contractors sign a work agreement that outlines specific work to be done around a project or projects.
Another key difference between these relationships is the way that employees and contractors are paid. In Spain, employers are responsible for making deductions at source for tax and social security contributions. They’re also obliged to make their own contributions on behalf of their employees.
For contractors, payments are made simply according to an agreed-upon rate. The contractor must manage tax returns and social security separately.
Contractors also don’t require business owners to take on employment tax liability. Because of this, the client should weigh the benefit of lower responsibilities versus less control over contractor work.
Employment Laws in Spain and How They Relate to Contractors
Contractors are not bound by the management structure of the companies they work with. Indeed, it’s typical for contractors to work with multiple clients at one time. Because of this they set their own work hours and work method, use their own tools, and manage their own tax and social security payments.
As such, they do not benefit from the same employment benefits as normal employees. As a result, they aren’t covered by the Employment Act in the same way. This includes a lack of paid leave, company health insurance, business expenses, or other mandatory benefits. Instead, they receive similar benefits through their own separate tax and social security contributions.
A contractor consents to complete the work as set out in the independent contractor agreement. However, beyond this, they are free to choose how the work is completed.
The Dangers of Misclassification with Independent Contractors in Spain
Misclassifying workers as self-employed or freelance independent contractors is known as falso autonomo in Spain. It is defined as when a company hires workers as contractors but then treats them in the same way as they would an ordinary employee despite having only a contractor work agreement.
This can mean the company controls the way the contractors complete a project or requires them to work in an office with set hours. It can also describe situations where a contractor is unduly reliant on a single client company.
Within the last few years, Spain has increased the level of scrutiny on companies hiring contractors with stricter punishments for those found guilty of misclassification. Spain enacted new laws in September 2022 that punish employers for abusing the rights of their employees. As a result, misclassification carries a maximum six-year jail sentence plus financial penalties.
However, contractors who work primarily with one client may fall into a separate distinction called Economically dependent self-employed workers (TRADE or TAED). This is most commonly applied to contractors who receive 75% or more of their income from a single client.
This type of relationship is legal but must function according to very specific guidelines. This includes the contractor performing work separately from other employees and the contractor retaining full control over their working method and environment.
In general, contractor payments must reflect the nature of the working relationship. This means payments on an hourly rate, or by the project, instead of a monthly salary.
Independent Contractors and Autónomo Spain taxes
Employers don’t withhold taxes for independent contractors in Spain. Contractors manage their own taxes, VAT, and social security.
In general, it’s best practice for a company hiring contractors to check that the contractor has properly applied for VAT (called Impuesto de Valor Añadido, or IVA) and files their taxes both quarterly (Modelo 303) and makes annual (Modelo 390) VAT statements. Doing this can protect a business as it shows an acknowledgment of the different responsibilities they have around contractors.
For their own part, companies in Spain hiring contractors must complete a Modelo 111 tax filing form quarterly and a Modelo 190 social security benefit form annually with the Spanish Tax Bureau. These work in a similar way to Form 1040 for US workers.
This system is convenient for companies and allows a business to save on costly social security contributions. It shouldn’t be seen as a simple cost-saving tool, however. Companies must factor in the loss of control over project delivery.
How to Convert an Independent Contractor to an Employee in Spain?
You could wish to keep a contractor on as an employee if they prove to be a valuable asset or exhibit special or marketable abilities. Then you’ll need to be able to effectively guide them through the change from contractor to employee.
If the contractor is engaged in foreign work, this may entail putting the proper systems in place in their home countries to ensure that they are paid regularly and in accordance with the law.
A third-party business that works with EOR (Employer of Record) services can hire and pay contractors in Spain on your behalf. When you want to convert the best contractors to employees an EOR can manage the process for you and pay them as employees in the same manner. This enables you to collaborate with new workers in nations or areas where your business organization does not yet exist.
The legal experience and information you need to effectively navigate the processes of turning an independent contractor into an employee in Italy may also be obtained from an EOR.
Four Ways to Pay Independent Contractors in Spain
1. Direct Deposits
While typically associated with paying employees, this payment method can also be used to pay contracts either once or regularly depending on your work agreement and payment schedule.
When paying contractors in this way, be careful to separate the payments from other deposits made to regular employees. You’ll also have to remember not to make the same deductions as with employees. Some contractors may not be immediately comfortable sharing confidential information with every client, and it will require being on time and secure every month to build trust.
Traditionally preferred by most contractors, checks are more trouble than they’re worth these days. Paying a contractor with a check is slower than electronic payments, with the potential for getting misplaced or damaged. They’re also less trusted due to their relative rarity and the potential for bouncing.
A company may also want to consider how useful a check is due to the risk of having potentially sensitive bank information on each note.
3. PayPal/ Online Payment Systems
Now joined by an increasingly large number of online payment services and electronic banks, PayPal has lost a lot of popularity over the years. However, it is still a good option for many due to its security, ease of use, and relative speed.
On the downside, it requires the contractor to also have a PayPal business account, and fees may be burdensome, especially for international transactions.
4. Payroll Services
Third-party payroll partners and services are specifically designed to pay freelancers and self-employed employees in a timely and legally compliant manner. These may take the form of an Umbrella company which seconds contractors to clients and manages their payroll, or through a PEO which can manage payroll compliantly through HR outsourcing services.
These payroll partners have the legal expertise to guarantee that your payment is made accurately and in accordance with all relevant practices.