When considering the Portuguese market, independent contractors represent a fantastic opportunity to hire specialists quickly. Contractors also allow you to hire workers in Portugal without expanding your HR department or tax and payroll functions. However, Portugal is serious about contractor misclassification. When it comes time to pay contractors in Portugal it’s essential to have the right information.
That’s why we’ve put together this guide on the definitions and risks of working with independent contractors. Below, you’ll find out how to recognize the potential for errors and find the best way to pay contractors in Portugal.
What are the Key Differences Between Independent Contractors and Employees in Portugal?
Since 2013, the Portuguese government has cracked down on companies paying workers as contractors while treating them as employees. In Portugal, this is often referred to as providing falso recibos verdes (false green receipts). This is in reference to the color of the official receipts used by contractors in the country to invoice clients.
This type of misclassification can happen innocently due to a lack of clear understanding of what constitutes a real employee vs an independent contractor.
Contractors in Portugal are not bound to a client by an employment contract like an employee. They form a work agreement, or contractor agreement, with their client which lays out the expected outcomes of a contractor’s involvement. This agreement must not include any provisions which dictate how, when, or where a contractor will carry out their role.
In Portugal, an independent contractor is not legally subordinate to an employer. This means they do not fall under their client’s chain of command. Additionally, contractors aren’t subject to the management of the client beyond what is set out in a work agreement.
This includes the contractor using their own tools and equipment, setting their own work schedule, and payment requirements. As a result, contractors in Portugal do not receive employee benefits such as paid leave or overtime.
If you pay contractors in Portugal as freelancers but treat them as employees, authorities may choose to investigate your company for misclassification.
What are the Contractor Misclassification Risks to Look Out for When You Hire or Pay Contractors in Portugal?
False self-employment, or misclassifying a worker as a contractor while treating them as an employee, is a serious offense in Portugal because it is depriving the worker of employee benefits and the country of tax revenue.
Should the authorities suspect a company of hiring and paying a worker as a contractor in Portugal just to avoid employer responsibilities, they can apply the following penalties:
- The employer must make retroactive payments on all social security and insurance contributions that they should have made throughout the employment period. This includes making payments on behalf of the “employee” with the employer expected to claim this amount back from the contractor
- Retroactive payment to the contractor for all missed holidays, leave, and other employee benefits
- Criminal fines of €2,040 to €9,690, with severe cases being subject to potential fines of up to €60,000
- Restrictions on access to public funding and services for up to 2 years
The Employment Laws That Relate to Contractors in Portugal
The Portuguese Labor Code sets out the main criteria used above to define an employee. It also defines what an independent contractor is not and lays out the process you need to follow to pay contractors in Portugal.
Much of how independent contractor agreements are formed is also found in the Portuguese Civil Code and its amendments. This provides many of the fundamental minimums that make up a contractor work agreement in Portugal if they aren’t explicitly mentioned.
While their filed taxes may give contractors some access to state benefits, independent contractors as a rule are not subject to national acts concerning social security.
How Portuguese Taxes and Other Payroll Costs for Independent Contractors Compare to Those of Employees
When you pay contractors in Portugal, you don’t need to manage their payroll in the same way as employees (including managing deductions for tax and social security contributions). Instead, Portuguese contractors or self-employed individuals manage their own tax and social security payments.
Independent contractors in Portugal pay the same individual income tax as employees, which they must declare themselves using their taxpayer identification number.
The Tax Authority provides the now digital “green receipts” used to pay contractors in Portugal.
Because contractors do not benefit from an employer contribution to their social security fund, contractors pay their contributions entirely by themselves. However, their expected contributions are levied at a lower rate of 29.6% (depending on specific regimes) on income.
However, for contractors who earn more than 80% of their income from a single client or group of clients, an additional 5% social security tax may be levied on the clients directly. This additional cost effectively recognizes the position of “dependent contractors”.
In general, self-employed individuals are also subject to VAT for income earned above €10,000 per year.
How Do I Convert an Independent Contractor into an Employee in Portugal?
If a contractor demonstrates skills that makes them a valuable future asset, you could want to keep them on as an employee long-term. It can also become a problem if you have to pay contractors in Portugal long-term due to the heightened risk of misclassification.
In this case, you may want to safely lead them through the transition from contractor to employee. Otherwise, problems can occur that lead to misclassification errors.
- Convince the contractor of the benefits of working for your business.
Including a clear discussion about employee benefits can be a good way to intertest the contractor in your proposal.
- Confirm the contractor can be considered an employee under Portuguese law.
You may have to inform the contractor that the new situation will require them to sever current business ties, or alter how they interact with other clients.
- Acknowledge how your relationship will change and clearly state all the new expectations in an employment contract.
All of these alterations must be specifically stated in a written employment contract that is developed in order to avoid communication problems.
- Add the new employee to your payroll system.
Now, as with all employees, you will be responsible for withholdings for tax and social security from the employee’s gross pay. In this case, you will also need a company structure in Portugal that can manage payroll and the required HR staff.
To lessen the possibility of difficulties, you might want to consider advice from a seasoned payroll provider.
A third-party business offering Employer of Record (EOR) services can employ and compensate workers on your behalf worldwide. This will enable you to collaborate with workers in other nations or locations.
4 Different Payment Methods to Pay Contractors in Portugal
When it comes time to pay contractors in Portugal, legal compliance means avoiding paying them in the same way as employees. This could mean avoiding regular monthly payments, or not making any deductions on their pay as with employees.
To reflect this less regular nature, it’s best to choose a separate manner of payment for independent contractors, such as the below:
1. Direct Deposits
Direct deposits allow you to pay contractors in Portugal once or repeatedly depending on your work agreement and payment schedule. However, as this method is usually used to pay employees, extra care should be taken to separate the payments between the two worker types.
Additionally, keep in mind that you shouldn’t make deductions for tax or social security the same way you would for workers.
The majority of contractors used to prefer checks for payment, but they are now far less common. Professionals might see checks as less trustworthy due to their increasing scarcity and bounce risk. They also include sensitive personal information and may take longer to process than electronic payments while being more prone to loss.
3. PayPal or Other Online Payment Systems
Due to a rise in businesses and organizations that exclusively accept electronic payments online, as well as relatively high fees and transfer costs, PayPal has experienced significant declines in popularity over time. Local options exist such as Mulibanco which is a service digitally linking numerous Portuguese banks.
In general, to pay contractors in Portugal and all around the world, these Internet payment options are quick and easy options for both clients and contractors.
4. Guaranteed Payroll Services
Some third-party payroll partners and outsourcing services can pay freelancers, other self-employed employees, and other independent workers on your behalf. These might mean an umbrella company which performs payroll administration, or a PEO which can legally handle payroll through HR outsourcing services.