Employment vs. Independent Contracting

PROVISION OF SERVICES IN COSTA RICA: LABOR RELATIONSHIPS VS. NON LABOR RELATIONSHIP ACCORDING TO LOCAL LAW AND CASE LAW

The basic legal principles that determine the existence of an employment relationship under Costa Rican labor law are established in the Labor Code, as follows:

Section 2: “Employer is any person or corporate entity, private of public, that employs the services of another or of others, based on an express or implied labor contract, written or verbal, individual or joint.”

Section 4: “Employee is any person that gives another person or entity his material, intellectual or material/intellectual services, based on an express or implied labor contract, written or verbal, individual or joint.”

Section 18: “Individual labor contract, whichever way it is actually called, is any of such in which a person commits to give another person or entity his services or to undertake a piece of work, under permanent dependency and immediate or delegated direction of such other entity or person, and in exchange for a payment of any kind or form.”

From these legal foundations, local case law is unanimous to consider that there are three basic elements in a labor relationship, whose presence is crucial to determine if the link between the parties is of the labor kind, thus subject to all stipulations and protections of the Labor Code or of a non-labor kind, solely governed by ordinary and non protectionist civil regulations.

Such basic elements are that the service must be given personally; that such service must be paid for and that it must be given under subordination with respect to the employer.  Among them, subordination is considered as the main and essential element for the determination of the presence or not of an employment-type relationship since the other two may be present and yet not necessarily involve the application of labor law.

Personal Service

A contractual relationship cannot be considered as of the labor type, if the service is not provided personally, which is essential to labor relationships and basically means that what has been contracted can only be performed by a sole individual, who cannot be substituted.

In a labor relationship, the party receiving the services is not only interested in the provision of the services per se, but also on the personal capacities of a specific individual.  Local case law has clearly stated that an important factor to rule out the existence of a labor relationship is if it is detected that services are given by parties other than the one signing the agreement, party that has the right to determine which specific individual or individuals actually provide the services (obviously under certain performance guidelines and qualifications, mainly related to the quality of work performed and not to the form it is to be performed).

Local Courts have even considered that once and if the possibility of substitution is existent and has actually happened, it is not necessary to determine if the other elements that create a labor relationship are or are not present (mainly, as indicated, payment and subordination) since the sole absence of the “personal service” element is considered sufficient to rule out the application of labor law.

The above said does not mean that a labor relationship will be avoided by solely indicating in the agreement between the parties that the services can be performed by other individuals.  Such fact must be confirmed in the day to day reality of the services rendered and as such, services must be performed by the contracting party or any other individual selected by such for those purposes, if the replacement meets the criteria established in the contract.

It is recommended, as an element to be used to argue the non-existence of this personal element, to have a corporation executing the agreement on behalf of the service provider, and for it to issue locally authorized official invoices for the payment of the services.  For this mechanism to actually work, it will be additionally important for the service providing company executing the service contract to have several employees and that as such they could be used to provide the services, following the guidelines set up in the agreement.

Payment

For the relationship to be considered as of labor-type, the service provider must have a compensation for his work.  Payment in an employment relationship can be calculated by unit of time, by task or by piece of work and made in currency, in currency and specie, or by participation in earnings, sales or collections from the employer.

Subordination

As indicated above, this element is considered essential for the existence of a labor relationship.  It is defined as the condition in which the employee’s autonomy is limited, with regards to the provision of the services, due to the written or oral agreement with the employer, such limitation coming from the capacity of the employer to guide the employee’s activities.

Subordination is also considered as an actual dependency condition created by the employer’s right to direct and give orders, and the consequent obligation by the employee of following such orders and directions and submitting to the employer’s will.  For subordination to exist, it is not enough to detect the possibility of giving orders, since the right to give them and to replace at will the individual providing the services is also considered to be needed by local Courts in order to confirm the existence of this element.

Subordination includes the possibility by the employer to establish disciplinary actions against the employee in cases of bad performance or misbehavior, basically being capable of imposing direct orders and penalties in case such orders are not followed.  Evidently, this possibility is many times in a grey area, since a non-labor relationship must also give the possibility to the contracting party to establish guidelines on how the service will be provided.  The key here would be to establish such guidelines, but not a direct supervision and disciplinary regime for the individuals providing the service.

The sole obligation to render reports on how the tasks have been completed does not by itself creates a subordination regime, since it is considered as an essential duty of information from one party to the other which could be present in a non-labor relationship as a performance obligation.  If additionally from this mere obligation of information, the performance of the services is controlled by the service receiver with regards to the actual manner of undertaking of the work activities (and not only to their quality), the relationship will be very probably considered as of labor-type.

What is also accepted and not considered to create a labor relationship is when the party contracting the services, instead of directly controlling how such services are rendered, is merely coordinating the activities.  In these cases of coordination, the link of the service provider with the recipient company’s commercial activities does not consist on a direct involvement on how the services are provided but on the indication of a specific “business program” in which the services are introduced as a means for the completion of such program.  Coordination must not exclude then the autonomy of the service provider with respect to the choice of the specific means or forms used for performing the services.

With respect to schedules, it is considered that subordination exists even if such schedules can be agreed upon by the parties but once they have been set up, the service provider cannot change them unilaterally and must comply with them as originally agreed.

In general terms, there are elements that can be introduced in the contract (and to be effective, to be present in the actual provision of the services over time) to try to have the services to be considered as not being provided with subordination.  Such elements materialize if the service provider:

(i) works on his own;

(ii) bears the risks associated with his activities;

(iii) is liable before the law for any illegal actions he may incur in while providing the services;

(iv) pays his own social security, taxes, etc.;

(v) hires his own employees, if any;

(vi) works as independent, for another employer;

(vii) has the capacities of selecting a replacement for him;

(viii) provides the services in a place or places not imposed by the service receiver;

(ix) does not get, from the service receiver, the instruments, tools or materials he needs to perform the services.

Although their existence or non-existence will not rule out or imply the appearance, by itself, of a labor relationship, the following elements would be evaluated by a local Court of Law in order to “suspect” the existence of it, and as such, should be avoided, if possible, and as much of them as also possible:

(i) exclusivity (as opposed to the possibility of providing services for other parties);

(ii) place of work under employer’s control;

(iii) periodical and fixed payment;

(iv) submission to hourly shifts and schedules;

(v) not having the possibility to accept or reject to provide specific services;

(vi) provision by the employer to the employee of the material and personal means needed for performing the services;

(vii) registration before the Costa Rican Social Security Agency and the length and continuity of the service relationship.

Work Contract and the Principle of “Reality Contract”

Section 18 of the Costa Rican Labor Code, which has been already referred to above, establishes the presumption of the existence of a contract -written or oral- between the employer and the worker. The sole initiation of the work relationship is sufficient for the presumption of the existence of the contract and such agreement compels the two parties to obey the obligations and rights established in the law.

Everything that is agreed upon by the parties of the labor relationship, being agreed in writing or not, but existing as the current conditions of the work relationship, becomes part of it.  This corresponds to a basic principle of local labor law (principle of “Contrato Realidad” –Reality Contract in English –) which establishes that no matter what has been agreed in writing as the contractual relationship employer-employee or no matter what the prior contractual relationship contents were, what rules is the current and real contents of the employment relationship, even though they are different from the agreement, all in favor of the employee (i.e. real work schedules vs. Contractually agreed work schedules; actually paid salaries and compensations vs. contractually agreed compensation; etc.).

While applying the “Reality Contract” principle to the labor relationships vs. non-labor service agreements issue, we must bear in mind that under local laws and case law, it is not important how the contract itself is labeled by the parties, as it is constantly indicated by Labor Courts that they consider that the employer frequently uses several mechanisms to deceive the application of labor law, giving the contract the appearance of a non-labor matter.

At the end of the day, local Labor Courts will examine how the actual relationship between the parties occurred, and in view of such and the detection and evaluation of the elements that have been covered in the paragraphs above, they will make the determination of its nature and the applicable legal regime.

Presumption of the Existence of a Labor Relationship

As per local laws and case law, the general rule is that the existence of a labor relationship when services are provided is always presumed, and the employer must bear the burden of proof of the contrary.

Notwithstanding the above, the general rule is reversed, as established by case law, when services are not provided personally (but by a corporate entity) and the parties expressly state, by the means of a written contract, that the relationship is not of a labor nature.  In this case, the burden of proof is transferred to the service provider’s side, who must demonstrate the existence of the elements that we have stated as determining an employment relationship.  In this type of situations, as indicated by local case law, what is applied is a case by case examination of the facts and proof in order to determine if the specific matter will be governed by labor law.

Legal Obligations by the Employer if the Relationship is Considered a Labor Relationship

Although all measures possible to try to characterize the relationship as out of the reach of local labor law are taken, the type of activities that will be performed certainly pose a high risk of being considered by a local Labor Court, if a dispute arises, as constituting a regular labor relationship between the parties.

If that happens, we consider it is important to have a clear picture of the obligations that will materialize for the employer, which mainly consist in penalties for the lack of registration of the employees before the local Social Security Administration, as well as the payment of all labor related compensations to which regular employees are entitled under Costa Rican labor law, namely vacations, Christmas bonus (also called thirteenth month), right of notice of termination and severance.

Vacations

With regards to vacations, besides holidays and Sundays, the employee is entitled to two weeks of paid vacation for each fifty weeks worked or, in cases of contracts that terminate before such 50 weeks, a day for each month worked. Vacations can be divided, but only in two segments.

Upon termination of the contract, unused vacation time should be paid using as a base the average of salaries earned during the last six months.

Christmas Bonus

Employees must be paid a bonus of one month’s salary after a year of work (“aguinaldo”), or an amount proportionate to the time worked, if it less than a year.

Right of notice of termination

After three months of employment, an employee has the right to receive notice in the event of termination of employment without just cause by the employer (if notice is not given, he must be paid one month's salary, or a fraction if he has been employed for less than one year).

Severance payment

If the worker is fired without justification after at least three months of service, the employer has to pay a severance payment whose amount increases in accordance with the time served and could be up to twenty two days per year worked, with a maximum calculated on the basis of eight years, all according to a specific calculation table indicated by the Labor Code.

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