Independent Contractors vs. Employees: Provision of Services in Costa Rica

January 12, 2007

It is common in some industries in Costa Rica for relationships between companies and those who work for them to be labeled contractually as “independent contractor.” With this practice, some company owners think they can avoid payment of most labor-related obligations stipulated by Costa Rican law, such as vacations, cesantía (termination pay), aguinaldo (13th-month bonus) and preaviso (notice upon termination).

However, local law and case law clearly indicate that, despite how the contract is labeled by the parties, what must be examined is how the actual relationship was carried out. A determination of the relationship’s nature and the applicable legal regulations will be made accordingly and in view of the evaluation of the factors described below.

Three basic elements are considered crucial in determining if the relationship between the parties is a labor relationship, and thus subject to all stipulations and protections of the Labor Code, or a non-labor relationship governed solely by ordinary regulations of the Civil and Commercial Codes, which apply to all types of contracts and do not afford the protection granted to employees by labor regulations. These are: that the service must be provided personally; that such service must not be free; and that it must be given under subordination with respect to the employer. Among these factors, subordination is considered the main element in determining the presence of an employment-type relationship, since the other two may be present yet not necessarily involve the applicability of labor law.

Personal Service

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

In a labor relationship, the party receiving the services is interested not only in the provision of services per se, but also in the personal abilities of a specific worker. Local case law clearly states that an important factor in ruling out the existence of a labor relationship is whether or not the services are provided by parties other than the person signing the agreement.

Local courts have even considered that if substitution is possible and has actually occurred, it is not necessary to determine if the other elements that create a labor relationship (mainly, payment and subordination) are present, since the absence of personal service alone is considered sufficient to rule out the applicability of labor law.

This does not mean that a labor relationship can be avoided merely by indicating in the agreement between the parties that the services can be performed by persons other than the signatory. This factor must be confirmed in the day-to-day reality of the rendering of services, and services may be performed by the contracted party or any other person selected by this party, if the replacement meets the criteria established in the contract.

Payment

For the relationship to be considered a labor relationship, the service provider must receive compensation for his or her 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 kind, or by participation in earnings, sales or collections from the employer.

Subordination

This element is essential to establish the existence of a labor relationship. Subordination is considered to be the result of the power of the employer to guide the employee’s activities. It indicates a dependency condition created by the employer’s right to direct and give orders, and the consequent obligation of the employee to follow such orders and directions and submit to the employer’s will. For subordination to exist, not only the possibility but also the right to give orders and replace at will the person providing the services must be established.

Subordination suggests that the employer has the power to take disciplinary action against the employee in cases of bad performance or misbehavior, and to impose direct orders and penalties if orders are not followed.

With respect to work shifts, subordination is considered to exist even if the shifts are agreed upon by the parties, if, once the shifts have been set up, the service provider cannot change them unilaterally and must comply with them as originally agreed.

Presumption of the Existence of a Labor Relationship

In general terms, the rule in Costa Rica is that the existence of a labor relationship is always presumed when services are provided, and the employer bears the burden of proof of the contrary.

However, this general rule is reversed, as established by case law, when the services are not provided personally but rather by a corporate entity, and the parties expressly state, by means of a written contract, that the relationship is not of a labor nature. In such cases, the burden of proof is transferred to the service provider, who must demonstrate the existence of the abovementioned factors in determining an employment relationship. In this type of situation, what is applied is a case-by-case examination of the facts and evidence to determine if the matter in question will be governed by labor law.

Whether you are an employer or an employee, a service provider or a company receiving services from independent contractors, it is important to know how these factors are evaluated and used to determine the legal consequences of a working relationship. Such determination can lead to significant differences in treatment and major monetary consequences.

 

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