Freelancers on a construction site as employees?
Can an employer-employee relationship be created retrospectively and contrary to the contract?
Mar 31, 2023
By: Itzick Simon
Engagement between contractors and freelance professional workers is a common phenomenon in the construction industry in Israel. On many sites, you can find independent foremen, freelance project managers, independent subcontractors, construction engineers, and more.
There is often a mutual desire in this type of engagement. On the contractor's part, he saves costs associated with hiring a senior employee with a high salary who derives rights from him (such as vacation days, convalescence pay, overtime, pension savings, etc.). From the employee's point of view, the freelancer, he maintains his independence, prefers such an engagement sometimes also for tax reasons, enjoys freedom of action, and so on.
However, just as the phenomenon is widespread, so too are cases in which such freelancers demand, after a period of time, to be recognized as employees with all that this implies. Sometimes even after several years.
By: Itzick Simon
Engagement between contractors and freelance professional workers is a common phenomenon in the construction industry in Israel. On many sites, you can find independent foremen, freelance project managers, independent subcontractors, construction engineers, and more.
There is often a mutual desire in this type of engagement. On the contractor's part, he saves costs associated with hiring a senior employee with a high salary who derives rights from him (such as vacation days, convalescence pay, overtime, pension savings, etc.). From the employee's point of view, the freelancer, he maintains his independence, prefers such an engagement sometimes also for tax reasons, enjoys freedom of action, and so on.
However, just as the phenomenon is widespread, so too are cases in which such freelancers demand, after a period of time, to be recognized as employees with all that this implies. Sometimes even after several years.
Claims in hundreds of thousands of shekels
Sometimes the request comes to light with the filing of a claim for retroactive payment of significant amounts for social rights, pension rights, and even severance pay.
In the next article, we will touch on this issue. For convenience, we will talk about foremen, but the information is relevant to all freelancers working on the site in a defined position and meeting the parameters we will present below, such as project managers, engineers, and more.
First of all, let's start with an example from a ruling that dealt with a foreman who filed a claim for approximately 200,000 shekels demanding that he be recognized as an employee. The Tel Aviv Labor Court accepted the claim of the freelance foreman (but awarded him a lower amount), following the recognition of him as an employee. Why? Well, for various reasons.
· A review of the work logs revealed that the plaintiff was present at the site frequently.
· The plaintiff worked side-by-side with the site employees on an ongoing basis.
· It was proven that the plaintiff performed the work himself, personally.
· It was proven that the plaintiff was not permitted to provide services through others.
· The Labor Court rejected the contractor's claim that the foreman only came "to sign papers." The plaintiff was the only foreman on site and " formed an integral part of the organizational structure ."
Regarding the possibility that the foreman had an independent business, the court rejected this in light of the evidence. The payment, incidentally, was not made against proper invoices. The contractor claimed that the foreman was working at the same time at another site, but the court reminded him that in the agreement signed between the parties, the plaintiff was not employed full-time and no restriction on occupation was imposed on him [1] .
[1] SAASH (Tel-Aviv-Jaffa) 63349-10-18
Sometimes the request comes to light with the filing of a claim for retroactive payment of significant amounts for social rights, pension rights, and even severance pay.
In the next article, we will touch on this issue. For convenience, we will talk about foremen, but the information is relevant to all freelancers working on the site in a defined position and meeting the parameters we will present below, such as project managers, engineers, and more.
First of all, let's start with an example from a ruling that dealt with a foreman who filed a claim for approximately 200,000 shekels demanding that he be recognized as an employee. The Tel Aviv Labor Court accepted the claim of the freelance foreman (but awarded him a lower amount), following the recognition of him as an employee. Why? Well, for various reasons.
· A review of the work logs revealed that the plaintiff was present at the site frequently.
· The plaintiff worked side-by-side with the site employees on an ongoing basis.
· It was proven that the plaintiff performed the work himself, personally.
· It was proven that the plaintiff was not permitted to provide services through others.
· The Labor Court rejected the contractor's claim that the foreman only came "to sign papers." The plaintiff was the only foreman on site and " formed an integral part of the organizational structure ."
Regarding the possibility that the foreman had an independent business, the court rejected this in light of the evidence. The payment, incidentally, was not made against proper invoices. The contractor claimed that the foreman was working at the same time at another site, but the court reminded him that in the agreement signed between the parties, the plaintiff was not employed full-time and no restriction on occupation was imposed on him [1] .
Retrospective employer-employee relations, the position of the ruling
The central principle in the ruling is that if it is proven that the contract with Perry Lancer was "only for show," then the foreman can be recognized as an employee for all intents and purposes. Including with respect to all rights, even years in the past.
The test is "actual reality." That is, even if the compensation is given against a tax invoice and even if the contract explicitly states that no employer-employee relationship will be formed between the parties, the Labor Court can still decide otherwise.
The settled law is that the concept of "worker" (i.e., employee) is a matter close to status, which is not determined according to " the description given to it by the parties " but rather " based on the circumstances of the case as it exists. " The Labor Court will examine the " essence of the relationships created in practice " according to " the totality of the characteristics and facts of the specific case " (see A.P. 176/09) [1] .
Employer-employee relationship between a foreman and a contractor
Labor courts characterize employee-employer relationships through tests that have been outlined in case law over the years, at the center of which is the " mixed test ." A test that itself contains a series of auxiliary tests, the main and most important of which is the " integrated test ." That is, to what extent the freelancer "integrated" into the business on two levels - negative and positive, and explained.
On the positive side , the Labor Court examines whether the employer was a productive business that could be integrated into it, whether the action for which the freelancer was brought in was necessary for the normal operation of the business, and whether the foreman was part of the normal organizational structure.
As far as foremen are concerned, it is clear that they claim the existence of a productive contractor and it is clear that the function they performed is necessary for its normal activity. The central question is whether the foremen has become part of the contractor's organizational structure. Various questions now arise, for example:
· To what extent could the contractor supervise the foreman and his working hours?
· Where was the work actually performed (for example, did the construction manager have an office on site or at the contractor's offices)?
· What was the degree of continuity of the relationship (daily, regular, etc.)?
· Could the contractor have assigned different and changing tasks to the construction manager?
· To what extent could the foreman refuse to perform certain tasks?
· Did the foreman have any employees on his behalf?
The negative aspect of the integration test deals with the question of whether the foreman had his own truly independent business or was employed completely and comprehensively by the contractor (for example, 8 hours of work per day, the absence of "other clients", complete or high dependence on the contractor, etc.).
Additional tests for an employer-employee relationship are the parties' agreement regarding the form of employment (written or oral employment contract), the manner of receiving payment (in an orderly manner, subject to an invoice, etc.), responsibility for deducting mandatory payments (vacation, sickness, pension, National Insurance, etc.), performance of the work personally or by others, etc.
How does the Labor Court examine those characteristics and those "case-specific facts"?
If the Labor Court determines that the foreman was indeed an employee of the contractor, the legal process will move on to calculating the salary retroactively . This is because all rights are derived from that determining salary. For example, how much is a "vacation day" worth, how much is the severance pay, which is multiplied by the number of years in the last salary, and more.
The contractor can raise an "offset" claim at this stage. A claim that the foreman received a higher payment than a salary at his level, which included social rights. That is, a standard wage must be determined, the rights calculated according to it, and the excess balance offset.
The ruling takes two approaches to the offset claim. A strict deterrent approach that does not allow offset out of a desire to warn employers against hiring employees as freelancers in bad faith, and a more solid computational approach that is suitable for "gray" cases that justify offset (but usually not full offset).
It is important to emphasize that there is a flip side to the coin. When a foreman is recognized as an employee but it turns out that he received a payment significantly higher than the market norm, he may be required to return amounts he allegedly received in excess (although these are relatively rare situations).
Retrospective calculation of rights and the "offset" claim
An ordinary employee is entitled to social conditions that provide him, among other things, with a pension protection system, such as a pension fund, which includes (in addition to accumulating pension savings) both a disability pension in the event of loss of working capacity and a survivor's pension in the event of death.
A freelancer or his/her survivors, who succeed in proving an employee-employer relationship, may, in the above-mentioned cases, demand payment of the full said benefits from the employer, depending on the case.
Here, the employer may be exposed to a significant lawsuit of an unreasonable financial scope.
Claims for lack of pension protection
An employment contract is not an infallible defense against claims by freelancers. As stated, the determination of whether a foreman was a freelancer or an employee is determined by the circumstances, and the contract is not a Torah from Moses at Sinai. However, experience certainly teaches that drafting meticulous, high-quality contracts with clear and precise appendices can help an employer in a pinch.
How to proceed? First and foremost, it should be defined in the contract that the contracting system does not establish an employer-employee relationship. It is important to address all the "corners" that may arise, such as the method of receiving payments only against an invoice or the possibility of the supplier working for other clients.
There are many other points to emphasize regarding the employment contract of freelancers from a future perspective of a possible claim for recognition as an employee and they should not be taken lightly. As always, the result lies in the small details. It is advisable to consult with lawyers who specialize in the field and avoid verbal or handshake agreements.
How do you deal with claims from freelance managers when the contract is being drafted?
The conduct between the contractor and the construction manager in the course of ongoing work can form future evidence to prove or disprove an employer-employee relationship. For example, professional dialogues, requests, email or WhatsApp correspondence, recorded conversations, witnesses involved, etc.
The daily relationship may help the foreman prove that he is an employee in various situations. For example, a demand for regular and regular work hours, not being able to refuse work, a demand that the work be performed solely by the foreman in person, a lack of agreement to freedom of occupation at other sites, very close supervision, working from the contractor's offices, tools and equipment (such as a telephone or computer), and so on. Similarly, "choppers" can be interpreted as integration into the business to the extent of giving gifts on holidays, participating in team building days, and the like.
Please note: The more the contractor treats the foreman as "one of our own," even if it is normal behavior related to his character, the more things can lead to recognition of the employment of an employee and not as a supplier-client system. Of course, these are not black and white things. A personal and warm attitude does not necessarily indicate a full employment, and the circumstances are always examined as a whole.
Do's and don'ts during collaborative work
After a claim is filed, what do we do?
Have you been sued by a foreman who claims to have been your employee? Stop everything . It's time to get counseling. From now on (and probably even before then), anything you say or do can weaken your "case" in labor court. Yes, even if you are sure that the person is a freelancer and that it will be proven without difficulty in court.
Once a claim or even a warning letter has been filed before filing a claim, you must carefully consider your steps. Incidentally, it is entirely possible that, although you are not aware of it, the circumstances of the employment did indeed make the freelance foreman an employee. However, even if the conclusion is not unequivocal, the matter should not be treated as a cancellation.
Close legal advice is critical, because as we mentioned earlier, these are claims that frequently escalate to huge sums. Retroactive payment of social rights (including severance pay) is no small matter when the plaintiff is a foreman whose salary must have been high.
Have you been sued by a foreman who claims to have been your employee?
Once a claim or even a warning letter has been filed before filing a claim, you must carefully consider your steps. Incidentally, it is entirely possible that, although you are not aware of it, the circumstances of the employment did indeed make the freelance foreman an employee. However, even if the conclusion is not unequivocal, the matter should not be treated as a cancellation.
Close legal advice is critical, because as we mentioned earlier, these are claims that frequently escalate to huge sums. Retroactive payment of social rights (including severance pay) is no small matter when the plaintiff is a foreman whose salary must have been high.
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