It happens that a freelancer wants to transition to employee status, sometimes at the freelancer's own request , but often at the request of the company. How do you offer a fair pay package that matches the pay package as an employee?
The situation where with employees taking the plunge into freelance self-employment is common. But the movement from freelancer to employee also occurs and has several reasons. Sometimes the freelancer himself wants this status, while other times the company suggests it, especially if the position is crucial. Determining a fair/equivalent pay package is complex, however, given the fundamental differences between freelance fees and employee wages.
Offering the same pay package as a comparable employee will generally not suffice. The employee in question will want to be able to compare his/her situation as a freelancer with his/her situation as an employee.
If you want to arrive at the best solution, you have to start from the net income, which has to be (at least) the same in the short and long term.
Although the movement from employee to freelancer is more common, the reverse movement - from freelancer to employee - also happens.
In some cases, this is at the request of a freelancer who previously already worked for your company or who worked as a freelancer for another company.
In some cases, the company itself is requesting that a freelancer already working for the company would now work as an employee. This occurs when the function of the freelancer is business critical. After all, one wants to better "tie" the employee to the company, and employee status is often a means to that end.
Now well, the question presents itself to put together a fair pay package for the freelancer / hopefully employee-to-be.
But how do you start there? Because freelance fees are nothing like an employee's salary.
And should you consider false self-employment in this case?
Fair - that is the key word.
There are three ways to quantify a fair wage package:
While there is a case for the first possibility, it is not evident in practice.
Unlawfully, you start from the employee's gross salary, while gross salary is a legal concept - but no one has ever seen a gross salary in real life except on paper.
Moreover, from which cost do you start: the gross labor cost or the net (aka effective) labor cost?
Starting from gross payroll, this can be cost-prohibitive for the company - which is not desirable for many companies.
Starting from the net wage cost, the prospective employee is penalized for the wage subsidies to which the company is entitled.
If you put this to lawyers and consultants, they will invariably choose the first option. The reason is very simple: they can still more or less calculate the first option; they simply cannot calculate the second option (cf. infra).
Still, the second option is the most appropriate.
It is fair to say that as an employee you take home (at least) as much net income, both in the short term and in the long term (e.g., in terms of pension accrual, guaranteed income, unemployment).
At the end of the story, the cost perspective for an individual is irrelevant. The income must enable the employee and freelancer, respectively, to earn a living.
So what matters is net income. People will judge the fairness of the (gross) wage package based on the net income and the extent to which it allows them to earn a living compared to freelance status.
Now, approaching a fair wage package according to the second option is not obvious. To quantify it, several domains must converge: personal and corporate taxation, social security and wage strategy translated into sophisticated mathematical models.
Fortunately, with hukaroi (the only one in Belgium, and beyond) we have all that expertise in house 💪
For completeness, in the case of high incomes, the labor cost to the company in the employee capacity will normally increase compared to that in the freelancer capacity.
In order to limit the increase in payroll costs, it may therefore make sense to find out how you can optimize your payroll (para)tax package. We also have the necessary expertise in this area at hukaroi 😎
This option seems the most obvious, at least if you have a point of comparison - either the pay package of a comparable employee within the company, or the pay package of a comparable employee within a well-defined reference group in the labor market.
Suppose there is a similar employee.
Does that end the sock?
Well, no.
How so?
Specific to people is that they will always compare their situation to other people. No problem you might think, because you are offering the same pay package as a current employee.
It is not that simple. Because people also compare their situation to themselves in a previous position, previous job, previous capacity, etc.
In other words, even if you offer the same pay package as that of a comparable employee, the prospective employee who is still working in the capacity of freelance self-employed at present will compare the pay package to his freelance fees.
That comparison is well nigh impossible unless you make the comparison at the level of net income in both the short and long term.
Option 3 is certainly an additional argument, but by itself will often not be sufficient in practice to convince the freelancer that the pay package is fair relative to what he/she earned as a freelancer.
Option 2 may be fair on the individual level of the freelancer/employee-to-be. But the application of Option 2 may cause injustices to creep into the employer's pay policy when a former freelancer, if any, would be paid more than a comparable employee. In short, the fairness perspective under the third option should not simply be cast aside.
In practice, it often happens that a company has to limp on two legs. On the one hand, the wage package must be fair to the former freelancer. On the other hand, the wage package must be fair to the employer's wage policy.
Now, this issue is commonplace today anyway when hiring scarce profiles on the (labor) market.
When option 2 results in a better pay package than for comparable employees, there are conceivable solutions. One example is to work with a one-time, isolated payment to compensate for the loss of net income. Another example is to ensure that the former freelancer increases at a slower rate through merit increases relative to comparable workers, thus systematically closing the gap.
Should you consider the risk of false self-employment at all? After all, by definition, the freelancer will be working as an employee from now on, right?
Well, let us assume that the capacity of employee is confirmed. If the employee performs the exact same job under the exact same circumstances as before, then one might ask whether the employee was not also previously employed as an employee.
In other words, transitioning from freelancer to employee obviously creates no risk of false self-employment for the present and future, but potentially does for the past.
Or vice versa. When an employment contract has been concluded, but in reality it turns out that it is actually still an independent partnership, there may be sham employment. This is less common, but is mainly used to enjoy the better social protection one has as an employee.
While the risk of sham self-employment and sham employment should certainly receive our attention, we must emphasize that the risk of sham self-employment and sham employment, respectively, can be greatly reduced by entering into watertight agreements.
If a social ruling is possible, the risk of sham self-employment or sham employment can even be reduced to zero. The social ruling is often still unknown. Do you want to know more about it? Read our blog post on social ruling.
What is important is that the agreement in question must correspond to its actual execution. But that actually goes without saying.
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