Should you hire an employee or a subcontractor?

When a company’s activity grows or whether it faces an exceptional increase of orders, two possibilities exist:

1. Hiring new employees
2. Calling in a subcontractor

In both cases, the work will be provided in exchange of a salary or an invoice, but outsourcing has important specificities in comparison to hiring an employee.

Let’s take a closer look at the differences between those two.

I – Definition of the two types of contracts 

1. 1. Employment contract definition

The Ministry of Labor defines it as:

“The employment contract exists when a person (the employee) undertakes a work, for remuneration, on behalf and under the direction of another person (the employer). The employment contract must generally be written. It specifies the remuneration, qualifications, working hours and, more generally, the responsibilities of the employee. It entails a certain number of obligations, both for the employee and for the employer. There are different types of employment contract depending on their length of time, the activity of the employer or the nature of the work given to the employee”.

• The permanent employment contract (CDI): this is the normal and general form of employment relationship.
• The construction site contract concluded for the duration of a construction site (permanent CDI contract).
• The fixed-term contract (CDD).
• The fixed-term contract with a defined purpose is reserved for the recruitment of engineers and executives.
• The senior fixed-term contract: concerns people over 57 who have been looking for work for more than 3 months or who are beneficiaries of a personalized reclassification agreement.
• The temporary employment contract: only for the execution of a specific and temporary task, only in the cases listed by law.
• The part-time employment contract is concluded with an employee whose working duration is less than the legal (24 hours) or conventional duration.
• Intermittent work: alternation of worked and non-worked periods corresponding to fluctuations in activity.
• The seasonal contract: Summer period, Winter period, etc.
• The harvest contract: particular type of seasonal contract.
• Adult relay positions: reserved to unemployed people over 30 for social and cultural mediation missions.

Several declarative platforms exist as well:

• The company employment-service title (TESE) allows employers who meet the conditions to simply fulfill the main administrative obligations linked to the recruitment and employment of an employee.
• The foreign firm title (TFE) is an optional service for foreign companies that employ in France and do not have any establishments in that country – you can read more about the TFE from our previous article: Foreign Firm Slip / Titres Firmes Étrangères (T.F.E.)
• The universal service employment check (CESU) allows an individual employer to declare and pay for personal service activities – you can read more about the TFE from our previous article: Direct Services for people and home services
• Title private foreign employer (TPEE): this form of “status” concerns non-resident persons who wish to employ a private employee for direct services to people activities – you can read more about the TFE from our previous article: Title Private Foreign Employer (Titre Particulier Employeur Etranger – TPEE)

1. 2. Subcontracting contract definition

Subcontracting is an operation by which a company entrusts another company (subcontractor) with the mission of carrying out for it part of the production and/or service acts for which it remains responsible. Subcontracting adapts to all sectors of activity.

Drafting a subcontracting contract is not mandatory but is essential to ensure optimal legal certainty.

If a contract is drawn up, it must include the following information:

• Object of the contract,
• Price of the service(s),
• Indexation clause or renegotiation clause (in the event of changes in economic conditions),
• Payment deadlines and late penalty fees,
• Terms of modification of the contract,
• Place of delivery, delivery times, transport etc,
• Sanction for non-compliance with deadlines,
• Control of services rendered,
• Guarantees granted to the subcontractor,
• Confidentiality of certain information transmitted to the subcontractor (NDA),
• Intellectual property (possibly),
• Clause on hidden work to ensure that the subcontractor does not use the work of undeclared people,
• Effective date of the contract and the end-date,
• Competent court and applicable law, in the event of a possible dispute.

The obligations of each party are as follows:

• Subcontractors: Agree to carry out the work entrusted to them while respecting the task execution schedule. They must also advise the company which they have been subcontracted for and inform them of any difficulties encountered during the work.
  The contract must determine whether the subcontractor has an obligation of means or an obligation of result.
• The hiring companies: They must pay the subcontractors based on the established contract and in compliance with the payment conditions contained therein. They must also do everything possible to ensure that the subcontractors can carry out the missions entrusted to them under good conditions.
  In addition, for any contract equal or greater than €5,000, the ordering party must verify that the subcontractor fulfills its obligations in terms of declaration and payment of social security contributions.

II – Advantages and disadvantages of the subcontracting contract

1. 1. The advantages of subcontracting

• Simplicity: Using a service provider is much simpler in terms of formalities than hiring an employee. It is only necessary to find the correct supplier and prepare a contract binding both parties.
  The contract can then often be terminated free of charge on the end-date, subject to the termination deadline. Thus, terminating a contract with a service provider is much simpler than terminating a contract with an employee.
• Flexibility: It is possible to use the subcontractor for a predefined period (the time to complete an exceptional order for example). It is obviously possible to employ an employee under a fixed-term contract, but the procedure is much more complex, and it is necessary to justify the contract with legal reasons.
• The competence of subcontractors: The company may prefer to use a service provider or a manufacturer specializing in an area in which it does not master, rather than training staff. Training can lead to additional delays and costs for an exceptional task.

1. 2. The disadvantages of subcontracting

• Cost: An external service provider generally costs more than an employee, but this additional cost is often offset by flexibility. In addition, it should be noted that it is the subcontractor who will bear the costs of resuming the work in the event of poor workmanship (if the contract is correctly established).
• The external service provider is not an employee of the company: There is no relationship of subordination and is not subject to the company’s schedules, he does not have to receive orders and works with its own technical means in complete independence.
  The labor inspectors or the URSSAF, in the event of an inspection, can look for a relationship of subordination and, if it exists, reclassify it as an employment contract (r.f. part III). The financial consequences would then be very heavy.
• The company can become dependent on the service provider: This dependence may be significant, particularly if it is regular, and it may one day become detrimental.

III – The risk of requalifying the subcontracting contract into a work contract 

1. 1. The subcontractor is presumed independent

In fact, article L8221-6 of the labor code stipulates that regularly registered traders, craftsmen, commercial agents, liberal professions, and company directors are presumed not to be linked with their contractor, order by an employment contract in the execution of the professional activity.

However, this article specifies that the existence of an employment contract can nevertheless be established when these people provide services directly or through an intermediary person to a prime contractor under conditions which place them in a relationship of permanent legal subordination status with regard to the subcontractor.

1. 2. The main points to check to avoid reclassification into an employment contract

Given the text of the law above, it is very important to constantly check whether the conditions below are respected during the contract:

• The subcontractor created his business himself, on his own initiative and committed his personal funds to it,
• It uses its own equipment to carry out the missions,
• He works for several clients and he is free to choose his clients and suppliers without constraint,
• He is free to organize his work and decide how, when and where he can provide the services,
• He can hire an employee or a subcontractor,
• He freely sets his prices,
• A contract must be signed for each mission,
• He must not bill for the number of hours or days,
• He must remain the owner of his customers,
• In the event of a dispute over his work, he must carry out repairs on his own time and at his own expenses.

If all, or a very large majority, of the above conditions are respected, the risk of reclassification into an employment contract will be very low.

It is also possible to ask URSSAF whether this activity falls under salaried activity using the social rescript procedure. This is a procedure which allows a contributor to question a social protection body about the application of the legislation to a situation.

1. 3. The consequences of a requalification

The reclassification of the subcontracting contract into an employment contract can result in heavy financial sanctions, the main ones are:

• Employee and employer contributions applicable to the company on the sums paid to the subcontractor,
• Payment of overtime and various compensations,
• Compensation for termination of an employment contract without real and serious cause,
• Cancellation of reductions or exemptions from contributions from which the company has benefited,
• Criminal sanctions for concealed work,
• Interest and late payment penalties.

It is not always easy to establish a subcontracting contract in compliance with French legislation, so it is preferable to seek advice from your accountant before finalizing such a contract. This could help avoid heavy financial penalties!