Illegal Employment in the Construction Sector: When Does a Certificate of Self-Employment Not Protect Against Liability?

The construction sector is characterized by flexibility—various models of cooperation are widely used here, including service contracts with self-employed individuals. At first glance, this practice seems reasonable and lawful to companies: the Construction Law of the Republic of Lithuania permits the conclusion of civil contracts with individuals, invoices are issued, and taxes are paid. However, businesses must understand that a formal contract by no means guarantees peace of mind. The State Labor Inspectorate (VDI) does not evaluate the civil contract and its accompanying documents, but rather the actual situation, and is increasingly reclassifying such relationships as illegal employment.

On paper—a contractor; on the construction site—an employee

Case law shows that attempts to “disguise” employment relationships as civil contracts result in severe financial penalties. In one of the recently heard cases, a construction company entered into a service contract with the manager of another company—acting as a self-employed individual—for the performance of site manager duties. The contract stipulated that the individual would perform the duties personally, adhere to the company’s internal rules and ISO standards, and receive a fixed monthly fee in exchange, as evidenced by a VAT invoice.

After conducting an unscheduled inspection, the State Labor Inspectorate identified clear signs of an employment relationship: this “independent” specialist reported directly to the company’s director, acted exclusively in the company’s interest, gave instructions to workers, purchased materials on behalf of the company, and used the company’s tools. Furthermore, the contract was not based on a specific outcome but on an ongoing process. The court rulings were uncompromising—this arrangement was deemed illegal employment. Consequently, the company was held liable under Article 56(1) of the Employment Act, and the company’s director was held personally liable under Article 95 of the Code of Administrative Offenses.

What is permitted by law, and where do violations begin?

Article 2, Section 75 of the Construction Law of the Republic of Lithuania, The Technical Regulation for Construction (STR 1.06.01:2016) stipulates that a natural person may serve as a construction contractor, and that site managers may act independently. However, there is an important exception here. According to Article 18, Paragraph 3 of the Construction Law, if a special structure is being built, the law strictly requires that only a standard employment contract be concluded with a certified site supervisor. Only in the case of a non-special structure may project management be carried out on the basis of a civil contract.

Even if a person has the right to enter into a civil contract, it will not provide protection if the relationship meets the criteria for illegal employment as established in the Employment Act (Article 56, Section 1, Subparagraph 1). Illegal employment is established when a person performs work functions under the direction of and for the benefit of another person in exchange for compensation, without having entered into an employment contract or without notifying “Sodra” of the employee’s hiring at least one working day before the employee’s start date. Judicial practice interprets that the essential feature of self-employment is autonomy—a person must act independently of others, not be subordinate to or bound by the client’s internal rules, and use their own resources rather than those provided by the client; no workplace needs to be provided for them, and they may provide services at any time convenient to them.

An additional and particularly serious risk is associated with identification codes. Article 56(1)(2) of the Employment Act stipulates that work is also considered illegal when a person at a construction site, performs construction work but does not have a valid “identification code for a transparently employed person.” This requirement stands entirely on its own and is particularly relevant when hiring third-country nationals. Even if you have entered into a flawless contract, the mere absence of a “transparent worker identification code” in itself gives rise to liability for illegal employment.

How Can Businesses Safely Hire Freelancers?

For the collaboration to withstand inspections by the State Labor Inspectorate (VDI) and the courts, the text of the contract and actual practice must be consistent. The most dangerous signs indicating a hidden employment relationship are a fixed monthly salary, a requirement to comply with the company’s internal rules, and the provision of a workplace and tools. To avoid this, compensation must be linked exclusively to a specific result, confirmed by work completion reports. The contractor must be given complete freedom to perform the work using their own resources, to organize their own work schedule, and, if necessary, to hire subcontractors.

Although civil contracts in the construction industry are legal, they must under no circumstances be used as a cover to evade payroll taxes. Only by ensuring the contractor’s genuine independence and properly preparing the legal documents can business leaders avoid lengthy legal disputes and fines.

Jolita Urbienė, Managing Partner of the law firm “Leagus” and attorney-at-law