The Supreme Court explained when cooperation between individual entrepreneurs can be considered a hidden employment relationship

The Supreme Court, as part of the panel of judges of the Cassation Administrative Court, adopted an important interim decision in the case regarding possible hidden employment between two individual entrepreneurs.

The subject of the dispute was a fine of 240 thousand hryvnias imposed on an entrepreneur for allowing a person to work without an employment contract. Case No. 280/10418/24 has already attracted the attention of business, as it concerns a widespread model of cooperation between individual entrepreneurs.

Tax audit and fine from the State Labor Service

As established by the courts, the State Tax Service in Kyiv conducted a factual inspection of the entrepreneur’s online store. During the inspection, the employee of the outlet explained that she works as a consultant according to the schedule, is subject to the rules of the internal regulations and has undergone occupational safety training.

At the same time, the business owner claimed that the woman is also registered as an individual entrepreneur and cooperates on the basis of a joint activity agreement.

However, the State Labor Service concluded that in fact it was a labor relationship disguised as cooperation between entrepreneurs, and imposed a fine.

Supreme Court: the law has priority over bylaws

The court of first instance canceled the fine, and the appeal indicated that the tax inspection report cannot be a sufficient basis for sanctions by the State Labor Service. However, the Supreme Court did not agree with this approach and sent the case for a new consideration.

In its decision, the Supreme Court emphasized that tax authorities have the right to monitor compliance with labor legislation, and reports of actual inspections can be appropriate evidence in cases of undocumented work.

Separately, the judges drew attention to the principle of the priority of the law over government resolutions. The court noted that even the absence of a separate bylaw does not cancel the powers expressly provided for by the Labor Code of Ukraine.

The court will verify the real nature of cooperation between individual entrepreneurs

The Supreme Court also emphasized that the mere existence of a contract between two individual entrepreneurs does not exclude the possibility of the existence of an employment relationship.

To assess, the court must take into account the actual circumstances: work schedule, subordination to internal regulations, the nature of the functions performed, the participation of the parties in lease agreements, the purchase of goods and the organization of the business.

The judges drew attention to the fact that in this case, most of the business contracts were concluded by only one party, while the other individual entrepreneur actually performed the functions of a sales consultant.

Thus, the Supreme Court actually confirmed the course of strengthening control over employee registration schemes through individual entrepreneur models and emphasized the need to verify the real content of the legal relationship between the parties.