Compliantly Engage Contractors in Croatia

Any business hiring in Croatia should understand the important legal distinction between who classifies as an independent contractor and who can be hired as an employee. Fines or penalties may be issued to businesses that are hiring contractors under the guise of employment. 

In Croatia, merely describing an individual as an independent contractor has no legal significance. Instead, various factors are taken into account to determine the true legal status of the individual. Therefore, understanding the distinctions between employees and independent contractors is critical to compliantly engaging workers in Croatia. 

It is important to work with a partner like Worksuite to ensure that you have an engagement framework that properly classifies freelancers able to work as independent contractors. Alternatively, Worksuite can automatically alert you when freelance talent must be engaged directly as employees, or contractors on the payroll.

Self-employment as an independent contractor is a popular income model for many individuals. The Covid pandemic has prompted an even greater increase in the number of Croatia individuals working as self-employed independent contractors.

As in many countries, there are no strict definitions of who is an employee and who is an independent contractor in Croatia. That said, there are six main criteria that are weighed when evaluating whether a worker is classified as an employee or an independent contractor. In general, the individual is considered an independent contractor if they:

• Are paid for the performance of a specific task within a specific timeframe.
• Work independently and do not have a clearly defined superior-subordinate relationship with the employer.
• Are able to substitute someone else to perform the work (e.g. an employee of the contractor or a subcontractor).
• Can determine their own working time, schedule, and place of work.
  
• Provide their own equipment (or most of their own equipment) and are not dependent on the hiring company’s resources.

Independent contractors in Croatia work under one of two main categories: self-employed freelancer, or operating as a company. 

• Self-employed freelancer: Independent contractors can work as freelancers without establishing their own company. This provides a quick route to self-employment in Croatia. However, when a client hires an independent contractor who is operating as a freelancer without their own company, the client is responsible for deducting the contractor’s taxes, pension, and healthcare contributions from their payment, which adds additional administrative burdens on the client.
• Operating as a company: independent contractors can establish their own company and work under this company as a legal entity. This model makes it easier for clients to engage with the independent contractor, as the client only has to pay the contractor’s invoices, rather than handling their tax and other deductions (see above). For some professions, the independent contractor will need to acquire the relevant certification for their company. Opening a trade company, known as an orbt, is a common route for many independent contractors who don’t have additional employees. Other options include limited liability company (d.o.o) and a simple limited liability company (j.d.o.o).

Independent contractors can register their business via the e-Građani portal after obtaining an electronic identity card (osobna iskaznica) or a digital certificate from the country’s Financial Agency. In order to register, independent contractors may also need to provide additional information including: evidence they have the right to use a given space (this applies to certain businesses), proof of professional qualifications, and a residency certificate.

There are two primary engagement models for working with independent contractors in Croatia:

A. Direct engagement of the independent contractor as self-employed or registered via their own limited company. 

• Service contract (ugovor o djelu): Under this type of contract, the independent contractor (izvođač) carries out a particular task or job for a client for a fee. Importantly, this type of contract allows the client to inspect and supervise the contractor’s work, and even to give instructions for the contractor to follow. Once the client has formally accepted the work, the contractor has no further contractual obligation to make changes.
• Author’s contract (autorskopravni ugovor or autorski ugovor): This contract is similar to the provision of ‘liberal professions’ services in other countries. It covers the provision of original intellectual and creative work by the independent contractor, generally in the arts, sciences, and literature. The work must be creative and original, and is therefore subject to copyright laws including the Copyright and Related Rights Act (Zakon o autorskom pravu i srodnim pravima). However, the copyright will pass from the independent contractor to the client upon completion of the work.

B. Third party: These firms come in two forms and both are specially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.

• Umbrella company: Here, the hiring company engages with an umbrella company, which has a license to supply its own contractors to deliver the contracted services. The client company pays the umbrella company directly, in accordance with the terms of the contract. The umbrella company then pays the contractor through a separate contractual arrangement. Under this model, the contract itself is between the client company and the umbrella company.
• Hiring partner: The client company can also work with a hiring partner who helps them vet potential independent contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and pay contractors.

Companies hiring independent contractors in Croatia should avoid making payments directly through their payroll system. Beyond these guidelines, there are no specific lawful requirements related to paying independent contractors in Croatia. The contract should stipulate the preferred payment method agreed upon by both parties.

Independent contractors earning up to HRK 300,000 per year can pay their income taxes via the  self-employment (paušalni obrt’) system. Independent contractors who operate as freelancers (i.e., without their own company – see above) have their income tax, pension contributions, and healthcare contributions deducted by the client company. Independent contractors who operate through their own company are responsible for paying their own taxes, pension, and healthcare contributions. 

Taxation levels vary depending on the municipality where the independent contractor is registered, and also on the type of contract. For example, author’s contracts (see above) incur additional tax rates to account for the copyright transfer to the client. Additionally, in January 2021 a Digital Nomad Visa came into effect, which allows foreign independent contractors to work temporarily in Croatia while only paying income tax in their country of residence. However, they cannot work for Croatian clients.

We can simplify hiring full-time workers in Croatia by acting as the Employer of Record (EOR) on your behalf, handling everything from contracts, onboarding, documentation, payroll, benefits, and workforce management. Reduce your time-to-hire by 90%, slash your overheads, and remain fully compliant.

• Quickly find, hire, and onboard talent in Croatia without setting up your entity
• Prevent expensive legal, contractual, or tax mistakes in Croatia
• Manage contracts, payroll, and global tax forms all in one Worksuite