Denmark

Contractor Classification in Denmark

Businesses hiring in Denmark should understand the legal distinction between independent contractors and employees. Businesses that are hiring independent contractors under the guise of employment risk facing fines ranging from DKK 10,000 (EUR 1300) to 20 weeks’ salary payment to a worker, in addition to applicable taxation. In Denmark, several legal procedures must be followed by both companies and contractors before establishing a relationship. It’s crucial to work with a partner like Worksuite when engaging contractors abroad, to establish a compliant and legal hiring framework.

There are two distinct legal statuses that govern the relationship between a hiring organization and its employees (medarbejdere) or independent contractors (uafhængige kontrahenter), or sole proprietors, as they are called in Denmark. A standard employment contract (ansættelseskontrakt), as well as a well-founded lack of subordination, indicate the traditional relationship between an employer and an employee. A business contract (forretningskontrakt) indicates a freelance engagement whereby an independent contractor, acting as a legal enterprise, agrees to provide a defined piece of work for a set amount of money.

Danish independent contractors are highly valued among businesses across the globe thanks to their skills, expertise, and proficiency in English.

Danish labor and civil laws are constantly subject to revision and policy changes. In addition, the country’s legislation defines very strict procedures to be followed by a contractor before engaging in work. 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.

Employment Laws

In Denmark, employment relations are regulated by various national legal acts, collective bargaining agreements, the European Union legislation, and local labor courts.

There are two types of employment agreements in Denmark:

Open-ended (ansættelseskontrakt på ubestemt tid) – an indefinite contract
Fixed-term (tidsbegrænset ansættelseskontrakt)

Collective bargaining agreements (CBAs) may apply.

Employment contracts can be concluded verbally. There is no legal requirement to provide the contract in a particular language.

Independent contractors have a choice of two legal forms in which they can provide services:

Sole proprietorship (enkeltmandsvirksomhed)
Limited company (Anpartsselskab)

Since an independent contractor agreement is effectively a business contract, it is regulated by the Danish Commercial Code. It must be concluded in writing.

Hiring Practice

Candidates are recruited externally through job boards and advertising. An applicant must submit their CV to the employer.

Selected applicants receive an offer letter, and a written contract, if concluded, must be provided within 1 month of the employment start date.

The following aspects must be collected and included in the contract, in addition to special clauses, if applicable:

Names and addresses of employer and employee
Workplace location
Job description and the employee’s title
Employment start date
Terms of notice
Salary and payment schedule
Information on social contributions
Working schedule
Benefits
Information on CBAs, if applicable

Employers reserve the right to perform background checks during the hiring process, but they must not request any information that is not related to the nature of the work. This process can be delegated to third parties, provided that they comply with the European Union privacy regulations.

Danish Labor Law does not regulate probation periods. Employers usually set a three-month probation period with a 14 days notice.

Through professional employer organizations or directly.

Contractors can be hired directly or via a third party, such as a staffing agency. Contractors may be found via word-of-mouth, job boards, social networks, industry bodies, or other forums. Although hiring practices vary, the contractor may be asked to provide a CV, portfolio, and references and possibly sign an NDA.

An independent contractor agreement must clearly stipulate that the worker is free to organize his/her work and his/her working time for an agreement to be considered valid and for it not to fall under the scope of employment. Apart from that, an independent contractor agreement contains the same details pertaining to the nature of the work. The following aspects must be stipulated:

Pay rates and arrangements
Scope of services
Contract duration
Termination conditions

There is no limitation on the use of independent contractors.

Tax Documents

The tax year runs from 1 January to 31 December. Employers have to submit income and social security tax reports (indberetninger om indkomst- og socialsikringsskat) to the Danish tax authority via its online portal before 1 May upon receiving a tax assessment notice from the SKAT in early March.

Contractors file annual personal income tax reports and pay social security contributions on their own. The following information is needed:

Anticipated salary for the following financial year.
Any pension and early retirement benefits.
Interest income and expenses
Documentation of any buying or selling of property
Other deductions, if any

Independent contractors’ earnings may also be subject to VAT.

Payer's Tax Withholding & Reporting Requirements

Employers must withhold the following deductions and make the following flat-rate payments each year for each employee:

Pension – DKK 1135.80 (EUR 152)
Injury/disease insurance – DKK 215-5,157 (EUR 29-693) depending on the type of work and associated health risks
Unemployment insurance – DKK 592 (EUR 79)
Maternity leave fund contribution – DKK 1350 (EUR 180)
Labor market contributions – 8% (can be included into PIT)
Personal income tax – 12-15% depending on employee’s income for Danish citizens; 31.92% for foreigners
Municipal tax – 24.9% (average; different in every region)
Church tax – 0.7% (average; different in every region; absent in many regions)

Independent contractors must pay:

Personal income tax – 12.10-52.07% depending on the size of a contractor’s annual income
Municipal tax – 24.9% (average; different in every region)
Church tax – 0.7% (average; different in every region; absent in many regions)
VAT – 25%

Payer’s Withholding / Reporting Requirements for Independent Contractors:

N/A

Remuneration

Employers are expected to pay their staff via automatic monthly payroll deposits to their bank accounts.

There is no obligation to pay independent contractors monthly. Employers are responsible for providing consistent compensation. There are no standard payment terms. Remuneration frequency is to be agreed upon between the contractor and the employer. Payments become due after the contractor issues an invoice.

Workers’ Rights

In Denmark, employees enjoy the following rights:

Paid annual leave – 5 weeks
Sick leave – first 30 days are covered by an employer, the rest (up to 22 weeks) – by health insurance
Maternity leave – 18 weeks (4 weeks for prenatal leave, 14 weeks for postnatal leave), paid at 50% salary rate
Paternity leave – 2 weeks during the first 14 weeks following birth
Parental leave – up to 32 weeks
Premium payment rate for overtime work (customary, not legally enforced) – 150% for work during weekdays and 200% during weekends and public holidays
Termination notice – based on a duration of the employment, from 14 days to 6 months
Severance pay – from 1 to 3 months’ salary payment, granted to employees who have been employed with the same employer for at least 12 years

Independent contractors are not entitled to any employee rights unless otherwise stipulated in the contract.

There is no protection from a sudden termination of the contract.

Benefits

All employees must have health and unemployment insurance, which the employer is required to pay for. Pension and health insurance contributions are deducted from employees’ salaries and are paid by employers. Employees may be granted additional internal benefits not otherwise governed by labor laws

Independent contractors are entitled to free public healthcare. They do not enjoy any rights granted to employees unless an agreement says otherwise.

Third-party benefits granted by professional employer organizations may apply when an independent contractor is hired through such organizations (i.e. umbrella company) and is considered their employee.

When Paid

From 15th to 30th day of the month. The payment is not anyhow stipulated in the contract.

Typical contractor invoices are issued monthly on net 30-day terms. Each invoice usually includes the following details:

Invoice number and date
The client’s name and address
The contractor’s bank details
Agreed payment terms and due date

Employment Laws

In Denmark, employment relations are regulated by various national legal acts, collective bargaining agreements, the European Union legislation, and local labor courts.

There are two types of employment agreements in Denmark:

Open-ended (ansættelseskontrakt på ubestemt tid) – an indefinite contract
Fixed-term (tidsbegrænset ansættelseskontrakt)

Collective bargaining agreements (CBAs) may apply.

Employment contracts can be concluded verbally. There is no legal requirement to provide the contract in a particular language.

Hiring Practice

Candidates are recruited externally through job boards and advertising. An applicant must submit their CV to the employer.

Selected applicants receive an offer letter, and a written contract, if concluded, must be provided within 1 month of the employment start date.

The following aspects must be collected and included in the contract, in addition to special clauses, if applicable:

Names and addresses of employer and employee
Workplace location
Job description and the employee’s title
Employment start date
Terms of notice
Salary and payment schedule
Information on social contributions
Working schedule
Benefits
Information on CBAs, if applicable

Employers reserve the right to perform background checks during the hiring process, but they must not request any information that is not related to the nature of the work. This process can be delegated to third parties, provided that they comply with the European Union privacy regulations.

Danish Labor Law does not regulate probation periods. Employers usually set a three-month probation period with a 14 days notice.

Tax Documents

The tax year runs from 1 January to 31 December. Employers have to submit income and social security tax reports (indberetninger om indkomst- og socialsikringsskat) to the Danish tax authority via its online portal before 1 May upon receiving a tax assessment notice from the SKAT in early March.

Payer's Tax Withholding & Reporting Requirements

Employers must withhold the following deductions and make the following flat-rate payments each year for each employee:

Pension – DKK 1135.80 (EUR 152)
Injury/disease insurance – DKK 215-5,157 (EUR 29-693) depending on the type of work and associated health risks
Unemployment insurance – DKK 592 (EUR 79)
Maternity leave fund contribution – DKK 1350 (EUR 180)
Labor market contributions – 8% (can be included into PIT)
Personal income tax – 12-15% depending on employee’s income for Danish citizens; 31.92% for foreigners
Municipal tax – 24.9% (average; different in every region)
Church tax – 0.7% (average; different in every region; absent in many regions)

Remuneration

Employers are expected to pay their staff via automatic monthly payroll deposits to their bank accounts.

Workers’ Rights

In Denmark, employees enjoy the following rights:

Paid annual leave – 5 weeks
Sick leave – first 30 days are covered by an employer, the rest (up to 22 weeks) – by health insurance
Maternity leave – 18 weeks (4 weeks for prenatal leave, 14 weeks for postnatal leave), paid at 50% salary rate
Paternity leave – 2 weeks during the first 14 weeks following birth
Parental leave – up to 32 weeks
Premium payment rate for overtime work (customary, not legally enforced) – 150% for work during weekdays and 200% during weekends and public holidays
Termination notice – based on a duration of the employment, from 14 days to 6 months
Severance pay – from 1 to 3 months’ salary payment, granted to employees who have been employed with the same employer for at least 12 years

Benefits

All employees must have health and unemployment insurance, which the employer is required to pay for. Pension and health insurance contributions are deducted from employees’ salaries and are paid by employers. Employees may be granted additional internal benefits not otherwise governed by labor laws

When Paid

From 15th to 30th day of the month. The payment is not anyhow stipulated in the contract.

Employment Laws

Independent contractors have a choice of two legal forms in which they can provide services:

Sole proprietorship (enkeltmandsvirksomhed)
Limited company (Anpartsselskab)

Since an independent contractor agreement is effectively a business contract, it is regulated by the Danish Commercial Code. It must be concluded in writing.

Hiring Practice

Through professional employer organizations or directly.

Contractors can be hired directly or via a third party, such as a staffing agency. Contractors may be found via word-of-mouth, job boards, social networks, industry bodies, or other forums. Although hiring practices vary, the contractor may be asked to provide a CV, portfolio, and references and possibly sign an NDA.

An independent contractor agreement must clearly stipulate that the worker is free to organize his/her work and his/her working time for an agreement to be considered valid and for it not to fall under the scope of employment. Apart from that, an independent contractor agreement contains the same details pertaining to the nature of the work. The following aspects must be stipulated:

Pay rates and arrangements
Scope of services
Contract duration
Termination conditions

There is no limitation on the use of independent contractors.

Tax Documents

Contractors file annual personal income tax reports and pay social security contributions on their own. The following information is needed:

Anticipated salary for the following financial year.
Any pension and early retirement benefits.
Interest income and expenses
Documentation of any buying or selling of property
Other deductions, if any

Independent contractors’ earnings may also be subject to VAT.

Payer's Tax Withholding & Reporting Requirements

Independent contractors must pay:

Personal income tax – 12.10-52.07% depending on the size of a contractor’s annual income
Municipal tax – 24.9% (average; different in every region)
Church tax – 0.7% (average; different in every region; absent in many regions)
VAT – 25%

Payer’s Withholding / Reporting Requirements for Independent Contractors:

N/A

Remuneration

There is no obligation to pay independent contractors monthly. Employers are responsible for providing consistent compensation. There are no standard payment terms. Remuneration frequency is to be agreed upon between the contractor and the employer. Payments become due after the contractor issues an invoice.

Workers’ Rights

Independent contractors are not entitled to any employee rights unless otherwise stipulated in the contract.

There is no protection from a sudden termination of the contract.

Benefits

Independent contractors are entitled to free public healthcare. They do not enjoy any rights granted to employees unless an agreement says otherwise.

Third-party benefits granted by professional employer organizations may apply when an independent contractor is hired through such organizations (i.e. umbrella company) and is considered their employee.

When Paid

Typical contractor invoices are issued monthly on net 30-day terms. Each invoice usually includes the following details:

Invoice number and date
The client’s name and address
The contractor’s bank details
Agreed payment terms and due date

Who classifies as an Independent Contractor in Denmark?

Self-employment as an independent contractor is a popular income model for many individuals. The latest pandemic restrictions have prompted more and more Danes to work as self-employed independent contractors. Moreover, hiring independent contractors from Denmark is currently a booming trend among organizations from all over the world. More and more representatives of Denmark’s highly-educated workforce choose to be their “own employers” and engage with companies as established self-managed businesses.

In Denmark, independent contractors are defined as “sole proprietors” rendering services as an enterprise. Their relationship with companies is regulated by the Danish Commercial Code.

Who is an Independent Contractor?

Any individual who independently and consistently carries out a gainful activity in the form of providing services for profit to a given organization while not abiding by its internal legal directives under an employment contract, and acting as a registered business, is considered an independent contractor. Independent contractor engagement implies that there is no professional subordination between the worker and the employer.

Under Danish law, an independent contractor is NOT obliged to:

Complete work for a set period of time each day, nor from a specified location
Make arrangements with the employer to take time off from work
Follow the employer’s disciplinary procedures

The following aspects also distinguish between employees and independent contractors:

Lack of legally-binding supervision
Possibility to provide services to more than one organization at the same time
An ability to designate the work to another person

To become a contractor in Denmark, a person must establish a sole proprietorship or a limited liability company. No legal minimum capital is required to set up a sole proprietorship, while a deposit of DKK 40,000 (EUR 5400) is needed for LLC. To register a business, individuals need a Danish digital signature (NemID) and a civil registry number called CPR, both of which can be obtained online. To register a business online, it needs to be registered with the Danish Business Authority by submitting an online application. Once an application is submitted and accepted, the business gets assigned a Central Business Registration Number (CVR number). It must be used when corresponding with public authorities and companies when issuing invoices for services.

Once a business is registered, a contractor must open a corporate bank account and designate it as NemKonto, a bank account used to pay for public services.

Contractors whose annual earnings exceed DKK 50,000 (EUR 6700) must also obtain a VAT number. It can be obtained online.

Contracting Models

Self-employed workers with their own business are classified as sole proprietors or limited companies.

Engagement Models

There are two primary engagement models for working with independent contractors in Denmark.

A. Direct engagement of the worker as self-employed and registered via their own company. Under this model, the hiring company engages directly with the independent contractor and draws up an agreement for the provision of services. The hiring company then pays the independent contractor directly.

B. Umbrella company. Companies operating under Employer of Record services in Denmark are often split into two categories, but both are essentially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.

Staffing agency: Some contractors may work under an umbrella company. In this case, the contractor is responsible for finding and performing their work, but they are an employee of the umbrella company, which manages payroll and applies an administration fee on the contractor’s earnings.
Hiring partner: The hiring company can also work with a hiring partner who helps them vet potential contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and make payments to them.

Contractor Payments

Independent contractors typically get paid upon issuing an invoice on net 30-day terms to the employer at the end of each month unless otherwise stipulated in the contract. Payments are made through direct deposits to their bank accounts or another preferred method stipulated in the contractor agreement.

Alternatively, companies may partner with wage processing providers. They can process wage calculations, prepare tax statements, and make deposits and withdrawals for contractors.

Terms, conditions, and frequency of payments can be settled between a contractor and an employer. Currencies other than the Danish Krone can be used in Denmark, and they are subject to fluctuating exchange rates, which may impact the contractor’s paycheck.

If you work with a hiring partner like Worksuite, it becomes significantly easier to streamline contractor payment processes. A dependable partner can help you hire contractors legally and pay them quickly, accurately, in euros, and in a way that complies with Danish regulations.

Contractor Taxes

Independent contractors submit their own income tax reports. Moreover, since they operate as businesses, their annual tax reports are more detailed. Danish contractors benefit from certain tax breaks and deductions of business-related costs. Contractors file annual personal income tax reports and pay social security contributions online before 1 May upon receiving a tax assessment notice from the SKAT in early March using their NemID and CVR number. If a contractor does not receive a notice, he/she must apply for it online before the payment deadline.

Independent contractors’ earnings are not subject to any social security contributions. 74% of the Danish population are members of the Danish National Evangelical Lutheran Church (Folkekirken). They pay a church tax using the customary platform of the Danish Tax Authority.

Gross Income Tax

Income tax in Denmark is unique for every contractor. It varies between 12.10% to 52.07%, inclusive of the 8% labor market tax rate and all applicable state and municipal taxes. There is no tax-free threshold for independent contractors. Expatriates working as independent contractors in Denmark are taxed at a flat rate of 31.92%.

Value-Added Tax

The majority of services, imports of goods and services, and the sales value of items are subject to a VAT deduction of 25%. Contractors must file VAT returns every six months online using their NemID. Some services are exempt from VAT. They are listed on the Danish Tax Authority website.