Finland

Contractor Classification in Finland

Businesses hiring in Finland should understand the legal distinction between independent contractors and employees. Businesses hiring independent contractors under the guise of employment risk facing fines in addition to increased taxation. In Finland, several important aspects must be considered 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 (työntekijät) or independent contractors (riippumattomat toimeksisaajat), or self-employed traders, as they are called in Finland. A standard employment contract (työsopimus), a well-demonstrated presence of subordination among other specific contractual obligations, indicates the traditional relationship between an employer and an employee. An assignment agreement made as a self-employed trader (itsenäisenä ammatinharjoittajana tehty toimeksiantosopimus) 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.

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

Finnish labor and civil laws are constantly subject to revision and policy changes. In addition, the country’s legislation defines very distinct taxation rates and procedures for independent contractors. 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 Finland, employment relations are regulated by various national legal acts, collective bargaining agreements, the European Union legislation, and local labor courts. The following legal acts are primary when determining the nature of employment relationship:

There are four types of employment agreement in Finland:

Full-time (kokoaikainen työsopimus)
Part-time (osa-aikainen työsopimus)
Fixed-term (määräaikainen työsopimus)
Agency contract (agentuurisopimus)

Collective bargaining agreements (CBAs) always apply, as they are considered to be the primary aspect that defines employment relationship.

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

Independent contractors can render services as:

Freelancers (Freelancerit) or sole traders (Yksinyrittäjät)
Limited companies (osakeyhtiöt)

Independent contractor engagements are not regulated by the Finnish Labor Code. Instead, they are covered by specific provisions of the assignment agreement. Relationships between businesses in Finland are regulated by the 2006 Companies Act.

Social security contributions of independent contractors are stipulated in the Self-Employed Person’s Pensions Act (YEL)

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 since the employment start date. In Finland, any employment contract that does not specify the duration of the agreement is considered to be indefinite by default.

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

List of duties
Duration of the contract for fixed-term agreements
Probationary period (if applicable).
Information on CBAs
Salary and payment frequency
Working hours
Names of the insurance companies from where statutory insurance has been taken out
Other provisions applicable to social security contributions
Notice period

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 and any information pertaining to the applicant’s health. This process can be delegated to third parties, provided that they comply with the European Union privacy regulations.

Probation period must not exceed 6 months.

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 freelancer is free to organize their work and his/her working time for an agreement to be considered valid and not regarded as an employment contract. Apart from that, an independent contractor agreement contains the same details pertaining to the nature of the assignment. The following aspects must be stipulated:

Pay rates and arrangements
Scope of services
Contract duration
Termination terms

There is no limitation on the use of independent contractors.

Tax Documents

The tax year runs from 1 January to 31 December.

Employers withhold taxes on the payment of salaries. Withholding must be applied as instructed on the employee’s tax card.

Companies are obliged to pay for mandatory health insurance, make unemployment and pension contributions, as well as withhold personal income tax (henkilökohtainen tulovero) in addition to other corporate taxes, such as the overall VAT.

There are two ways to report and pay mandatory contributions:

Online via Palkka.fi
Through a local Incomes Register

Contractors file annual personal income tax reports and pay social security contributions online on their own upon the receipt of a pre-completed tax return form in March or April.

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 – 24.55% (17.4% is paid by an employer, 7.15% or 8.65% for employees aged 53 to 62 is withheld from an employee’s salary)
National progressive personal income tax – 0 – 31.25% (35% for non-residents)
Municipal progressive personal income tax – 16.5 – 23.5%
Occupational accident insurance – 0.7%
Health insurance – 3.05% (1.71% is withheld from an employee’s salary and 1.34% is paid by an employer)
Unemployment insurance – 1.4%
Group life insurance – 0.06%

Independent contractors must pay:

National progressive personal income tax – 0 – 31.25%
Municipal progressive personal income tax – 16.5-23.5% for residents and a flat rate of 35% for non-residents
Pension – 24.1% for contractors under the age of 53 or between 63 and 67; 25.6% for those aged between 53 and 62; only applicable to the contractors whose annual income exceeds EUR 8 261,71
Unemployment insurance – 1.4%
VAT – 24%
Church tax – 1 – 2.10%

Health insurance is not mandatory for self-employed individuals.

Payer’s Withholding / Reporting Requirements for Independent Contractors:

Employers are taxed for payments made to contractors (as well as to any other companies, organizations, or consortiums) at the flat rate of 13% if a contractor is not registered in the Finnish Pre-Payment Register. This tax is payable online.

Remuneration

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

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. Currencies other than the euro are allowed.

Workers’ Rights

In Finland, employees enjoy the following rights:

Paid annual leave – 24 days during the first year of employment; 30 days starting with the second year
Sick leave – up to 10 consecutive days are paid at a 70% salary rate by an employer; 300 working days in total
Maternity leave – 105 days
Paternity leave – 54 days
Parental leave – 158 days
Premium payment rate for overtime work – 150% for work during weekdays and 200% during weekends and public holidays
Termination notice – based on the duration of employment, from 14 days to 6 months
Severance pay – outstanding payments until the end of an employee’s notice period; paid only to employees aged 45 and above

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

Unemployment, maternity, paternity, parental allowances, and pension benefits are granted by the state. The scope is individual to every contractor according to the income reported.

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

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

When Paid

Once or twice a month.

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 Finland, employment relations are regulated by various national legal acts, collective bargaining agreements, the European Union legislation, and local labor courts. The following legal acts are primary when determining the nature of employment relationship:

There are four types of employment agreement in Finland:

Full-time (kokoaikainen työsopimus)
Part-time (osa-aikainen työsopimus)
Fixed-term (määräaikainen työsopimus)
Agency contract (agentuurisopimus)

Collective bargaining agreements (CBAs) always apply, as they are considered to be the primary aspect that defines employment relationship.

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 since the employment start date. In Finland, any employment contract that does not specify the duration of the agreement is considered to be indefinite by default.

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

List of duties
Duration of the contract for fixed-term agreements
Probationary period (if applicable).
Information on CBAs
Salary and payment frequency
Working hours
Names of the insurance companies from where statutory insurance has been taken out
Other provisions applicable to social security contributions
Notice period

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 and any information pertaining to the applicant’s health. This process can be delegated to third parties, provided that they comply with the European Union privacy regulations.

Probation period must not exceed 6 months.

Tax Documents

The tax year runs from 1 January to 31 December.

Employers withhold taxes on the payment of salaries. Withholding must be applied as instructed on the employee’s tax card.

Companies are obliged to pay for mandatory health insurance, make unemployment and pension contributions, as well as withhold personal income tax (henkilökohtainen tulovero) in addition to other corporate taxes, such as the overall VAT.

There are two ways to report and pay mandatory contributions:

Online via Palkka.fi
Through a local Incomes Register

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 – 24.55% (17.4% is paid by an employer, 7.15% or 8.65% for employees aged 53 to 62 is withheld from an employee’s salary)
National progressive personal income tax – 0 – 31.25% (35% for non-residents)
Municipal progressive personal income tax – 16.5 – 23.5%
Occupational accident insurance – 0.7%
Health insurance – 3.05% (1.71% is withheld from an employee’s salary and 1.34% is paid by an employer)
Unemployment insurance – 1.4%
Group life insurance – 0.06%

Remuneration

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

Workers’ Rights

In Finland, employees enjoy the following rights:

Paid annual leave – 24 days during the first year of employment; 30 days starting with the second year
Sick leave – up to 10 consecutive days are paid at a 70% salary rate by an employer; 300 working days in total
Maternity leave – 105 days
Paternity leave – 54 days
Parental leave – 158 days
Premium payment rate for overtime work – 150% for work during weekdays and 200% during weekends and public holidays
Termination notice – based on the duration of employment, from 14 days to 6 months
Severance pay – outstanding payments until the end of an employee’s notice period; paid only to employees aged 45 and above

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

Once or twice a month.

Employment Laws

Independent contractors can render services as:

Freelancers (Freelancerit) or sole traders (Yksinyrittäjät)
Limited companies (osakeyhtiöt)

Independent contractor engagements are not regulated by the Finnish Labor Code. Instead, they are covered by specific provisions of the assignment agreement. Relationships between businesses in Finland are regulated by the 2006 Companies Act.

Social security contributions of independent contractors are stipulated in the Self-Employed Person’s Pensions Act (YEL)

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 freelancer is free to organize their work and his/her working time for an agreement to be considered valid and not regarded as an employment contract. Apart from that, an independent contractor agreement contains the same details pertaining to the nature of the assignment. The following aspects must be stipulated:

Pay rates and arrangements
Scope of services
Contract duration
Termination terms

There is no limitation on the use of independent contractors.

Tax Documents

Contractors file annual personal income tax reports and pay social security contributions online on their own upon the receipt of a pre-completed tax return form in March or April.

Payer's Tax Withholding & Reporting Requirements

Independent contractors must pay:

National progressive personal income tax – 0 – 31.25%
Municipal progressive personal income tax – 16.5-23.5% for residents and a flat rate of 35% for non-residents
Pension – 24.1% for contractors under the age of 53 or between 63 and 67; 25.6% for those aged between 53 and 62; only applicable to the contractors whose annual income exceeds EUR 8 261,71
Unemployment insurance – 1.4%
VAT – 24%
Church tax – 1 – 2.10%

Health insurance is not mandatory for self-employed individuals.

Payer’s Withholding / Reporting Requirements for Independent Contractors:

Employers are taxed for payments made to contractors (as well as to any other companies, organizations, or consortiums) at the flat rate of 13% if a contractor is not registered in the Finnish Pre-Payment Register. This tax is payable online.

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. Currencies other than the euro are allowed.

Workers’ Rights

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

Benefits

Unemployment, maternity, paternity, parental allowances, and pension benefits are granted by the state. The scope is individual to every contractor according to the income reported.

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

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

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

In Finland, independent contractors are defined as “self-employed traders” rendering services as an enterprise. Independent contractors and companies conclude a one-off assignment agreement that stipulates such cooperation. When the distinction isn’t clear between employee vs contractor, the tax authorities start evaluating the overall situation and its characteristics to reach a conclusion.

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 no professional subordination between the worker and the employer. In Finland, funds paid to independent contractors are considered “trade income” (työkorvaus). Hence, a worker that renders services to companies on behalf of his/her business and for remuneration clearly defined as “trade income” in an agreement, is an independent contractor.

Under Finnish 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 assign the work to another person

The following facts are evaluated by the Finnish tax authorities when it is challenging to determine whether a worker is an employee or an independent contractor:

Whether the worker/operator is a registered, self-employed entrepreneur or an owner of a corporate entity
The arrangements that cover the worker’s/operator’s social insurance (social security benefits are sponsored by companies only for employees and not for independent contractors)
Whether or not the worker/operator is on the Prepayment Register
Whether or not the worker/operator is on other registers
Submittal of the legally required reports to authorities
The existence of a permit, license, authorization
The matters agreed upon in the text of the contract
Worker’s/operator’s degree of personal autonomy and independence
Tools, materials and supplies the worker works with
The time when the work is done
The place where the work is done
The principles of compensation
How direct expenses are reimbursed to the worker/operator
Responsibilities, warranty agreements and insurance policies
Termination policy
The existence of restrictions against taking on other assignments, the existence of a non-compete rule and confidentiality agreements

To become a contractor in Finland, a person must establish a business. For this, a registered address and an individual tax card are needed. The simplest way to become a freelancer or a sole trader is to register as a private entrepreneur (toiminimi) with the Finnish tax authorities through an online portal. Alternatively, a contractor may also set up a limited company, in case if there is going to be more than one employee in the organization, although this would require a startup capital of at least EUR 2,500. Some contractors must also register in the Finnish Prepayment Register. Independent contractors must also register for VAT.

Contracting Models

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

Engagement Models

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

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 Finland come under one of 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 are typically 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 Euro can be used in Finland, and they are subject to fluctuating exchange rates, which may have an impact on 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 Finnish regulations.

Contractor Taxes

Independent contractors submit their own income tax reports. Moreover, since they operate as businesses, their annual tax reports are more detailed. Contractors file annual personal income tax reports and pay social security contributions online upon receiving a tax assessment notice in April or May. The deadline for submission is specified in the notice. The process involves entering general company information and an overview of earnings. The majority of contractors also receive a tax decision indicating the amount of a tax refund or the amount of back taxes, and payment dates. If such a decision is not received, its status can be checked online through the MyTax platform.

Independent contractors are personally liable for self-employed pension contributions (YEL) and other insurance costs if their estimated annual work compensation income exceeds EUR 8,261,71. A self-employed person who takes up self-employment for the first time is entitled to a 22% discount on the insurance contribution during the first 48 months of operating. Social security contributions can be paid via the Finish Center for Pension’s online portal.

Gross Income Tax

Income tax in Finland is progressive depending on the contractor’s annual earnings. The following tax rates applied in 2022:

Less than EUR 19,200 – 0%

EUR 19,200 – 28,700: 6%

EUR 28.700 – 47,300: 17.25%

EUR 47,300 – 82,900: 21.25%

EUR 82,900 and above: 31.25%

Non-Finnish tax residents working as independent contractors in Finland are taxed at a flat rate of 35%.

Value-Added Tax

The majority of services, imports of goods and services, and the sales value of items are subject to a VAT of 24%. Contractors must file VAT returns every month, quarter, or a year online before the deadline specified by the Finnish tax authorities.