Hire in Switzerland with Confidence

Any business hiring in Switzerland 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 hiring independent contractors under the guise of employment. 

Understanding the distinctions between an employee (Abgrenzung Arbeitnehmer) and an independent contractor (Auftragnehmer) is critical to compliantly engaging workers in Switzerland. It is important to work with a partner like Worksuite to ensure you put in place an engagement framework that accurately classifies freelancers as independent contractors for you and lets you know when freelance talent must be engaged as an independent contractor or employed directly.

This is critical to compliantly engaging workers in Switzerland and thereby avoiding severe legal, financial, and other penalties. 

Swiss labor law distinguishes an employee from an independent contractor. An employee works under an employment contract and provides services to an employer under subordination. The individual is remunerated for the time spent on work, but not strictly for the successful achievement of an outcome. An independent contractor provides services to a hiring company without subordination, and is remunerated primarily for the successful completion of contracted tasks within a specified time period rather than for the time spent. 

It is worth noting that in Switzerland, the criteria for determining whether an individual is an employee for private law purposes (i.e., employment rights) are separate from  what determines the individual’s status for social security purposes. 

Regardless, if the real substance of the company-contractor relationship proves to effectively be an employment relationship, the hiring company may suffer legal and financial penalties (including payroll taxes). It is therefore important to leverage an employment service partner like Worksuite when hiring in Switzerland in order to ensure that independent contractors fall under the correct working relationship with your business.

Who is an Independent Contractor?

Working as an independent contractor is an increasingly popular option in Switzerland, with 25% of the labor force working as freelancers. As in many European countries, the primary factor in determining that someone is an employee or independent contractor is the degree of subordination. However, in reality this can be difficult to determine, and therefore each case will be considered holistically based on a variety of relevant factors. Individuals are generally considered to be independent contractors if they:

• Are subject to relatively little control by the hiring company, which means they are free to decide when, where, and how they complete their tasks.
• Do not have fixed hours of work that are determined by the hiring company.
• Can choose the location from which to undertake their work.
• Provide their own equipment rather than receive it from the hiring company.
• Are not integrated into the hiring company’s organizational structure.
• Are paid for a specific project or task rather than on a recurring basis.
• Can refuse to perform a task (unless that task is part of their contract).
• Work for multiple clients at the same time or in parallel.
• Are not entitled to a minimum amount of work or a minimum amount of pay.
• Are not listed on the hiring company’s normal payroll.
• Pay their own social security contributions and income taxes.
• Have their own individual professional branding (business cards, email domain, email signature, website etc.) rather than operating under the branding of the hiring company.

There are two main categories under which independent contractors operate in Switzerland: 

• Sole proprietorship (German: Einzelfirma): This is a common category for independent contractors in Switzerland – including freelancers, entrepreneurs, and small businesses – as there is a low administrative burden for registration and there is no minimum capital requirement. Steps to register a sole proprietorship include: registering with a compensation office (Ausgleichskasse), obtaining Civil Liability Insurance, registering with the trade register, and registering with the Swiss Federal Tax Administration (FTA) (if above the VAT threshold).
• Limited company: This includes a limited liability company (LLC) (Gesellschaft mit beschränkter Haftung, or GmbH) and a public limited company (PLC) (Aktiengesellschaft). Each type has specific requirements regarding minimum capital, number of shareholders, executive boards, minimum share value, and company naming conventions, amongst other details. New companies require registering with the Commercial Register, along with creating Articles of Association, holding a shareholder meeting, and assigning an auditor.

There are two main types of contracting model for working with independent contractors in Switzerland.

A. Direct engagement of a contractor as self-employed or registered via their own company. Under this model, the hiring company engages directly with the independent contractor – either as an individual sole trader or as a limited company (see above) – and establishes a direct contract for the provision of services. The hiring company then pays the independent contractor directly in accordance with the terms of the contract.

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.

• Temp agency: Here, the hiring company engages with a staffing agency, which in turn supplies one of its own independent contractors to deliver the contracted services. The hiring company pays the staffing agency directly in accordance with the terms of the contract. The contract is, therefore, between the hiring company and the staffing agency, while the agency pays the independent contractor through a separate contractual arrangement. 
• Umbrella company: Independent contractors can also work through an umbrella company. This turns a ‘self-employed’ individual into a legal ‘employee’ of the umbrella company itself. The contractual relationship is between the umbrella company and the client, with the umbrella company running payroll and administration for the independent contractor. The umbrella company invoices the client directly while paying the contractor via PAYE as a standard employee. Umbrella companies levy a fee on the contractor to cover their costs.
• Hiring partner: The hiring 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 make payments to them. 

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

The tax year aligns with the calendar year (1 January to 31 December). Employers remit employees’ income tax, social security, and public health insurance at source via the PAYE (pay-as-you-earn) system, meaning there is typically no requirement for employees to file additional tax documents. However, if they have additional sources of income that are not taxed at source, they must file and pay tax returns by 31 March for the preceding tax year.

Switzerland has national (federal), cantonal, and municipal income taxes. Tax rates at the national level are progressive. For employees who are single, national income tax ranges from 0.77% on incomes of CHF 17,800–31,600 (USD 18,800–33,400) to 11.5% for incomes of CHF 755,200 (USD 798,300) and above. For employees who are married or who have young children, national income tax ranges from 1% on incomes of CHF 30,800–50,900 (USD 32,600–53,800) to 11.5% for incomes of CHF 895,900 (USD 947,300) and above.

Contributions to the Swiss social security system (Sozialversicherungen) are mandatory. The rate is 7.9–11.9% for employees and 8.07–23.4% for employers, although for medical insurance, only the employee makes contributions. 

Independent contractors must file and pay their own income taxes. As such, payers do not withhold taxes or other deductions from contractors’ payments. There are no specific reporting requirements in relation to paying contractors. Contractors who are operating as a company are subject to the flat-rate national-level Corporate Income Tax (CIT) of 8.5% on profit after tax. There are also cantonal and municipal corporate incomes taxes that vary across locations, and so companies typically pay a total combined corporate income tax of 11.9% to 21.0%. Contractors with an annual turnover of CHF 100,000 (USD 105,700) will usually be subject to the Value Added Tax (VAT) regime, which is rated at 2.5–7.7%. 

The tax filing deadline varies, but it is usually 6–9 months following the tax year’s end. Companies are required to pay the provisional CIT by 31 March for the preceding tax year, although the due date for the final payment varies. Contractors must arrange their own social security provisions.