Contractors vs. employees: when the hiring process doesn't match reality.

By: Kimberly Esquivel, Esq.

Labor Management Manager – EAS LATAM

Many companies use contractors, consultants, external technicians, or specialized suppliers to meet specific needs. That's perfectly acceptable. The problem arises when the relationship is documented as independent, but in reality operates as an employment relationship.

The Labor Code is based on a simple idea: an employment contract exists when a person agrees to provide services to another, under permanent supervision and direct or delegated direction, in exchange for remuneration. In more practical terms, the key is to identify whether there is personal performance of the service, payment, and subordination.

Subordination is often the most important element. It can be seen when the company sets schedules, gives constant instructions, controls how the work is performed, requires daily attendance, integrates the person into the internal team, imposes permanent reports, or limits the possibility of providing services to other clients.

Element	Sign of employment relationship	Sign of independent hiring
Schedule	The company defines the work schedule, entry, exit, and daily availability.	The person organizes their time to deliver an agreed result.
Address	He receives continuous orders about how, when, and where to do the work.	Define the methodology, within the contracted scope.
Integration	Use internal email, participate as part of the team, and cover routine duties.	It provides an external, delimited service and does not replace permanent positions.

A professional services contract helps, but it doesn't provide complete protection. If, in practice, the person works set hours, receives instructions like any other employee, uses company tools, reports to a supervisor, and performs ongoing business functions, the risk of reclassification increases.

The risk is not only related to employment. If an authority or a court concludes that an employment relationship actually existed, the company could face claims for vacation pay, Christmas bonus, notice period, severance pay, overtime, social security contributions, workplace accident insurance, and other employment-related benefits, as applicable.

There may also be an impact on the Costa Rican Social Security System (CCSS). A self-employed worker has their own affiliation and contribution obligations when working independently. However, if the relationship is treated as that of an employee, the employer may be held liable for omissions in payroll and social security contributions.

Good practices for reducing risk

Recommended practice	How it helps
Define scope and deliverables	Focus the relationship on concrete results, not on permanent availability.
Avoid monitoring working hours	It reduces signs of subordination when dealing with non-salaried personnel.
Separate external and internal functions	It prevents the contractor from covering ordinary needs as if they were a permanent part of the payroll.
Support billing and payments	It allows you to demonstrate the commercial or professional nature of the service.

From a tax perspective, electronic invoicing and taxpayer registration are important elements, but they do not, on their own, determine the nature of the relationship. They serve as evidence of an independent contract, provided that the operational reality is consistent with that form of contract.

The key question isn't whether the person invoices or whether the contract says "professional services." The right question is: Does the person truly act as an independent contractor or work under the direction, control, and authority of the company?

When form and reality don't align, the risk increases. Therefore, before hiring professional services, it's advisable to review the position, the business need, the supervision method, the deliverables, the payment structure, and the required documentation. A well-designed contract protects both the company and the individual providing the service.

Bibliographic references

• Attorney General's Office, Costa Rican Legal Information System. Labor Code, Law No. 2, especially provisions on individual employment contracts, employer obligations, and labor protection.

• Ministry of Labor and Social Security. Costa Rican Labor Code and general legal-labor criteria.

• Costa Rican Social Security Fund. Regulations for Contributory Insurance of Self-Employed Workers and institutional guides for employers and self-employed workers.

• Ministry of Finance. Regulations and guidelines on electronic receipts, tax registration and formal obligations applicable to professional services.