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Based on real client situations, amalgamated for anonymity.
Key Takeaways
- When an employee leaves and returns as a contractor doing substantially the same work, labour authorities can reclassify the arrangement as disguised employment, triggering back-pay, penalties, and reinstatement claims.
- Romanian law applies a substance-over-form test. If the work operates like employment, it will be treated as employment, regardless of what the contract says.
- The compliant approach requires two completely separate transactions with clear separation between them.
- Teamed's legal experts identified the risk before the client acted, and structured a compliant path forward.
- The EU Platform Work Directive is extending these protections across every member state.
If you have been through a contractor conversion that felt too easy, this one will feel familiar.
Teamed is the trusted global employment expert for seasoned global employers who need the right structure for where they are, and trusted advice for where they're going. This is part of a series drawn from real compliance situations our clients have faced, showing how we advise when the stakes are high and the answers are not straightforward.
The situation
A mid-market company had an employee working in Romania. The role was coming to an end for legitimate business reasons, and there was no longer ongoing work to sustain the position.
The employee suggested a tidy solution: leave the employment and come back as a contractor, picking up similar work on a project basis.
The client's HR team contacted Teamed before proceeding.
The question that revealed the trap
The client's HR lead came back with a follow-up that gets to the heart of this issue: if there is genuinely no work to justify keeping the employment going, how can we also offer contractor work? Does one not cancel the other out?
This is the exact question that trips up experienced HR leaders. It feels like a contradiction.
Both can be true, but only if there is a genuine break and a fundamental change in the working relationship. A termination is based on the current position no longer being viable. A contractor arrangement is a separate, independent commercial decision that can only happen after the employment has been properly concluded.
Most companies do not understand that distinction. And most providers will not explain it to them.
What Teamed identified
Our legal experts flagged significant risk under Romanian labour law. When an employee leaves and comes back as a contractor performing substantially the same duties, authorities apply a substance-over-form test.
That test asks straightforward questions. Is the work the same? Is there still subordination? Are there ongoing assignments rather than discrete projects? Is compensation fixed rather than project-based?
If the answer to most of those is yes, the arrangement will be reclassified as continued employment. The label on the contract changes nothing.
Our legal team escalated this for a full compliance review. It was not a routine situation. The assessment confirmed that engaging someone as a contractor after employment ends is technically possible, but the conditions are strict: each engagement must be clearly defined, genuinely different from the previous role, sporadic rather than regular, and documented precisely enough to withstand scrutiny.
Without those safeguards, it would be treated as disguised employment.
What was at stake
Reclassification means the employer owes every entitlement that should have been provided during the "contractor" period, all backdated. Social security contributions, leave, statutory compensation. Labour authorities can impose sanctions. The individual can pursue reinstatement. Legal costs compound it further.
The financial exposure from a misclassified contractor arrangement can be several multiples of what a compliant termination would have cost in the first place.
What Teamed recommended
Teamed recommended two completely separate transactions with clear separation between them.
First, a proper termination based on the legitimate business reason, with all statutory requirements and entitlements handled correctly.
Second, if contractor work is genuinely needed later, a properly structured arrangement. That means temporal separation, structural independence (genuinely different, discrete, project-based work), and precise documentation for every engagement.
The sequencing is what matters. A compliant termination addresses the business reason. A contractor arrangement afterwards is an independent, subsequent decision. Combining them, or even discussing them at the same time, is what creates the risk.
Why this matters beyond Romania
Contractor misclassification is a top-three compliance concern for every mid-market company with international workers. And it is getting harder.
The EU Platform Work Directive is designed to address exactly this scenario. The Directive creates a rebuttable presumption of employment when certain indicators are present, shifting the burden of proof to the company. As it rolls out across member states, the substance-over-form test that Romania already applies will become the standard across Europe.
This is where Teamed's Graduation Model becomes critical. The model exists because the right employment structure changes as circumstances change. Contractor to EOR to entity, each stage has a moment where the economics and compliance profile shift. But graduation works in both directions. When a role no longer justifies employment, the path back to contracting has to be handled with the same rigour as the path forward.
The honest answer here was not what the client expected. But it was the right one.
FAQs
Can an employee leave and immediately return as a contractor?
Technically possible, but extremely high-risk. Labour authorities across Europe apply substance-over-form tests: if the work and relationship remain substantially the same, it will be reclassified as employment regardless of the contract. The only compliant approach is full termination with all entitlements settled, followed by a genuinely different contractor arrangement with clear separation.
What is the substance-over-form test?
Courts and labour inspectorates look at the reality of a working arrangement, not the label. If someone is working regular hours, receiving fixed pay, and integrated into the organisation, that is employment, even if both parties call it contracting. The EU Platform Work Directive is extending this principle across all member states.
What are the penalties for contractor misclassification?
Reclassification means backdated entitlements, social security contributions, administrative sanctions, potential reinstatement claims, and legal costs. The total exposure can be several multiples of what a compliant termination would have cost.
Can you terminate someone if there might be contractor work for them later?
Yes. This is the distinction most companies miss. Termination is based on the current position. A future contractor arrangement is a separate decision that can only happen after employment is properly concluded. The two must be completely separate in time, documentation, and intent.
How does the EU Platform Work Directive affect this?
The Directive creates a presumption of employment when certain indicators are present, shifting the burden of proof to the company. For any company managing international workers across Europe, this raises the compliance bar on every contractor conversion.
When should a company move from EOR to its own presence in-country?
When you have a critical mass of employees in a market, a long-term commitment, and the capacity to manage local compliance. Teamed's Graduation Model guides this based on when the economics shift in favour of your own entity. From first hire to your own presence in-country, the right structure changes as your business does.
The right structure for where you are
The global employment industry profits from keeping companies where they are. When a client comes to us with a situation like this, the easy answer would be to process the conversion and move on. That is not how we earn our place.
Teamed is the trusted global employment expert for companies who need the right structure for where they are, and trusted advice for where they're going, from first hire to your own presence in-country. Over 1,000 companies across 180+ countries trust us because we give the honest answer, even when it is not what you expected to hear.
Book your Situation Room. Tell us your setup, we will tell you what we would recommend, whether that includes us or not.
