Employee vs. Consultant: Navigating the Legal Fine Line to Avoid Misclassification

Habiba Mokhtar ([email protected]) – Associate

Misclassifying employees as consultants can be a costly mistake for establishments in Bahrain, potentially leading to unexpected lawsuits and fines. This misclassification can deprive employees of benefits under Law No. 36/2012 Issuing the Labour Law (the Labour Law) and expose businesses to unexpected liabilities, including claims for compensation for unutilized benefits, protections, and unfair dismissal if termination lacks legal justification. Since courts assess the true nature of the relationship, rather than relying solely on contractual terms, businesses relying too heavily on written agreements may unintentionally misclassify employees. This article aims to clarify the determination of an employment relationship under Bahraini law and outline best practices towards accurate classification.

Determination of an Employment Relationship

Irrespective of the parties’ stipulated intention regarding whether they are bound by a consultancy or employment relationship, the courts look beyond the words of the contract and assess the reality of the relationship.

Article 1 of the Labour Law defines an employee as “Every physical person working in return for a wage for an employer and under the latter’s management and supervision”. Accordingly, the two main elements determining an employment relationship are subordination and remuneration. When both elements are present, the contractual relationship constitutes an employment relationship.

Subordination

When assessing if subordination exists, courts examine whether the establishment has actual authority over the employee. While the factors indicating subordination are non-exhaustive, key considerations include whether the employee is required to adhere to specific working hours and employee policies, is integrated into the company through an assigned office, equipment, or business cards, and performs duties under the employer’s supervision and direction.

The Bahraini Court of Cassation affirmed this in Challenge No. 386 J.Y. 2010 wherein the court held “Subordination only exists when the employer holds actual authority to supervise and direct the employee, including issuing orders, overseeing their execution, and imposing penalties for non-compliance. The assessment of subordination depends on the actual nature of the relationship, focusing on whether the employer exercises actual authority over the employee, irrespective of how the relationship is described by the parties”.

Under the same Challenge, the court held that an employment relationship did not arise because the appellant operated independently without supervision or authority from the respondent, managing clients, and assigning tasks autonomously, without fixed working hours or a fixed salary, demonstrating the absence of subordination.

Remuneration

Article 1 of the Labour Law defines an employee’s wage as “All that the employee receives in return for his work of any kind whatsoever, whether fixed or variable, in cash or in kind, including the basic wage, benefits, allowances, grants, rewards, commissions, and other benefits”. This broad definition allows an employee’s wage to be structured in diverse ways, including fixed salaries, commissions, or variable payments. Consequently, an employment relationship can arise irrespective of the specific remuneration arrangement between the parties.

The Bahraini Court of Cassation affirmed this in Challenge No. 460 J.Y. 2007 wherein the court stated that “The stipulation of remuneration as a percentage of net profits does not contradict the characterization of the contract as an employment contract, as there is no legal restriction on structuring the employee’s wage in this manner”.

Consequently, given that remuneration under employment and consultancy agreements cannot be distinguished due to the broad definition of an employee’s wage under the Labour Law, the prevailing judicial standard is that the decisive criterion for distinguishing an employment agreement from a consultancy agreement is the employee’s subordination to the employer. Notwithstanding, considering that the court’s assessment is non-exhaustive and relies on a wide range of factors, it is best practice for establishments to avoid paying a fixed monthly wage, rather (i) ensure that the elements of subordination are not satisfied and (ii) provide remuneration in a manner contingent upon the services provided.

Accurate Classification of a Consultancy Agreement

The following factors can aid in accurately classifying a consultancy agreement:

-Autonomy in determining work methods and hours.

-Exemption from the company’s employment policies.

-Lack of integration into the company, including the absence of office space, equipment, or business cards.

-Remuneration directly tied to services rendered.

-Freedom to market services independently and engage with third parties.

-The right to appoint a substitute to perform the work.

-Ensuring the contract accurately reflects the nature of the relationship, with periodic reviews to confirm its continued validity.

Concluding Remarks

Ensuring accurate classification is not just a legal obligation but a strategic business decision that safeguards both employer and consultant interests. To safeguard mutual intent and minimize potential disputes, it is essential for businesses and consultants to understand the distinguishing factors and ensure the actual working relationship aligns with the contractual terms throughout the term of the agreement.

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