In the pursuit of tapping into Denmark's skilled labor market, global corporations often hire independent contractors. However, navigating Danish tax and labor rules can be challenging.
Before the first invoice arrives, you must acquaint yourself with the guidelines for accurately classifying Danish contractors, bringing them on board, and compensating them—all while complying with the nation's comprehensive labor statutes.
Continue reading to learn how you can promptly pay your international contractors in Denmark, in accordance with Danish employment and labor laws.
Step #1: Classify your workers in Denmark
In Denmark, the government has established clear definitions for both independent contractors and employees, based on how they engage with companies.
Employees are committed solely to one employer, who sets their work hours, location, and job tasks. On the other hand, contractors or freelancers handle temporary or specific assignments, often juggling multiple clients. They have the autonomy to decide their work methods and schedules, and they typically invoice clients for their services.
In Denmark, correctly categorizing workers is crucial due to the serious consequences that can arise from misclassification. These consequences include:
- Monetary penalties: If an employee is wrongly labeled as a contractor, there can be fines starting at DKK 10,000. In severe cases of misclassification, the penalty might escalate to paying 20 weeks' worth of the employee's salary.
- Non-compete compensation: Employees may also be entitled to compensation for non-compete agreements.
- Back payments and benefits: The employer might need to provide compensation to wrongly categorized workers, covering missed payments and benefits, while ensuring all taxes and contributions are settled.
To avoid any confusion, here's a helpful chart outlining the key distinctions between contractors and employees within Denmark's labor laws:
More autonomy over work. Contractors have more autonomy over how and when to complete their work.
More direction from the employer. Employees receive more guidance and instructions from their employer. They may also have specific working hours.
Equipment and tools are owned by the worker.
Equipment and tools are typically provided by the company.
Less integrated. Contractors are fairly independent and more likely to work remotely.
Highly integrated. Employees are typically more integrated into the organization, usually working on-site.
Not entitled to benefits. Contractors don’t receive the same benefits and protections as employees. They’re also responsible for paying their own taxes.
Entitled to benefits. Employees are entitled to certain employment benefits and protections. This includes minimum wage and vacation pay. Sometimes, they also receive health insurance, retirement plans, and paid sick leave.
Time-bound agreement. Contractors are typically engaged for a specific time period or task.
Indefinite engagement. Employees are generally hired indefinitely.
Risk of loss. Contractors assume more risk and liability for their work.
Shielded from risk. Employees are generally covered from work-related liabilities.
Subcontracting. Contractors can assign work to other entities or individuals.
No subcontracting. Employees cannot assign work to anyone else unless they have company approval.
Step #2: Determine the best way to pay your contractors in Denmark
Your next focus is to select a payment method that suits both you and your contractors, especially considering the growing trend of global workforces. Here are several options for confidently making international payments:
- Bank transfers: You have a couple of avenues to explore here. You can either open an account in a Danish bank to directly deposit funds into your contractors' accounts, or you can use your own bank for a global wire transfer. These methods ensure secure and reliable payment transfers.
- International money orders: While this approach has been in use for some time, it's relatively slow, involving the physical purchase of a money order and a subsequent physical deposit by your contractor. Further, there could be associated fees and less favorable exchange rates to consider.
- Digital wallets or payment platforms: If speed and convenience are your priorities, digital payment platforms are worth considering. Keep in mind that not all platforms (like Venmo and Zelle, which are limited to the US) work in Denmark. However, alternatives like PayPal and Wise offer cross-border money transfer capabilities. Exchange rates may vary, so stay informed about any fluctuations.
- Global payroll services: Contractors typically operate differently from full-time employees, often invoicing for their services. Nevertheless, with Rippling, you can simplify this process by including both your Danish employees and contractors in a single pay run, regardless of their location.
Step #3: Use global payroll software to process payments for Danish contractors
As seen in Step #2, there's no shortage of compliant methods to pay contractors in Denmark. But the swiftest and most straightforward approach is using global payroll software.
For example, with Rippling, you can disburse payments to employees and contractors globally, all within a single pay run. Here's how our global payroll system works:
Step #4: Ensure your Danish contractors have the right tax information
In Denmark, many contractors choose to work as self-employed freelancers because of the freedom this arrangement offers them. They simply need to register as contractors with the Danish business authority and Danish Customs and Tax Administration (SKAT).
If you're hiring a freelancer, it's important to ensure the contract outlines payment terms and expected outcomes clearly. This clarity is vital to prevent any potential conflicts or misunderstandings down the line.
Remember that, unlike traditional employees, you aren't obligated to deduct and pay taxes on your payments to Danish contractors. However, depending on the local tax status of your contractors and the type of work they're engaged in, you might need to supply them with specific tax documents.
For instance, if your business is headquartered in the United States and you're working with Danish contractors (or other international contractors), they should complete an IRS Form W-8BEN to confirm their status as foreign contractors. This step ensures compliance with relevant regulations in the US.
Frequently asked questions about running payroll for contractors in Denmark
Do you need to withhold taxes when paying contractors in Denmark?
No, you don't. Foreign companies aren't required to withhold payroll taxes when paying Danish contractors, as they're responsible for managing their taxes and making social security contributions.
Does the Danish minimum wage apply to independent contractors in Denmark?
Denmark doesn't have a fixed minimum wage set by law. Instead, wages depend on the particular job. The minimum pay is decided through discussions between employers and workers’ unions, which are part of national collective bargaining agreements. However, even within these agreements, there isn't a compulsory minimum payment requirement for contractors.
Do Danish contractors get benefits?
In Denmark, independent contractors do not receive the same benefits as employees do. Providing benefits like health insurance or paid time off to independent contractors might even raise questions about their misclassification.
Can you pay contractors in Denmark in your home currency?
It's a good idea to pay international contractors in their local currency whenever possible. For instance, if you're working with contractors from Denmark, consider paying them in Danish krone (DKK). If you choose to pay them in your home currency, that's acceptable. In this case, however, they might need to deal with exchange rates and wait longer for the payment to be processed.
Can you manually pay contractors in Denmark?
Yes, you can pay Danish contractors manually. While many small business owners choose this approach to save on costs, it's worth noting that this process can become quite time-consuming as your business grows or if you're dealing with multiple foreign contractors. Additionally, there are some potential drawbacks to handling payments manually:
- Compliance: When payroll is managed manually, there's a higher chance of errors or missing details. To address this concern, Rippling automatically enforces compliance to ensure your business adheres to local laws and regulations.
- Security: Using spreadsheets or physical records for payroll introduces security vulnerabilities, as sensitive employee information could be lost, stolen, or misused. By contrast, Rippling's system ensures the confidentiality and protection of your data.
Rippling provides an effective solution by automating the payroll process. It integrates your company's HR data seamlessly, eliminating the need for manual data entry. This way, you can pay your global contractors and employees swiftly and in accordance with regulations, all within a single streamlined pay run.
How do you turn a contractor into an employee in Denmark?
If you're considering transitioning a contractor, there are several reasons to do so, like preventing misclassification, integrating them as a formal team member, or safeguarding your intellectual property. To convert a contractor into a full-time employee, follow these steps:
- Onboard them: Treat the contractor like any new hire by providing them with proper onboarding. This involves various steps. If you don't already have Danish employees, you must decide between setting up a local entity (and registering with the appropriate regulatory and tax authorities) or using an Employer of Record (EOR) service to hire in Denmark.
- Provide documents: Give the newly transitioned employee an employment contract and an employee handbook. Make sure these documents align with minimum wage laws, mandatory employee benefits, legal working hours, public holidays, severance pay regulations, and other Danish laws.
- Verify employee information: Confirm and collect accurate employee details such as their name (matching their bank account), nationality, date of birth, date of hire, contact information, identity certificate number, and pay specifics. Safely store this data while adhering to privacy laws.
- Execute payroll: Once payroll is set up, you can manage withholdings and submissions of federal income tax and social security contributions. These contributions include pension, health insurance, medical care (including paternity leave), work-related injury insurance, and unemployment insurance.
Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.