Knowing the legal difference between a consultant and an employee is important for a company that needs to hire someone in Nicaragua or for a person interested in rendering services for a company or another person, due to the fact that the nature of the contractual relationship will determine many factors that both parties must be aware of before executing the contracting modality that will govern the relationship between them—the nature of the contractual relationship impacts on the employment benefits, tax implications and liabilities that the parties must comply with according to the law.
An example of the importance of knowing this difference occurs when a company that isn’t domiciled in Nicaragua (a company that has not been legally incorporated in this country) needs to hire someone or provide services in Nicaragua; in which case, the nature of the contractual relationship will determine if the person can be hired as a consultant or as an employee; and, therefore, determine if the company (not domiciled in Nicaragua) can establish the relationship directly with this person without requiring the opening of a branch or a subsidiary in this country or the use of another modality, such as the outsourcing.
Which is the legal difference between a consultant and an employee according to Nicaraguan law?
First, it is important to be clear that the Labor Code of Nicaragua regulates the labor relationship between an employer and an employee. Any other kind of relationship (professional or general service relationships celebrated with a consultant) are governed by the applicable legislation, i.e. civil or commercial legislation, but specifically by the provisions stipulated in the particular contract for professional or general services subscribed between the parties.
Based on the concept given by the thirteenth and nineteenth articles of the Labor Code of Nicaragua and certain interpretations of the Labor Ministry of Nicaragua, in order to consider the existence of a labor relationship, the service provided by a person to another, either natural or legal person, must comply with the following characteristics: (i) the subordination, which is referred to the obligation of the employee to work in a determined place; execute his/her labor obligations according to the instructions given by the employer and following a specific work shift during which he/she will be at the employers disposal and must complete assigned tasks/assignments, being exposed to receiving sanctions if he/she does not comply with the assigned tasks/assignments, as well as to completing the required tasks using the tools and material conditions required for the rendering of the services, provided by the employer; and (ii) the economic dependence, which means that the employees principal income is the salary directly received from the employer as consequence of the exclusive dedication to work for the employer.
As observed above, the main difference between an employee and a consultant lies in the autonomy that the consultant has under the contract for professional or general services to provide the service for which he/she was contracted, and does not require the constant direction and/or supervision from the contracting party in order to render the services, he/she is not subject to a working schedule or a place where the service must be rendered, as is usually required for an employee.
In this sense, we have to conclude considering that it is the nature of the contractual relationship based on the characteristics of the services provided by the employee or the consultant, and not the title or name given to the contract, that determines the kind of relationship between the parties, and, consequently, the legal frame to be applied to such relationship; and therefore, even when a person is contracted as a consultant with a contract for professional or general services, if the characteristics abovementioned to consider the existence of a labor relationship are met, then, the person will be considered as an employee and he/she will be entitled to receive the legal benefits provided by the labor laws of Nicaragua.
Now that we have seen the legal difference between a consultant and an employee, we will review the importance of knowing this, as mentioned before, for a company that isn’t domiciled in Nicaragua wanting to hire a person in this country, where the kind of relationship that will be established and contracting modality that will be used will be based on the services that this person will provide. Therefore, if this person will provide services that meet the characteristics of a labor relationship, then, he/she will be entitled to receive the labor benefits provided by the Nicaraguan labor laws, such as the right to be covered by the obligatory social security provided by the National Institute of Social Security (“INSS” in Spanish), and the employers obligation to register itself in such Institute and pay the social contribution required by law, and withhold the corresponding tax from the employee´s salary and pay it to the tax authority (“DGI”) in Nicaragua, which, in practice, all this can only be possible when the employer is duly registered and domiciled in Nicaragua. On the contrary, if the characteristics of the services to be rendered by the person in Nicaragua are not proper of a labor relationship, then, this person may be hired as a consultant by a company that is not domiciled in Nicaragua.
Finally, we recommend that companies or people wanting to celebrate contracts to provide any kind of services in Nicaragua look for the assistance of a lawyer specialized in labor matters to assist them in the execution of the proper contracts according to Nicaraguan law in order to avoid legal contingencies that can arise from the execution of the wrong contracts resulting in higher economic burdens.