When an FOP is actually an employee: how the state is tightening the screws

The state is increasingly closely monitoring cases where an individual entrepreneur (FOP) is formally a “contractor” but in fact works as an employee for a single employer, which allows savings on social security contributions and taxes but deprives the person of part of their social guarantees and distorts competition in the labor market; in the coming years, counteracting such schemes, rather than putting pressure on small businesses, will become one of the key vectors of tax policy.

1. Why the “FOP = employee” issue has become so acute

• The mass shift to FOP models in IT, creative industries, and the service sector was driven by the desire to reduce the tax burden: instead of 18% personal income tax, 1.5% military levy, and 22% unified social contribution, companies pay a single tax of 5% and a minimal unified contribution “for themselves”.
• In many cases, a FOP performs work under what is effectively an employment schedule – fixed working hours, subordination to the company’s internal rules, regular “salary‑like” payments, and the absence of entrepreneurial risk.
• For the state, this means a loss of revenues to social insurance and pension funds, while for the contractors themselves it means limited access to sick leave benefits, paid vacation, protection against unlawful dismissal, and other labor guarantees.
• Ukraine’s European orientation also plays a role: in the EU there are already several initiatives aimed at combating bogus self‑employment and protecting platform and gig‑economy workers, and Ukrainian legislation is gradually aligning with these standards.

2. How it is currently determined that a FOP is actually an employee

• The Tax Code differentiates between a self‑employed person and an employee: a self‑employed person may conduct activities only if they are not an employee within the scope of the same activity, whereas an employee performs a labor function under an employment contract and is subject to the employer’s rules.
• In practice, inspectors look at a combination of indicators: a single customer, regularity of payments, fixed schedule, presence of a supervisor, corporate email, workplace in the office, and restrictions on working for other clients.
• If most of these indicators are present, the tax authority or a court may reclassify the FOP’s civil‑law contract as an employment relationship, assess additional taxes and social contributions, and impose fines both on the company and on the “pseudo‑FOP”.
• Even now, the State Tax Service is actively analyzing “business splitting” schemes into dozens of FOPs, especially where there is a high turnover and uniform contracts with people who in fact perform identical labor functions.

3. What tools the state plans to use against pseudo‑self‑employment

• Strengthening risk analytics: the tax service is building profiles of taxpayers that show signs of bogus self‑employment – a single major client, synchronized payments, and the absence of expenses typical for entrepreneurial activity (rent, advertising, purchase of materials, etc.).
• Expanding audits: after the moratorium on inspections of FOPs in groups 1–2 was lifted, the tax authorities gained the ability to include them in the general audit plan and review a period of up to three years, paying particular attention to employment‑like relationships.
• Harmonization with European approaches: in the future, legislation may introduce a list of formal criteria under which a self‑employed person is automatically deemed an employee (number of clients, share of income from one customer, degree of control, duration of cooperation), similar to EU directives on platform work.
• Encouraging “white” models: in parallel, tax regimes are being discussed that would allow companies to legally engage gig workers or experts under flexible conditions but with basic social guarantees (for example, via gig contracts of Diia.City residents).

4. How this may change the labor market and tax burden

• For businesses, stronger oversight will mean reassessing cooperation models: large companies, especially in IT and services, are likely to gradually convert key FOPs to employees or gig‑contractors, keeping the FOP format only for truly independent consultants.
• The tax burden on employers will increase, but the risk of large additional tax assessments and litigation following audits will decrease; instead, there will be greater predictability and manageability of personnel costs.
• For FOPs who de facto work as employees, a change of status may mean a lower net income but a broader package of social guarantees – paid vacation, sick leave, protection against unjustified termination, and contributions to the pension system.
• The state expects that bringing such relationships out of the shadow will increase revenues from social contributions and personal income tax, reduce distortions between “white” employers and those aggressively optimizing taxes through mass FOP schemes, and at the same time will not harm genuine small businesses that have multiple clients and bear entrepreneurial risk.

5. What companies and FOPs should do now

• Conduct an audit of relationships with FOPs: identify where individuals are effectively integrated into the staff (fixed schedule, subordination to managers, use of corporate infrastructure) and assess the risk of reclassification into employment during an inspection.
• Review contracts: replace standard “FOP‑type” templates with more flexible models that clearly set out the contractor’s independence – the right to work with other clients, self‑organization of working time, and payment for results rather than a fixed “salary”.
• Analyze payments separately: if there are mostly regular identical amounts “on the 25th of each month”, this looks more like wages than payment for services; it is worth either changing the remuneration structure or honestly switching to employment contracts.
• FOPs working with a single client should assess their own interests: sometimes employee status with clear guarantees and insurance record is more beneficial than a higher but unstable income without protection or prospects for a pension.
• In high‑risk sectors (IT, logistics, creative agencies), it is worth considering combined models – a mix of employees, gig contracts, and FOPs only where there is genuine entrepreneurial initiative and several independent clients.

If you have questions or issues related to choosing a safe cooperation model with FOPs, assessing the risks of reclassification of civil‑law contracts into employment, preparing for tax audits, or changing the remuneration structure for employees and contractors, seeking professional legal and tax assistance will help minimize financial and reputational risks, avoid fines, and build a transparent system of relations with your personnel.

Author – Yuliia Popadyn, attorney of the tax and housing law practice at the Law Firm “Winner Legal Company”.