What is “disguised employment” — the prohibition in Art. 1(2) LC
Art. 1(2) of the Bulgarian Labour Code states: „Relations involving the provision of labour are to be regulated only as employment relationships.“ Therefore, when a natural person in fact provides labour — regardless of the contract form (civil, service, piecework, management) — the relationship is employment in substance. Form does not change substance.
The term “disguised employment” (or “false self-employment”) is used where the parties knowingly frame a civil-law contract to avoid:
- The social-security burden of employment (contributions to unemployment, occupational accidents, general illness and maternity for the employer).
- Labour Code entitlements — paid annual leave (Art. 155), sick leave, termination compensation (Art. 220–225).
- Labour Code termination procedure and dismissal protection under Art. 333.
- Employment records and recognition of service.
A practical driver of this practice: cutting employer cost by ~20% and shifting the social-security burden to the “contractor” (treated as self-insured). For the individual — the 25% statutory expense deduction under Art. 29 PITA and a lower effective rate.
Converse. Not every civil contract is disguised employment. Legitimate civil contracts — for a specified outcome, without subordination and with autonomous organisation — are valid and widely used (IT, consulting, creative professions). Disguise arises when a civil contract masks an actual employment relationship.
Distinguishing criteria — when a contract is “disguised”
Case law and guidance from the Labour Inspectorate and NRA use several indicators. No single factor is decisive — the assessment is based on the totality of circumstances.
| Feature | Employment | Civil contract |
|---|---|---|
| Subordination | Worker follows managerial instructions | Contractor works autonomously |
| Working time | Fixed schedule set by employer | Flexible time allocation |
| Place of work | Employer’s premises | Contractor’s choice |
| Equipment | Employer’s | Contractor’s |
| Personal performance | Mandatory | Substitution possible |
| Remuneration | Fixed monthly (salary) | Tied to outcome |
| Subject | Labour (process) | Specific outcome/service |
| Business risk | Employer’s | Contractor’s |
| Exclusivity | Usually single engagement | Multiple clients |
| Duration | Continuous, systematic | Specific assignment |
The Labour Inspectorate typically opens a case when 3–4 indicators point to employment. Subordination, fixed working time, employer-owned equipment, and exclusivity carry the greatest weight.
Procedure for declaring an employment relationship (Art. 405a LC)
Where a violation of Art. 1(2) LC is established, the procedure is:
- Labour Inspectorate inspection. Inspectors visit the site, request documents (civil contracts, schedules, emails, access logs) and interview workers and witnesses.
- Decision under Art. 405a(1) LC. Upon finding disguised employment, the control bodies declare the existence of an employment relationship by decision. The decision specifies the start date of the employment relationship (typically the date of actual commencement of work).
- Mandatory instruction. The employer is instructed to offer the worker a written employment contract reflecting the established conditions.
- If no contract is concluded. The decision replaces the employment contract and is deemed concluded for an indefinite term, 5-day working week, 8-hour working day.
- Notification to the NRA. The Labour Inspectorate transmits the decision to the NRA for recalculation of social contributions and taxes.
Appeal
The employer may appeal the decision before the administrative court having jurisdiction over its seat within 14 days of service (under the Administrative Procedure Code). Important: the appeal does not suspend execution — the employment relationship is deemed declared until the court annuls the decision.
Tax and social-security consequences
For the employer
- Retroactive social contributions for the full duration of the established employment relationship — employer portion (~20% of gross remuneration).
- Withholding and remittance of the employee-portion contributions (~13%) that were not withheld under the civil contract.
- PITA tax reassessment under Art. 42 (employment income), with credit for the advance tax already paid under the civil contract.
- Interest on all delayed contributions and taxes under the Delayed Tax and State Receivables Act.
- Limitation: 5-year regular, 10-year absolute under Art. 171 DOPK (see our limitation article).
For the worker
- Recalculated contributions credit insurance service for the relevant period (including for pension and unemployment).
- Unemployment benefit may be available if the relationship is terminated.
- Entitlement to paid annual leave arises for the full period.
- The worker may reclaim contributions wrongly paid as a self-insured person.
Administrative penalties under the Labour Code
| Violation | Sanction (BGN) | EUR equivalent |
|---|---|---|
| Work without an employment contract (Art. 414(3) LC) | 1,500–15,000 for employer; 1,000–10,000 for officer; 100–1,000 for worker | EUR 767–7,669 / 511–5,113 / 51–511 |
| Non-compliance with the Art. 405a(4) mandatory instruction (Art. 416(5)) | 2,500–15,000 | EUR 1,278–7,669 |
| Repeat violation | Double the sanction | Up to EUR 15,338 |
Sanctions are administrative and imposed by АУАН and penalty order under the Administrative Violations and Sanctions Act (ZANN). For appeal procedure see our article on appealing АУАН and penalty orders.
Supreme Administrative Court practice
The Supreme Administrative Court (SAC) has repeatedly ruled on Art. 405a LC disputes. Key takeaways:
- Substance over form. The name of the contract (“civil”, “service”) is irrelevant — the court examines the actual nature of the relationship.
- Burden of proof. In the appeal, the employer must prove that the relationship is not employment in substance.
- NRA limitation. In an SAC judgment (on the scope of NRA powers), it has been held that the NRA cannot independently reclassify a contract as employment for tax purposes — that is the competence of the Labour Inspectorate. The NRA may act on the basis of the Labour Inspectorate’s findings.
- Totality-of-circumstances test. The absence of 1–2 typical features does not exclude an employment relationship if the remaining features clearly indicate one.
Important: the Labour Inspectorate and the NRA may independently detect violations. An inspection by one institution often triggers the other — information is exchanged ex officio.
Typical high-risk situations in practice
- Long-term “consultancy” contracts with daily work. A consultant working 5 days/week, 9am–6pm, from the client’s office, exclusively for that client — high risk.
- Former employee turned contractor. Circumventing Labour Code restrictions — same tasks, location and equipment.
- Mass freelancer engagement. IT companies hiring 20+ individuals on civil contracts with identical conditions, without legitimate independent-contractor arrangements.
- Fixed monthly payment. Not linked to a specific deliverable.
- Contractor integrated into corporate hierarchy. Reporting to a manager, attending team meetings, participating in corporate Slack/Teams.
- Trainees/juniors under civil contracts. Performing supervised work without worker status.
How the employer can protect itself
Preventive measures
- Screen each civil contract before signing — cross-check against the table of criteria.
- Avoid fixed working time clauses in civil contracts. Frame the task as a deliverable, not hourly presence.
- Self-employment setup. If the activity has the hallmarks of a business, register the contractor as a self-insured person with a unique tax number and allow them to work for multiple clients.
- Output-based documentation. Work-acceptance protocols, reports, sample deliverables.
- Multi-client engagement. Avoid long-term exclusivity — allow the contractor to serve other clients.
Response to a Labour Inspectorate inspection
- Stay calm and provide only requested documents.
- Do not make informal admissions to inspectors.
- Consult counsel before signing any protocol.
- File written explanations within the statutory deadline.
- Upon receipt of a decision — 14 days to appeal before the administrative court.
The Labour Code text is available at lex.bg. Labour Inspectorate official information — at gli.government.bg.
Received an instruction from the Labour Inspectorate?
Before signing addenda or paying sanctions — we assess the legality of the decision, prepare an appeal before the administrative court and minimise the risk of NRA recalculation. The Innovires team supports employers from inspection through to court decision. Contact us for urgent consultation.