Smart Hiring: How to Avoid Contingencies by Correctly Distinguishing Between Employment Contracts and Professional Services Agreements
In Costa Rica, many companies choose to engage workers under the figure of professional services, believing this exempts them from social security contributions, labor rights, or employer obligations. However, when the factual reality of the relationship reveals the existence of an employment bond, the company becomes exposed to serious legal, financial, and reputational contingencies.
1. The Principle of Primacy of Reality
Article 18 of the Costa Rican Labor Code defines an employment contract as one in which a person agrees to provide personal services to another, under that party’s direction and control, in exchange for remuneration. (
Costa Rican jurisprudence consistently upholds the principle of primacy of reality, meaning the real facts prevail over the contract label or wording.
In other words, even if the document is titled Professional Services Agreement, the presence of subordination, continuity, schedule control, or economic dependency will constitute a concealed employment relationship.
2. When Does a Services Agreement Become an Employment Relationship?
The determining factor is not the title of the contract but the presence of the essential elements of an employment relationship:
- Personal performance of services: the work is performed directly by the contractor, without the possibility of delegation.
- Subordination or dependency: the hiring party issues instructions, controls results, schedules, or methods of execution.
- Remuneration: there is a fixed or periodic payment in exchange for services.
- Work tools: when the hiring party (employer) provides the tools needed for the work to be performed.
If these elements are present, an employment relationship exists, regardless of how the contract is labeled.
3. Risks and Contingencies for the Company
When a company improperly uses professional services contracts to conceal employment relationships, it faces several legal and financial consequences, including:
a) Labor Claims
The worker may file a claim before the labor courts seeking:
- Recognition of the employment relationship.
- Retroactive payment of vacation, Christmas bonus (aguinaldo), notice (preaviso), and severance (cesantía).
- Compensation for unjustified dismissal.
b) Penalties from the CCSS and INS
The Costa Rican Social Security Fund (CCSS) may impose sanctions for failure to insure the worker, require retroactive payment of employer and employee contributions (37.34% of all unreported amount at current rates), and impose additional fines.
Likewise, the National Insurance Institute (INS) may sanction the employer for failing to provide mandatory Workers’ Compensation Insurance.
c) Tax and Reputational Risks
Abusive use of this type of contracting may be interpreted as evasion of social charges or labor fraud, harming the company’s reputation and its compliance record in audits or public procurement processes.
4. Corporate Best Practices
To avoid contingencies, companies should adopt a preventive labor compliance strategy that includes:
- Technical review of professional services contracts before signature.
- Evaluation of the actual working conditions, especially when services are performed continuously or exclusively.
- Training leaders and managers on the difference between functional coordination and true labor subordination.
- Periodic updates to hiring and outsourcing structures to ensure alignment with current regulations.
It is important for employers to understand that disguising an employment relationship under the appearance of professional services does not eliminate employer obligations, it merely postpones and aggravates them, exposing the company to significant risks. Consequences may include litigation, financial penalties, and damage to corporate reputation.
Complying with labor regulations not only protects the company from legal exposure but also strengthens its reputation as a responsible and ethical employer.
At GLC Legal, we assist companies in properly structuring and formalizing their working relationships, drafting contracts and policies that comply with Costa Rican legislation, prevent litigation, and support a culture of comprehensive labor compliance.
Contact us for a preventive review of your contracts and hiring structures. Our team is ready to help safeguard your company against labor and social security contingencies.
Author: Licda. Yannsi Paniagua – Labor Department, GLC Legal
