A sole proprietor instead of an employee: when it is lawful and when it is risky

A company may lawfully work with an individual entrepreneur (FOP, the Ukrainian sole-proprietor status), and many do. Businesses engage FOPs for software development, marketing, design, consulting, logistics, repairs and other services.

The problem arises when a contract with a FOP in fact conceals an ordinary employment relationship.

The name of the contract settles very little. During an inspection the authorities look at how the person’s work is actually organised: do they provide services independently as an entrepreneur, or do they work under the company’s control like a staff employee?

Below we explain how to tell lawful cooperation with a FOP from disguised employment and what to do to reduce the risks.

How an employee differs from a FOP

An employee performs a job function within the employer’s business. The company organises the process, sets the schedule, supervises performance of duties and provides working conditions.

A FOP is an independent contractor. They organise their own activity, are not bound by internal work rules and are answerable to the client for a specific result.

Employee	FOP
Performs a job function	Provides a specific service or performs specific work
Reports to a manager	Organises the work themselves
Follows the internal schedule	Decides when and how to do the work
Receives a salary	Is paid for services or a result
Is given a workplace by the employer	Usually uses their own resources
Has employment guarantees	Bears business risk

The main difference is this: an employment relationship concerns the organisation of the work process itself, while a business relationship concerns a result defined in the contract.

Signs of disguised employment

The risk increases if the FOP:

• permanently performs the functions of a particular staff position;
• works to a schedule set by the company;
• comes to the office or another designated place every day;
• reports to a manager;
• has to agree absences, holidays or sick leave;
• receives the same amount every month regardless of results;
• works only with the company’s equipment, materials and accounts;
• cannot engage other contractors;
• has no other clients;
• has a corporate job title, email address or business card;
• goes through internal performance reviews alongside employees;
• does not document results with acts of acceptance or reports.

None of these circumstances on its own proves an employment relationship. The engagement model is assessed as a whole.

For example, regular monthly payment does not by itself make a contract one of employment. But if it comes together with a schedule, job duties, reporting to a manager and constant supervision, the risk of reclassification rises noticeably.

Contracts that most often raise questions

Contracts attract the most questions when:

• the subject is described as the ongoing “performance of duties”;
• staff job titles are used;
• the contractor reports to the director or a head of department;
• an eight-hour working day is set;
• the words “salary”, “holiday” or “probationary period” appear;
• payment does not depend on the volume or result of services;
• acts of acceptance are signed formally, with no description of the work done;
• the contractor bears no liability for a poor result.

Simply renaming an employment contract a “services agreement” does not change the nature of the relationship.

Who may detect a violation

The question of a de facto employment relationship may arise:

• during an inspection by the State Labour Service (Derzhpratsi);
• during an on-site tax inspection (see our article on unannounced tax inspections);
• during a tax audit;
• in a court dispute;
• after a complaint by the contractor themselves;
• in criminal proceedings or when other aspects of the company’s activity are being examined.

The evidence is not limited to the contract and acts of acceptance. Inspectors also take into account:

• email correspondence;
• corporate chats;
• access control system data;
• work schedules;
• job descriptions;
• internal orders;
• internal regulations;
• payment documents;
• statements by other employees;
• information from corporate systems.

If the work is in fact organised as employment, a well-drafted contract will not protect the business.

Possible consequences for the business

If the relationship is recognised as employment, the company may face:

• financial penalties for allowing a person to work without an employment contract;
• additional assessment of personal income tax (PIT), military levy and the single social contribution (SSC);
• fines and late-payment interest for tax violations;
• administrative liability of officers;
• legal costs;
• claims by the worker for wages and employment guarantees.

For allowing a person to work without a formal employment contract, paragraph 2 of part 2 of Article 265 of the Labour Code of Ukraine provides for a fine of ten times the minimum wage for each worker. In 2026 the minimum wage is UAH 8,647, so the fine is UAH 86,470 per person (10 × UAH 8,647). Legal entities and FOPs that pay the single tax (groups 1–3) receive a warning for this violation, but only the first time: for a repeat violation within two years of detection, Article 265 provides for a fine of thirty times the minimum wage, i.e. UAH 259,410 (30 × UAH 8,647). The law makes no separate exception for single-tax payers in the case of a repeat violation, and the State Labour Service’s clarification of 26 January 2026 likewise provides no warning option for repeat violations.

Under martial law, part 3 of Article 16 of Law No. 2136-IX applies: if the employer has complied with an order to remedy violations in full and on time, the fines under Article 265 of the Labour Code are not imposed. This rule does not cancel additional tax assessments, administrative liability or claims by the individual.

The Tax Code also addresses this situation directly. Under paragraph 177.8 of Article 177 of the Tax Code of Ukraine, a company need not withhold PIT from income paid to a FOP, but this rule does not apply where it is established that the relationship under a civil-law contract is in fact employment.

How to structure cooperation with a FOP properly

1. Describe a specific service or result

The contract should state clearly what the contractor will do, for example:

• develop a software module;
• run an advertising campaign;
• prepare a legal opinion;
• create a design;
• carry out repairs;
• provide technical support on request.

Wording such as “performs the functions of a manager” or “ensures the ongoing work of the department” looks like employment duties.

2. Do not impose internal work rules

The FOP should decide how and when to do the task, unless the nature of the services dictates otherwise.

A deadline or an agreed meeting time is perfectly acceptable. Daily monitoring of arrival, lunch breaks and the end of the working day, however, creates an employment risk.

3. Link payment to services

The documents should state:

• the list of work done;
• the period or stage;
• the volume;
• the result;
• the price.

Monthly payment is possible if the acts of acceptance reflect work actually done.

4. Keep FOPs separate from staff employees

Do not automatically apply to a contractor:

• internal work rules;
• HR orders;
• timesheets;
• the holiday system;
• job descriptions;
• disciplinary procedures.

At the same time, information security, confidentiality and premises access rules may also apply to external contractors, if this is properly documented.

5. Check the FOP’s status

Before starting cooperation, check:

• state registration;
• tax status;
• single-tax group;
• registered activity codes (KVED);
• the signatory’s authority;
• bank details;
• that the business activity has not been terminated.

How to do this using public registers is explained in our article on checking a counterparty.

When an employment contract is the better option

An employment contract is safer if the person:

• performs an ongoing function within the company’s structure;
• works to a set schedule;
• reports to a manager;
• regularly receives tasks within a single position;
• is fully integrated into the team;
• uses the employer’s resources;
• bears no real business risk.

If the work is in fact employment, rewriting the FOP contract will not solve the problem. Either the format of cooperation itself has to change, or the person has to be employed.

For Diia.City residents, a gig contract may be an option in certain cases. It is available only within this special legal regime and also needs to be drawn up properly. More on the Diia.City regime in our article on company registration and residency.

A short checklist

Before signing or extending a contract with a FOP, check:

• whether a specific result of the services is defined;
• whether the contractor duplicates a staff position;
• whether there is a mandatory work schedule;
• whether the FOP is subject to internal work rules;
• whether tasks, reports and acts of acceptance are documented properly;
• whether payment matches the services actually provided;
• whether employment terminology appears in the documents;
• whether the contractor’s entrepreneur status is confirmed;
• whether the contract and documents match the real way the work is done.

Conclusion

Working with a FOP is not in itself a breach of the law. The risk arises when an independent contractor in fact works as a staff employee: performs an ongoing job function, works to a set schedule and is under the company’s organisational control.

A standard contract template is not enough for this. The whole chain of the relationship needs to be checked: how tasks are set, how payment is made, what documents exist, how communication works and how the work is actually organised.

Legal framework

• Labour Code of Ukraine — Art. 21 (employment contract), Art. 24 (concluding an employment contract and notifying the tax service before work starts), Art. 265 (liability for allowing a person to work without a contract)
• Law of Ukraine No. 2136-IX “On the Organisation of Labour Relations under Martial Law” — part 3 of Art. 16 (no fines if an order is complied with)
• Tax Code of Ukraine No. 2755-VI — para. 177.8 of Art. 177 (paying income to a FOP without withholding PIT, and the exception for de facto employment)
• Law of Ukraine No. 2464-VI “On the Collection and Accounting of the Single Contribution for Mandatory State Social Insurance”
• Law of Ukraine No. 1667-IX “On Stimulating the Development of the Digital Economy in Ukraine” — gig contracts for Diia.City residents

ARGUS Consulting group reviews contracts and the actual model of cooperation with FOPs, helps remove signs of disguised employment and prepares businesses for inspections by the tax service and the State Labour Service. See legal support for business; if an inspection has already started, see tax dispute support.

Legal framework as of 06.10.2026.