Sole Proprietor (FOP) or Employee: Hidden Risks of Cooperation

In Ukraine, especially in the IT sector, there is a common practice where instead of hiring staff, companies offer cooperation as a sole proprietor (FOP). For the employer, this is beneficial: the tax burden is reduced several times (FOP pays 5% single tax and minimal social contributions instead of nearly 40% in taxes and payroll charges). But for the specialist, this arrangement has not only advantages but also serious drawbacks.

By registering as an FOP, you are no longer considered an employee but rather an independent contractor of the company. This means:

• no paid vacation, sick leave, or maternity leave;
• no guarantees of minimum wage or overtime pay;
• no social insurance for temporary disability or workplace accidents;
• no protection against dismissal — a contract with an FOP can be terminated quickly and without compensation.

In practice, companies rarely provide additional social guarantees in FOP contracts. If you don’t work, you simply don’t get paid.

Taxes, bureaucracy, and responsibility

Another key issue is that all tax obligations and accounting lie on the FOP personally. You must independently:

• pay single tax and social contributions;
• file tax returns;
• keep records of income and expenses;
• open a business account and properly issue acts of completed work.

Any mistakes — fines or penalties. Unlike employees, for whom the company’s accounting department handles taxes, an FOP is fully responsible.

When a civil contract turns into employment

The law clearly distinguishes between employment and civil contracts. If you have a fixed workplace, schedule, subordination to a manager, and regular salary — these are employment relations, even if the paperwork calls it an “FOP contract.”

Such practices are considered an attempt to bypass labor law. The State Labor Service and tax authorities monitor such schemes, especially when applied on a large scale.

• Obeying internal company rules. If an “FOP” follows company policies: works in the office on a set schedule, follows manager’s orders, and is integrated into staff routines — this indicates employment, as independent contractors organize their work themselves.
• Continuous work process vs. result. Employees are paid for their work process (monthly, hourly), with ongoing tasks assigned. Contractors are supposed to deliver a specific result and get paid upon completion (e.g., a finished program or project). If someone is required to be present daily, handling varied tasks, and receives a fixed monthly payment — it looks more like employment.
• Workplace and company resources. An independent entrepreneur chooses where and how to work, and may serve multiple clients. If the “FOP” works at the company’s office, uses its equipment, corporate email, and has no other clients — this strongly suggests employee status.
• Long-term cooperation with a single client. If an FOP works exclusively with one company for years, performing the role of an employee, regulators often interpret this as concealed employment. It is especially suspicious if a company has many “FOPs” working solely for it — a clear sign of a scheme.

The Tax Service and Labor Inspectorate use these criteria during audits. If actual employees disguised as entrepreneurs are revealed, the consequences may include:

• For the company (employer): fines for each undeclared worker (Article 265 of the Labor Code — up to 80,000–240,000 UAH), as well as tax reassessments of PIT and social contributions. Tax authorities may reclassify payments to FOPs as wages, adding 18% PIT and 1.5% military levy on all amounts paid, plus penalties. According to lawyers, these sums can be astronomical if many FOPs are involved over a long period. In some cases, company executives may even face criminal charges for tax evasion if amounts are large.
• For the FOP worker: direct sanctions are rarer, since formally the 5% single tax was paid. However, indirect consequences are significant. First, once an investigation begins, cooperation usually ends immediately — the person loses their job, with no severance or notice compensation. Second, the worker may have to testify and prove the real nature of relations. While fines are imposed on the employer, defending oneself is not easy. Courts increasingly side with regulators in recognizing disguised employment if obvious signs are present. For the worker, this means at minimum loss of income, and at worst — tax problems (such as blocked business accounts during inspection or even forced closure of the FOP).