Convert Independent Contractors to Employees in the Faroe Islands

An independent contractor may be the right choice for a defined assignment in the Faroe Islands. But when a professional works continuously for one company, follows its management instructions and performs the same duties as its employees, the contractual description may no longer reflect the working relationship.

For international companies, this distinction matters. Independent business income and employment income are treated differently under the Faroese tax system, and formal employment brings obligations concerning holiday pay, pensions, employment terms and potentially collective agreements.

Acumen International helps companies convert existing contractors into employees through its Global Employer of Record (EOR) services, without requiring the international client to establish its own Faroese employing entity.

When does a contractor relationship begin to resemble employment?

Faroese tax administration distinguishes between people earning income from their own businesses and people receiving wages from employers. The distinction is not determined simply by whether an agreement calls someone a freelancer, consultant or contractor.

A review should consider how the work is actually performed.

These are practical indicators for assessing the relationship, not a published statutory checklist that automatically determines Faroese employment status.

For example, an independent software developer delivering a completed application to several customers may operate a genuine business. A developer who works indefinitely within one company’s engineering team, reports to its managers and follows its daily working schedule presents a different set of facts.

The critical question is whether the commercial reality supports the independent business arrangement.

Why worker classification matters under Faroese tax rules

The Faroese Tax and Customs Authority, TAKS, distinguishes between A-income and B-income.

This distinction has direct consequences for how remuneration is reported and taxed.

A-income: Employment remuneration

A-income commonly includes wages and salaries paid through a Faroese employer.

Tax and applicable statutory deductions are generally withheld automatically before the employee receives their net salary.

B-income: Independent business income

B-income includes income earned through self-employment. TAKS also identifies income paid by an employer outside the Faroe Islands as B-income for withholding purposes.

A self-employed person generally must:

• Prepare a preliminary assessment of expected taxable income.
• Pay tax according to the resulting assessments.
• Maintain business accounts.
• Submit the required annual tax return and accounts.
• Account for applicable business taxes and registrations.

B-income treatment does not, by itself, establish that a worker is genuinely self-employed. In particular, income paid by a foreign employer can fall outside the Faroese automatic withholding system without changing the underlying nature of the working relationship.

This distinction is especially important for foreign companies paying Faroese residents directly.

Source: TAKS – Taxation in the Faroe Islands.

Five reasons to convert a Faroese contractor into an employee

1. The role has become a permanent part of the business

A contractor initially engaged for a six-month technical project may subsequently become responsible for continuing product development, customer support or operational management.

The original services agreement may no longer describe the work accurately.

Converting the position into employment allows the parties to establish contractual duties, reporting relationships, remuneration and working conditions that reflect the ongoing role.

2. The company needs greater control over the work

Independent contracting generally involves greater autonomy over service delivery.

A company may instead need to establish working hours, direct daily priorities, require personal performance and integrate the professional into an internal management structure.

These requirements are more consistent with an employment relationship.

3. The worker should receive formal employment entitlements

Employees in the Faroe Islands have statutory holiday rights and may be covered by collective agreements that establish additional employment conditions.

Formal employment also brings relevant pension, insurance and other contractual arrangements.

Converting a long-term contractor gives both parties a defined basis for these obligations.

4. The company needs clearer ownership of ongoing work

Contractors may develop software, technical documentation, designs, customer materials or other commercially valuable work.

The company should not assume that payment of an invoice automatically resolves every question concerning intellectual property ownership.

An employment agreement can address confidentiality, intellectual property, access to company systems and the treatment of work produced during employment.

Existing intellectual property created under the previous contracting arrangement should be addressed separately.

5. The company wants to retain a specialist professional

The Faroese labour market is relatively small, and expertise in technical and specialist occupations may be difficult to replace.

A permanent employment arrangement can provide greater certainty over remuneration, working conditions, benefits and the professional’s longer-term position within the company.

This may be particularly relevant to engineering, software development, aquaculture technology and maritime services.

What changes when a contractor becomes an employee?

Conversion is not simply a change from invoicing to salary payments.

The company must establish a new employment relationship with its own contractual, payroll and administrative requirements.

Employment documentation

Under Faroese employment documentation requirements, employees working more than eight hours per week for longer than one month generally must receive written employment terms.

These include:

• Employer and employee details.
• Employment commencement date.
• Position and workplace.
• Working hours.
• Salary and payment arrangements.
• Holiday entitlements.
• Applicable collective agreements.
• Pension and insurance arrangements.
• Notice periods.

The Faroese Workers’ Union explains these requirements in its guidance on contractual rights.

Payroll administration

The employee’s remuneration must be administered through the appropriate Faroese payroll arrangements.

The employment package must distinguish gross salary from the employee’s net remuneration and the company’s total employment cost.

Pension arrangements

TAKS states that individuals aged 18 or over who are fully liable to tax in the Faroe Islands are generally required to contribute to a pension scheme.

Its guidance for people moving to the Faroes for work specifies a minimum contribution of 12% of salary for those covered by that requirement.

The employer administers the contribution when salary is paid. Applicable collective agreements and employment terms may also affect pension arrangements.

Holiday pay

Faroese holiday pay rules distinguish between hourly-paid wage earners and monthly-paid salaried employees.

According to TAKS:

• For hourly-paid wage earners, the employer generally contributes holiday allowance equivalent to 12% of wages to the holiday fund.
• Monthly-paid salaried employees generally receive their usual salary during holiday, together with a holiday supplement of 1.5% of salary earned during the accrual year.

The applicable arrangement must be reflected in the employee’s contract and payroll.

Source: TAKS – Holiday Allowance.

Collective agreements: An important consideration in contractor conversion

Collective bargaining has a substantial influence on employment conditions in the Faroe Islands.

Trade unions and employers’ organisations negotiate agreements covering different occupations and sectors.

These agreements may establish:

• Minimum or agreed wage rates.
• Working hours and overtime payments.
• Seniority-related supplements.
• Pension contributions.
• Insurance requirements.
• Holiday and other leave arrangements.
• Notice periods.

A company converting a contractor should determine whether a relevant collective agreement applies to the proposed employee.

This can materially affect the employment package.

For example, converting a technical worker into a salaried employee without reviewing the applicable agreement could result in an employment offer that omits relevant pension or working-time provisions.

The Faroese trade union federation Samverk provides guidance on employment conditions and collective agreements.

Comparing contractor fees with employment costs

The amount paid to a contractor cannot be compared directly with an employee’s gross salary.

A contractor’s fee may cover business expenses, equipment, professional insurance, unpaid time and other costs that an employee does not bear in the same way.

An employment cost assessment must consider the actual remuneration package and applicable employer obligations.

A contractor earning DKK 40,000 per month in fees will not necessarily receive DKK 40,000 in gross salary following conversion.

The appropriate employment offer depends on the agreed remuneration, statutory obligations and benefits.

How to convert an existing contractor in the Faroe Islands

<text weight=”medium”>1. Review the current working relationship</text>

Examine the services agreement, actual duties, reporting arrangements, payment history, working hours and degree of independence.

Identify any differences between the written agreement and how the professional works in practice.

<text weight=”medium”>2. Establish the proposed employment terms</text>

Define the position, responsibilities, salary, working hours, workplace, benefits and intended commencement date.

Determine whether a relevant collective agreement affects the proposed terms.

<text weight=”medium”>3. Calculate the employment package</text>

Assess gross remuneration, pension obligations, holiday pay arrangements, applicable insurance and other employment costs.

The proposed salary should be commercially agreed with the individual rather than derived automatically from previous contractor invoices.

<text weight=”medium”>4. Resolve the existing contractor agreement</text>

Establish how the existing services agreement will end.

Address outstanding invoices, unfinished deliverables, equipment, confidentiality and intellectual property created during the contracting period.

A new employment contract does not automatically resolve liabilities arising from earlier work.

<text weight=”medium”>5. Establish the employment relationship</text>

Prepare the appropriate employment documentation and complete the required onboarding and payroll arrangements.

For an eligible engagement, Acumen International can employ the professional through its EOR service.

<text weight=”medium”>6. Transfer the professional to employment payroll</text>

Begin salary administration from the agreed employment commencement date, with the applicable tax, pension and holiday arrangements.

Maintain a clear distinction between payments relating to the former contractor agreement and remuneration earned as an employee.

Can an Employer of Record resolve previous contractor misclassification?

An EOR can establish a formal employment arrangement for future work, but conversion does not automatically extinguish liabilities arising from an earlier contractor relationship.

If a contractor was effectively working as an employee before conversion, the company may need to examine previous tax treatment, contractual obligations and potential employment entitlements.

The position depends on the facts and the applicable Faroese requirements.

A contractor conversion should therefore distinguish between two questions:

• What is the correct employment arrangement going forward?
• Does the previous contracting period require separate legal or tax assessment?

This distinction matters when the individual has worked for the company over several years or where the arrangement has gradually changed from project-based services to a continuing internal role.

What about Faroese VAT on contractor invoices?

Faroese value-added tax is known as MVG.

TAKS states that the standard MVG rate is 25% and that businesses with annual sales not exceeding DKK 50,000 are generally not required to register for VAT.

The treatment of a contractor’s invoices depends on the nature of the services, the supplier’s registration and the applicable place-of-supply rules.

When the individual becomes an employee, salary payments are no longer treated as invoices for independently supplied business services.

The transition should therefore include a review of the contractor’s final invoices and the start of employment payroll.

Source: TAKS – Starting a Business.

Converting foreign contractors working in the Faroe Islands

A contractor’s nationality and immigration position may affect whether they can enter formal employment.

Nordic citizens generally have the right to live and work in the Faroe Islands without a work permit.

Non-Nordic citizens, including citizens of other EU countries and the United Kingdom, generally require appropriate work and residence permission.

A foreign professional’s existing immigration permission should not be assumed to authorise a different employment relationship or employer.

Where a contractor is changing to an employed position, the proposed employer, duties and immigration conditions must be assessed before employment begins.

Read our guide to Global Employer of Record immigration support for an overview of international employment and immigration arrangements.

Contractor conversion through Acumen International

A company may decide that an existing Faroese contractor should become an employee but have no local employing entity through which to formalise the relationship.

Acumen International’s Global Employer of Record service supports eligible conversions by providing the local employment arrangement and administering the associated obligations.

Our involvement can include:

• Assessing the proposed employment terms.
• Preparing the local employment documentation.
• Establishing payroll and applicable pension arrangements.
• Administering holiday entitlements and agreed benefits.
• Supporting eligible immigration requirements.
• Managing ongoing employment administration.

The international company retains responsibility for the professional’s commercial duties, project objectives and day-to-day work.

Where previous contractor arrangements raise potential historical liabilities, those matters require separate assessment.

Frequently asked questions about contractor conversion in the Faroe Islands

Can a contractor work exclusively for one company?

Exclusivity is a relevant factor when examining the working relationship, but it does not independently determine employment status. The actual degree of independence, control, integration and commercial risk also matters.

Does paying a Faroese contractor as B-income prove self-employment?

No. TAKS identifies B-income as including both self-employment income and income received from an employer outside the Faroe Islands. Tax payment arrangements alone do not conclusively establish employment status.

Can a contractor become an employee without changing their duties?

Yes. However, the parties should document the employment relationship and establish the applicable remuneration, benefits, working conditions and payroll arrangements.

Is a new employment contract sufficient to address past misclassification?

No. A new agreement establishes terms for the new employment period but does not automatically resolve questions relating to the previous contracting relationship.

Does converting a contractor always increase costs?

Not necessarily. The outcome depends on the previous contractor fee, agreed salary, pension and holiday obligations, benefits and administration costs. A like-for-like cost comparison is necessary.

Can Acumen International employ a single former contractor?

Yes. Acumen International can support an eligible individual appointment through its Employer of Record service without requiring the international client to establish its own Faroese subsidiary.

Formalise Your Existing Contractor Relationship in the Faroe Islands

When a contractor has become essential to your operations, the next decision is how to formalise the relationship without disrupting their work or overlooking the obligations attached to employment.

Acumen International can assess the proposed conversion, establish the employment terms and provide the local employing arrangement for an eligible professional.

Discuss Contractor Conversion in the Faroe Islands