How foreign companies move a Croatian freelancer onto a compliant employment contract through an Employer of Record (EOR) in Croatia, without opening a local entity
Every so often we get a call from a foreign company that has been working with someone in Croatia for quite a while. Not a new hire, but a person they know well: a developer, a salesperson or a project lead who has been invoicing them every month through a paušalni obrt (the flat-rate sole trader setup most Croatian freelancers use).
At some point in that relationship, questions start to surface. The company wonders whether the setup is actually legal. The worker says, “I’ve been with you for three years now, wouldn’t it make more sense for both of us if I were properly employed?” And sooner or later someone asks the uncomfortable one: what happens if the tax office takes a closer look?
By the time they reach us, neither side can really tell how compliant the arrangement is. The contract says one thing and the day-to-day work says another. This piece covers how we sort that out, and what the switch involves when employment turns out to be the right answer.
Why companies start asking, and why now
In our experience the push rarely comes from an inspector. More often the contractor asks for paid holidays and sick leave, auditors or a prospective investor start asking how the team is structured, or the client simply realises that its “freelancer” works its hours, on its laptop, in its Slack, for nobody else.
The legal backdrop has also tightened. Croatia’s Act on the Suppression of Undeclared Work (Zakon o suzbijanju neprijavljenoga rada) was amended in June 2026 (NN 69/26). It treats as undeclared work any work done under a civil-law contract that, by its nature and the employer’s authority over it, has the features of employment, and it separately defines a disguised employment relationship (prikriveni radni odnos) as the same situation with a self-employed person on the other side. The EU Platform Work Directive, which Member States must transpose by 2 December 2026, rests on the same principle for platform work: if someone is directed and controlled like an employee, they should be employed as one.
How Croatian authorities look at a contractor relationship
No single fact decides it. The Tax Administration assesses whether work is dependent (nesamostalni rad) through three groups of criteria: behavioural control, financial control and the relationship between the parties. It has also used a dedicated questionnaire, Upitnik NR, to check flat-rate traders, and its earlier review covered around 3,800 of them. Legal commentary on recent administrative court practice stresses that the burden of proving disguised employment sits with the tax authority, and that one client or regular invoices are not enough on their own.
When we review a contractor setup for a client, what worries us is the combination: hours set by the client, client equipment and accounts, no other clients, an invoice that never changes regardless of output, and a place in the client’s org chart with a line manager. Each of these, on its own, is ordinary in B2B work. When four or five show up together, we tell the client plainly that it looks like a job.
What happens if an inspector gets there first
Under the amended Act, when a labour inspector establishes undeclared work, the person is presumed to have worked full time for the six months before the inspection, unless the evidence shows a different period. The inspector orders registration for pension insurance from that date and a payment of €2,650 per worker to the state budget. A repeat finding within three years costs €6,630 per worker, and a third costs €8,000 and brings a ban on operating from the inspected premises for at least 30 days. On top of that, the employer must pay a full-time salary for each month of the period at the national gross median wage, with contributions, and is published on the Ministry of Labour’s list of employers where undeclared work was found.
Where the contractor works through their own obrt, the Act directs the inspector to notify the Tax Administration, which can then reassess the relationship for tax purposes. We would not build a hiring strategy on the hope that enforcement is slower across a border.
A typical case: the developer who was already part of the team
| A software company had worked with a Zagreb-based backend developer for three years. He invoiced through a paušalni obrt, worked the company’s core hours, used a company laptop, joined the daily stand-up and had no other clients. When the company began preparing a funding round, its advisers flagged the arrangement. Opening a Croatian d.o.o. for one person made no sense. Ambacia became his legal employer in Croatia. We agreed the gross salary with the client, issued a Croatian employment contract under the Labour Act, registered him for pension and health insurance before his first working day, and took over monthly payroll, payslips, JOPPD reporting and leave records. The client kept full control of his daily work, exactly as before. From the first call to the first payroll took 2 weeks. Most of the time on that file went into one thing: agreeing a salary that worked for both sides. |
The mistake we see most: turning the invoice into a gross salary
A contractor on the flat-rate regime pays fixed monthly contributions and a lump-sum tax, so they keep a large share of what they invoice. Employment changes the picture. Pension contributions of 20% come straight out of gross pay, income tax is charged at municipal rates on what remains above the €600 monthly personal allowance (23% for most salaries in Zagreb), and the employer adds a 16.5% health contribution on top of the gross.
So when a client tells us “he invoices us €3,000, let’s make that his salary”, we slow things down. At €3,000 gross in Zagreb, a single employee with no tax relief takes home just under €2,000. If he needs around €2,600 in hand to accept the move, the gross has to be close to €4,000, and the client’s monthly cost goes up to roughly €4,660 before our fee. That conversation is much easier in week one than in week four.
The conversion, step by step
- Review the setup. Contract, invoices and how the work is really done. Sometimes the right answer is a cleaner B2B contract, not employment.
- Agree the net target and the gross salary. Also decide whether the new contract recognises the contractor years, for example for notice periods. This question comes up in almost every conversion.
- Close the B2B contract cleanly with an end date immediately before employment starts, so there is no overlap for the same work.
- Sign the Croatian employment contract and register the employee for pension and health insurance no later than the first day of work.
- Run the first payroll. The employee can keep their obrt alongside employment and pay contributions on it as another activity, but should stop invoicing the same client for the same work.
Our view
Not every contractor should become an employee. A genuine freelancer with several clients, their own tools and real commercial risk is usually better served by a clear B2B agreement. But when someone has worked as a member of your team for years, converting them is almost always less painful than defending the arrangement later. The person gains paid leave, sick pay and employment protection the obrt never gave them, and you get a setup you can explain to an auditor or an investor without hesitating.
FAQ
Does having only one client make a contractor an employee in Croatia?
Not on its own. The authorities look at the whole relationship: who controls the work, who carries the financial risk and how the parties actually behave.
Can a foreign company employ a Croatian contractor without a local entity?
Yes. Through an Employer of Record in Croatia such as Ambacia, the person is employed under Croatian law while you keep direction of their work. No d.o.o. is needed.
How long does the conversion take?
With Ambacia, typically 2 working days from signed salary terms to the employee’s first day, depending on how quickly the B2B contract can be closed.
| Working with a Croatian contractor who has quietly become part of your team? Tell us how the relationship works today and we will tell you, honestly, whether to convert, restructure or leave it as it is. ambacia.eu | [email protected] |
