Principal Employer – Subcontractor Relationship

The relationship between a principal employer and a subcontractor is very common in Turkish practice and, at the same time, one of the most contentious structures in labour law. The legal basis is Article 2 of Labour Law No. 4857 (İş Kanunu) and the Regulation on Subcontracting (Alt İşverenlik Yönetmeliği). For companies that assign ancillary work or parts of their business to third parties, it is of great importance to know the statutory limits and the joint and several liability, because an unlawful arrangement (sham arrangement, muvazaa) has serious and retroactive consequences.

Contents

• What are a principal employer and a subcontractor?
• Under what conditions can work be assigned to a subcontractor?
• What restrictions apply to the assignment of the main work?
• What formal requirements apply?
• What does the joint and several liability of the principal employer mean?
• What is a sham arrangement and how is it established?
• What are the consequences of a finding of a sham arrangement?
• How is subcontracting distinguished from similar arrangements?
• What should companies pay attention to in practice?
• Conclusion

What are a principal employer and a subcontractor?

Subcontracting within the meaning of labour law means that an employer (the subcontractor) undertakes work at the workplace of another employer (the principal employer) in ancillary work relating to the production of goods or services carried out there, or in a part of the main work where this requires expertise for reasons arising from the needs of the business and the work and for technological reasons, and employs the employees it assigns to this work exclusively in the work it has undertaken at that workplace. A two-way link is therefore required: the principal employer must also employ its own employees in the main work at that workplace, while the subcontractor's employees must be assigned exclusively to the work undertaken and at that workplace. Where the work is assigned in its entirety to another contractor in such a way that the employer has no employees left in that work, there is, as a rule, not a principal employer/subcontractor relationship within the meaning of Law No. 4857 but a contract for work or a service relationship; the legal nature of the relationship is in every case determined by the actual organisation.

Under what conditions can work be assigned to a subcontractor?

Ancillary work is not every task falling outside the main activity; it is work which, although related to the production of goods or services at the workplace, is not directly part of the production organisation, is not an essential element of production, is dependent on the main work and continues for as long as the main work continues. Cleaning, protection and security, catering and staff transport may be regarded as ancillary work depending on the specific organisation of the workplace; warehouse logistics or technical building services, by contrast, may constitute main work depending on the operational structure of the business, so each case must be assessed separately. A part of the main work may be assigned to a subcontractor only if it requires separate expertise for reasons arising from the needs of the business and the work and for technological reasons; these conditions must be met cumulatively. The subcontractor must be an independent employer with its own work organisation and sufficient expertise and equipment, and must actually exercise the right to direct its employees itself.

What restrictions apply to the assignment of the main work?

The main work may not be split up and assigned to subcontractors unless the conditions of the needs of the business and the work and of technological reasons requiring expertise are met cumulatively. The Labour Law also provides for two express prohibitions: the principal employer's employees may not continue to be employed by the subcontractor with their rights restricted, and no subcontracting relationship may be established with a person who was previously employed at that workplace. However, the Regulation on Subcontracting does not in itself regard it as an obstacle if an employee who previously worked at that workplace subsequently becomes a shareholder of a company with legal personality or of an ordinary partnership. In the event of a breach of these prohibitions, the subcontracting relationship is deemed to be a sham arrangement.

What formal requirements apply?

The subcontracting agreement must be concluded in writing and must contain the mandatory elements listed in the Regulation on Subcontracting; where a part of the main work is assigned, a technical explanation and a list of equipment demonstrating the expertise, a work completion certificate and the relevant operator or technical staff certificates are also attached to the agreement. The subcontractor registers the workplace by notifying the Provincial Directorate of Labour and Employment. As regards social security notifications, it reports its employees from the principal employer's workplace file under a special number to be obtained from the Social Security Institution (SGK) by submitting the agreement concluded with the principal employer to SGK; accordingly, no separate independent main file is opened for SGK purposes. If the documents give rise to a suspicion of illegality or of a sham arrangement, a labour inspector may carry out an examination. An objection against a report establishing a sham arrangement may be filed with the competent labour court within 30 working days of its notification; if no objection is filed in time or if the finding is upheld by the court, the registration is cancelled and the employees are deemed to have been employees of the principal employer from the outset.

What does the joint and several liability of the principal employer mean?

The principal employer is jointly and severally liable with the subcontractor towards the subcontractor's employees for obligations relating to that workplace arising from the Labour Law, the employment contract and any collective labour agreement to which the subcontractor is a party. This liability covers claims for wages, overtime, weekly rest days and public holidays connected with the period of work at that workplace within the scope of the subcontracting and, where the relevant conditions are met, annual leave pay, severance pay (kıdem tazminatı) and payment in lieu of notice. Under Law No. 5510, joint liability also applies to social insurance obligations. In addition, the principal employer is obliged to check, upon application or of its own motion on a monthly basis, whether the wages of the subcontractor's employees have been paid, to deduct unpaid wages from the progress payment and pay them into the employees' bank accounts, and to ensure that annual leave is taken within the relevant year. As regards occupational health and safety, each employer bears the obligations relating to its own employees; cooperation and coordination are required in the same working area, and committee obligations may also arise in relationships lasting more than six months. An employee of the subcontractor may apply directly to the principal employer for the entire claim falling within the principal employer's liability; provisions on recourse, security and deductions in the internal relationship do not remove the external liability.

What is a sham arrangement and how is it established?

A sham arrangement (muvazaa) exists where an ostensibly established subcontracting relationship does not reflect the true intention of the parties or is used to evade public-law obligations or to restrict or eliminate the individual or collective rights of employees. In assessing a sham arrangement, the following aspects in particular are taken into account:

• Decisions on recruitment, assignment, leave and disciplinary procedures and dismissal of the subcontractor's employees are in fact taken by the principal employer, or day-to-day work instructions are given directly by the principal employer
• The subcontractor lacks an independent work organisation or sufficient expertise, experience or equipment appropriate to the work
• Employees of the principal employer, other than those assigned to coordination and supervision, work in the work assigned to the subcontractor, or teams and workflows cannot in fact be separated
• A part of the main work is assigned without the conditions of the needs of the business and the work and of technological reasons requiring expertise being met cumulatively
• Former employees of the principal employer continue to be employed by the subcontractor with their rights restricted, or a subcontracting relationship is unlawfully established with a person previously employed at that workplace

What are the consequences of a finding of a sham arrangement?

If a sham arrangement is established, the subcontractor's employees are deemed to have been employees of the principal employer from the outset. However, being deemed an employee of the principal employer does not mean that wages and fringe benefits are automatically equalised with those of every employee in the same or a similar position. Claims for wage differences and claims based on workplace practice are assessed according to the scope and conditions of application of the specific arrangement; entitlement to benefit from a collective labour agreement is, as a rule, assessed according to the membership, solidarity contribution or other eligibility conditions under Article 39 of Law No. 6356. As regards job security and termination-related rights, the actual employer and its number of employees are decisive. In a lawful subcontracting arrangement, the obligation to reinstate lies with the subcontractor, while the principal employer and the subcontractor are jointly liable for the financial consequences of a failure to reinstate; in the case of a sham arrangement, the obligation to reinstate is directed against the principal employer, which is regarded as the actual employer. Although mediation remains a precondition for bringing reinstatement claims, the special provision requiring the principal employer and the subcontractor to participate jointly in the negotiations and to reach a concurring decision ceased to have effect upon publication in the Official Gazette on 17 October 2025 of the annulment decision of the Constitutional Court, E. 2024/157, K. 2025/121. In addition, corrections of social security registrations and contributions as well as administrative sanctions may arise. Because of the retroactive effects, substantial amounts may accumulate.

How is subcontracting distinguished from similar arrangements?

Subcontracting must be distinguished from a temporary employment relationship and from mere staff provision. Under Article 7 of Law No. 4857, a temporary employment relationship may be established either through a private employment agency authorised by the Turkish Employment Agency (İŞKUR) in the cases listed in the Law, or, with the employee's written consent, within a holding structure or at another workplace belonging to the same group of companies. Where staff are in essence provided under the guise of a service agreement, the legal classification depends on who actually holds the powers relating to the payment of wages, recruitment and dismissal, leave and discipline and day-to-day instructions; the structure may give rise to the identification of the actual employer and to risks of administrative sanctions. Which model is lawful and fit for purpose depends on the purpose for which, and the period for which, employees attached to another employer are assigned, and on the actual working arrangements.

What should companies pay attention to in practice?

To reduce the risks, the following measures in particular are recommended:

• Clearly defining the scope of the assigned work in a written agreement; ensuring that the agreement contains the mandatory elements of the Regulation and, where a part of the main work is assigned, that the conditions of the needs of the business and the work and of technological reasons requiring expertise are substantiated by a technical explanation and documents
• Preserving the actual independence of the subcontractor: its own managers and work organisation, its own powers of recruitment, assignment, leave, discipline and termination, and sufficient expertise and equipment appropriate to the work; the part of the main work undertaken must not be transferred to another employer
• Separating areas of activity as far as possible; avoiding situations in which employees of the principal employer and of the subcontractor perform the same work together in an inseparable manner
• Checking wages every month of the principal employer's own motion and deducting unpaid wages from the progress payment and paying them to the employees; regularly auditing annual leave, payroll, overtime and SGK notifications; including provisions on the submission of documents, security, deductions and recourse in the agreement
• Expressly regulating OHS risks, training, the committee or representative structure and coordination in the agreement, bearing in mind that a contractual allocation does not remove statutory obligations

Conclusion

Subcontracting offers companies flexibility in ancillary work and in parts of the main work that require expertise and meet all the conditions cumulatively; however, it entails serious legal risks. Even in a lawful relationship, the principal employer is jointly and severally liable within the statutory limits; in the case of a sham arrangement, the employees are deemed to have been employees of the principal employer from the outset, and related retroactive financial, administrative and procedural consequences may arise.

What is decisive is not merely the title of the agreement, but whether the assigned work can lawfully be transferred, whether the subcontractor has an independent organisation both on paper and in practice, and whether the implementation is continuously monitored for consistency with the agreement. Before any working arrangement involving employees attached to another employer is set up, the specific workflow, the structure of instructions and the allocation of responsibility should be assessed from a legal perspective.

GEMS Schindhelm advises companies on the lawful structuring of subcontracting relationships and other working models in which employees attached to other employers are assigned, on the prevention of sham arrangements and on the defence against claims based on joint and several liability. This article is intended for general information purposes only and does not constitute a legal opinion or legal advice; each dispute must be assessed separately in light of the specific circumstances of the case and the legislation in force.