Formalization of labor relations between employer and employee by means of entry into employment contract

Legal employment of a specialist requires conclusion of an agreement with him in accordance with the legislation of Ukraine. Many heads of businesses and private entrepreneurs face the question, “How to formalize relations with a programmer; must he be taken on the staff; what taxes must be asessed and paid.”

At present, the employment relationship may be established by a labor or civil contract. Each of these has its own characteristics, based on which the employer makes a decision on the form of cooperation.

Based on the provisions of Art. 21 of the Labor Code of Ukraine, a labor contract is an agreement between the employee and the employer, according to which the employee undertakes to perform the work specified in the agreement; to comply with the work schedule; and the employer (owner of a business or his representative) undertakes to pay for the work and ensure working conditions in accordance with the legislation of Ukraine. Thus, the labor contract establishes the rights and obligations of the employee and the employer. According to Art. 24 of the Labor Code, the labor contract is concluded by execution of the owner’s order or directive on the eployment of the individual on the basis of an employment application. As a rule, a labor contract is concluded for an indefinite period, however, it may have a specific term of validity, if this is due to the nature or conditions of the activity, or the interests of the employee himself. In addition, a labor contract may be concluded for fulfillment of a specific job. Actually, the subject of a labor contract is the work process itself, which is performed by a specialist personally. This activity is paid by issuing salary, which can not be below the minimum. The conclusion of a labor contract provides for labor and social guarantees of the employee, for example, paid annual leave, occupational safety and health, payment for the period of disability, etc. The employee may be subject to disciplinary action, and in some cases, material liability, for improper fulfillment of the terms of the labor contract. When paying salary and other income to the employee, the employer acts as a tax agent, which lays him under the obligation to charge and withhold certain taxes and fees (personal income tax, pension fund contributions, unemployment and accident insurance funds, social insurance fund, and a military tax (up until 01.01.2015)).

A civil contract is an agreement on performing  works or providing services, which is concluded in accordance with the requirements of the Civil Code of Ukraine. This contract is classified as the performance of work for the remuneration by one person in favor of another. The subject matter of the contract, the settlement procedure, the term of validity and other material terms are determined by the mutual agreement of the parties by the concluded contract. Accordingly, the civil contract establishes the rights and obligations of the customer and the contractor, therefore, the employee is not subject to corporate work conduct , job descriptions, etc. Unlike the labor contract, the subject matter of the civil contract is a tangible result of the work or service. The order of payment is determined by the contract, and its amount is in its essence a remuneration. As a rule, the contractor shall be fully liable (except in cases established by law or specified in the contract) for non-performance of the contract, the damage caused to the customer. Labor guarantees are not a binding term of the contract, and social guarantees are provided only in cases when the contractor independently pays fees to social funds or the provision of guarantees is stipulated in the contract. A business entity that pays the remuneration to the  contractor under the civil contract acts as a tax agent and withholds income tax on personal income tax, a military tax and pension fund contributions.

Thus, a labor contract has an advantage in organizing the control of a specialist’s activity, and a civil law contract allows one to establish clear terms and volume of work performed, reduce the amount of payments into the budget and does not require the mandatory establishment of social and labor benefits. An important advantage of a civil contract is the possibility of concluding it with a non-resident without the permission of the agency for labor. It should be remembered that in the event of a dispute between the parties, a civil contract can be recognized by court as a labor contract.

Publication date: 22/12/2014

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