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Comparison of contractor agreement and employment contract in Ukraine

At the end of 2016, the Law of Ukraine №1774-VIII "On Amendments to Certain Legislative Acts of Ukraine" was adopted, which amended, particularly, the Labor Code of Ukraine. Amendments to labor legislation established large amounts of fines for non-compliance with the Labor Code of Ukraine. Among the violations which can be the basis for the sanctioning is the formalization of legal relations with the employee through a civil law contract, and not a labor agreement.

Since in Ukraine, in order to reduce the amount of taxes, it’s common to prefer civil law contracts, there is a tendency to increase appeals to our company for legal assistance on the differentiation of civil law and labor contracts.

One of the most optimal options of civil law contracts for the above-mentioned aims is an independent-work contract or service agreement. It’s explained by the fact that such agreements, according to the norms of the Civil Code of Ukraine, are compatible in meaning with labor agreements, but not the same.

Let's try to find out what differences exist between an independent-work contract and a labor contract. In this issue, such regulatory legal acts will be helpful for us as: the Civil Code of Ukraine, the Labor Code, the Law of Ukraine “On Remuneration for Work”, the Letter of the Ministry of Labor and Social Policy of Ukraine № 06 / 2-4 / 42 dated 11.03.2002 and № 06 / 1-4 / 200 dated 26.12.2003, Letter of the State Tax Administration of Ukraine № 7346/5 / 17-0716 dated 22.06.2009 and judicial practice.

Firstly, the main difference between such contracts is the subject itself. In a civil law contract, an employer must be interested in the result which is received as a consequence of the work performed. As for labor contracts, the subject is the process of employee’s work itself, that is, in this case, the employer will be interested in how the work process in the enterprise is organized (job responsibilities, the beginning and end of the working day, the duration of the break, providing with annual leave, etc.).

Confirmation of it is found in the norms of the Civil Code of Ukraine and the Labor Code. Part 1 of Article 837 of the Civil Code of Ukraine says that according to an independent-work contract, the contractor must give the finished result of the work, and the customer must pay for it. In Part 1 of Article 21 of the Labor Code, it is indicated that the subject of a labor contract is the obligation of the employee to do the work, with subordination to the internal labor schedule, and the employer's obligations to pay salary and ensure the necessary working conditions.

According to Article 1 of the Law of Ukraine “On Remuneration for Work”, the salary is the reward of an employee for the work performed by him in accordance with established labor standards. Moreover, in this regulatory legal act, it is indicated that such a payment consists of the main part (payment for work performed due to an employment contract) and an additional part (for example, work performed above the established norms or additional reward for difficult working conditions). Salaries are a guarantee established by the state because the latter establishes the minimum wage rate for work performed (Article 3 of the Law of Ukraine “On Remuneration for Work”).

A reward under an independent-work contract is not regulated by law and, accordingly, is set by agreement of the parties.

Thus, the subject of a civil law contract can’t be a fixed-term relationship aimed at the performance of certain work in certain periods of time. It’s necessary to indicate the concrete result of the work and the obligation to pay it.

Secondly, the independent-work contract and the labor contract differ in their duration.

According to Article 846 of the Civil Code of Ukraine, the independent-work contract may be fixed-term or indefinite, but in this case, the customer has the right to demand its implementation within a reasonable time. Article 23 of the Labor Code also establishes that the labor contract can be either fixed-term or indefinite.

However, after analyzing the judicial practice, there were several arguments not in favor of an indefinite independent-work contract. For example, Solomensky District Court of Kyiv, in its decision №2-4305 of 13.10.2011, refused to satisfy the claim for recognition of the contract as labor, since one of the arguments in favor of the civil law nature of the relationship was the established deadlines for the execution of the work. That’s why it should be noted, in particular, the deadlines for the work; a person shouldn’t be allowed to perform work or provide services after the expiration of the independent-work contract - it’s better to enter immediately into a new civil law contract.

The other condition which is better not to specify in the civil law contract is the period of time when the contractor must perform the work. Such a situation may arise, for example, if access to an enterprise is restricted at a certain time. In this case, it’s necessary to spell out that the contractor is obliged to perform work within a certain period of time (several days, months). 

Thirdly, the approaches to payment under the independent-work contract and the labor contract differ significantly. In the case of the civil law contract, it’s better to define the price in the form of payment for certain measurements or sizes. For example, UAH for each hectare or UAH for one specific item. According to Article 843 of the Civil Code of Ukraine, parties are allowed to determine the price of works in various ways in the contract itself. The price includes recovery of costs and actually the payment for the work.

The labor contract doesn’t belong to this method of recovery of costs - the amount of salaries must be specified. Article 6 of the Law “On Remuneration for Work” provides for specific methods of calculating salaries (tariff scales, post salaries).

Judicial practice demonstrates the need to determine remuneration under the independent-work contract by the above-mentioned method. The Superior Specialized Court of Ukraine for the consideration of civil and criminal cases in its ruling dated 10.29.2014 in case №6-29652св14 refused to satisfy the complaint about accepting a contract to be labor, since one of the arguments in favor of the civil law nature of the relationship was that payment for work was carried out at 10 UAH for each hectare of the harvested crop, which is characteristic for independent-work contract.

Another feature which is inherent to civil law contracts is that the work performed under the independent-work contract is delivered by acts. The labor law doesn’t contain provisions on the signing of acts of acceptance-transfer, and the parties don’t sign such a document.

Signed after completion of work or provision of services acts of acceptance-transfer can be the basis for their payment. It will also be a ponderable argument for concluding a civil law contract and not a labor contract.

Another difference of the contracts is that the work or services under the independent-work contract are performed at their own risk (Part 1 of Article 837 of the Civil Code of Ukraine), and according to the employment agreement, the employee performs the functions which are outlined by his position and gets guaranteed salary (Part 1 of Article 21 of Labor Code of Ukraine). Performing works at your own risk means that if the contractor provides his services poorly, he will independently correct the gaps and won’t be entitled to payment. Under a labor contract, non-payment of salaries is impossible - it’s a criminal offense.

The distinction between labor and civil law contracts in court practice has other significant features, so in order to get full confidence in the correctness of the relationship with the employee and to avoid significant financial losses, we recommend to seek for professional help.
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