In order to perform the work, it is possible to enter into different agreements between the person who performs the work and the person who wants the result. However, it is important to keep in mind that the agreement to be concluded between the parties would correspond to a specific need and actual situation. The three most common contracts on the basis of which work is performed are an employment contract, a contract for services and an authorisation agreement. However, each contract has its own specific features and legal consequences for the parties to the contract. In order to ascertain the nature of a contractual relationship, it is necessary to compare the characteristics of contracts.
The main feature of an employment contract is that the employee is subject to the management and control of the employer. Thus, the relationship of subordination between the parties is specific to the employment relationship. In the case of a contract for services and authorisation agreement, there is no subordination relationship between the parties and both the contractor and the mandatary are free to decide for themselves when, where and how they will perform the agreed work.
It is characteristic of an employment relationship that the employee’s activities are consistent in the execution of the employer’s orders and continue over time. An example of this is when there is no agreement between the employee and the employer on a specific task or a deadline for its completion. In the case of an authorisation agreement, the specific content of the task, i.e. the order, is defined and the term for its performance is fixed. Work is also a continuous process if the contract does not indicate, for example, the final date of performance of the work, the volume of performance of the work or the total cost of the project. All this indicates that the contract is not aimed at achieving an agreed result, which is characteristic of a contract for services, for example, but at the continuous performance of work, which is characteristic above all of an employment relationship.
Another important aspect to assess is the procedure for payment of the remuneration. In a legal relationship based on an employment contract, an obligation arises from law to pay remuneration to an employee at least once a month. Thus, if the remuneration is paid periodically on a monthly or weekly basis, this is more likely to indicate an employment relationship. It is also common in an employment contract relationship if, for example, an hourly fee, a price per piece or per square metre has been agreed. However, a contract for services and a contract for authorisation refers to such an agreement in respect of remuneration which includes the manufacture of the whole thing or the service provided.
One of the ways to distinguish an employment contract from a service contract is whether the work is done in person. An employee must fulfil their obligations personally, unless agreed otherwise. In the case of an authorisation agreement, the mandatary is presumed to perform the order in person, but the mandatary may also use the assistance of a third party in the performance of the order. Upon entry into a contract for services, it is presumed that the contractor is not required to perform the obligations arising from the contract in person.
In an employment contract relationship, the employee will be provided with the materials, clothing, equipment, work equipment and other necessary for the work by the employer. The contractor and the mandatary work with work equipment procured by themselves to a significant extent and it is customary practice that the remuneration agreed between the parties includes both remuneration for the work done, compensation for travel expenses and the cost of materials and, if necessary, other work equipment.
Why is it important to define the correct legal relationship in the first place? Above all, it is important for the parties to the contract to know what their rights and obligations are. This will help avoid costly and nerve-wracking disputes. The Labour Inspectorate and the Estonian Tax and Customs Board are also making great efforts to identify hidden employment relationships. A situation where the parties’ agreement to date is reassessed as an employment relationship if signs of an employment relationship exist, may result in significant financial claims and additional costs for the company.
The nature of a contract cannot be judged simply by its title or by what is stated in the document. It must be based on who organises and manages the work process, who determines the time, place and manner of performance of the work, the procedure for remuneration, whether the work needs to be performed personally, who ensures the availability of the necessary work equipment. It is only by assessing these facts in their entirety that it becomes clear what the actual legal relationship between the parties is. However, in a situation where a legal relationship has the characteristics of both an employment contract and a contract for the provision of services, the existence of an employment relationship must be presumed. In order to disprove such a presumption, it is necessary to prove, in particular, that the person who carried out the works was not subject to the direction or control of the contracting authority and had a significant degree of autonomy in choosing the manner, time and place of carrying out the works. In a situation where a dispute arises between the parties over a dominant legal relationship, the burden of proof falls to a significant extent on the alleged employer, i.e. the contracting authority or mandator.
Understanding the nuances and consequences of different contracts is important for both the person who performs the work and the person who wants the result. Legal advisors of Leinonen OÜ are ready to support you if you need clarity or want instructions on how to navigate Estonian labour law correctly.
