When entering into work arrangement, it is essential to understand the nature of the work relation. These relations can vary significantly depending on the type of agreement and the obligations that both parties agree to fulfil. This article mainly focuses on separating employment relations and contractor or service relations, and also touches upon a question on who can be a contractor in contractor or service relations.
Employment and Contractor relations
Employment relations are characterized by their long-term nature, involving continuous obligations between the employer and the employee. Employment agreements are not meant for one-time tasks but rather for ongoing cooperation, where the employee provides labour, and the employer provides compensation over an extended period of time.
Contractor or service relations are established when there is a need for specific tasks to be fulfilled or services to be provided, for example, producing a particular item or organizing an event. This work is carried out using the contractor’s tools and resources. The contractor agreement focuses on delivering a specific result and receiving a compensation for it rather than ongoing work.
It is crucial for both parties to correctly differentiate between the two types of work relations because each comes with different responsibilities for parties towards each other, and each type allows for specific rules to be applied in the respective agreements. The table below outlines the key difference between rules that apply to employment agreement and contractor agreement.
| Employment Agreement | Contractor Agreement | |
|---|---|---|
| Legislation | Labour Law | Civil Law |
| Parties | Employer and employee (only natural person) | Client and contractor (natural or legal person) |
| Subordination | Employee obeys the internal rules and orders of the employer | Contractor is not bound by internal rules and orders of the client |
| Place of execution of work | Employee performs work at the workplace provided by the employer, with the employer’s tools and materials | Contractor performs work with its own tools and materials, the client does not have to provide a workplace |
| Remuneration | Employee receives a monthly salary | Contractor is paid the agreed-upon price for the work done |
| Working time | Employee works fixed hours | Contractor is not bound by client’s work schedule |
| Guarantees | Employee is entitled to annual paid leave, severance pay, the right to a collective agreement, training and other benefits | The are no guarantees under contractor agreement |
| Term | Employment contract is concluded for an indefinite period (fixed term is allowed only in cases specified in labour legislation) | Contractor agreement is concluded either for a certain period or until the specified result is achieved |
| Taxes | Taxes are withheld and paid to the tax authority fully by the employer | Contractor can be registered as a subject performing commercial activity or an individual entrepreneur and pay taxes on their own |
It is important to note that the distinction between the two types of agreements is made not by the name of it, but by the content – the rules and the obligations that the parties have agreed-upon. This means that an agreement that is for ongoing work, including monthly salary, specific work schedule and social benefits, may establish employment relations, even if an agreement itself is called “Contractor Agreement”.
Overall, employment agreement establishes long-term obligations and a structured work environment, while contractor agreement offers more flexibility, focusing on specific tasks or results. Knowing these differences helps individuals and businesses make informed decisions about their work arrangements.
Contractors – performers of commercial activity
Contractor can be either natural or legal person. If a natural person wants to start commercial activities, they must register at the State Revenue Service as taxpayers – performers of commercial activities. That can be achieved by either obtaining status as self-employed person or as an individual entrepreneur. Each status comes with specific legal obligations and implications, particularly in terms of tax and social insurance requirements.
Self-employed person status can be obtained after registering commercial activity with the State Revenue Service. However, registering economic activity is mandatory if either one of the following criteria is met:
- activity is regular and systematic – 3 or more transactions per year or 5 or more transactions in 3 years;
- revenue from transaction exceed 14,229 euros per year;
- the economic nature of the activity or the number of things in a person’s possession indicates a systematic activity with the aim of obtaining a pay.
Individual entrepreneur is a natural person who is performing commercial activities and that is registered has registered their activity in the commercial register. This registration is mandatory if either one of the following criteria is met:
- person’s annual turnover from commercial activities exceeds 284 600 euros;
- person’s commercial activities align with those of a commercial agent or a real estate agent;
- the commercial activities meet the following combined criteria:
- annual turnover is exceeding 28 500 euros, and
- more than five employees are employed simultaneously.
The distinction between a self-employed person and an individual entrepreneur hinges largely on the scale and nature of the economic activity. When a self-employed person’s business grows to the point where the annual turnover surpasses 284 600 euros, or they employ at least five employees with an annual turnover above 28 500 euros, they are legally required to register as an individual entrepreneur. This registration comes with additional legal responsibilities and aligns the individual’s business activities with the standards set for more significant commercial operations.
