EMPLOYMENT AGREEMENT vs CIVIL LAW CONTRACT
New Law on changes to the Labor Code in terms of defining the scope of labor relations was adopted on 02 April 2021. This Law gives definition to the labor relations and identifies conditions establishing employment relations. According to the changes, one of the principles of employment relations that is newly included in the Labor Code is “inadmissibility of formalization of employment relations by civil law contracts”.
Before moving to discussion of above-mentioned conditions, it would be worthy to clarify the concept of "civil law contracts”. By law, civil law contract is not limited exclusively to service contract, it encompasses other contracts of civil law nature, such as assignment contract, brokerage, etc. The businesses, however, are more accustomed to and commonly utilize the term “service contract” in lieu of civil law contract.
Unlike the previous version, the Labor Code clearly now sets out criteria defining “employment relations”:
- employment relations are based on the principles specified in the Labor Code;
- employment is carried out in accordance with the obligations provided for in labor legislation, collective agreements and employment agreement at the mutually agreed workplace;
- job functions are performed by the employee himself/herself in the profession or position he/she was hired/appointed, elected, reinstated in consideration of salary;
- employee observes internal disciplinary rules;
- employer provides safe working conditions, benefits and labor protection of the employee.
According to newly added clauses 2-3 and 2-4 to the Labor Code, the existence of any of below conditions automatically establishe employment relations and the parties are obliged to conclude a written employment agreement from the discovery date of one of these conditions:
- content of the agreement is in compliance with Article 43, and the form of the agreement coincides with the exemplary form of the employment agreement mentioned in Article 44 of the Labor Code;
- relations between the parties are formalized by submission of the labor record book and by making appropriate notes therein;
- relations between the parties arise in connection with the admission/appointment to relevant position or profession, as well as holding paid elected or appointed and “on-the-competitive” basis positions, “on a quota” basis employment, or reinstatement to previous work by the court decision;
- relations between the parties arise in connection with the implementation of the work/service that is included in the “main activity” area of the employer;
- relations between the parties emerge from fullfilment of the work/service as a result of substitution and temporary replacement;
- extension of the agreement is regulated in accordance with Article 73 of the Labor Code, in case the work/service has temporary character regarding its realization conditions;
- amount of the compensation paid for the work/service consists of the monthly tariffs, additions, and award as stipulated in Article 157.3 of the Labor Code;
- the agreement intends to regulate the issues stipulated in Articles 10, 77, 112, 179, 186 of the Labor Code.
These conditions are fundamental in distinguishing employment relations from civil contracts. However, the condition stipulated under item (d) above, is likely to cause confusion both from employment and civil law point of view.
As such, in practice, companies may require external service even in relation to their main activity area. This is a common issue for example in the construction industry. For instance, construction company may use a device such as a pouring machine, truck, etc. that is owned by another entrepreneur. The contract is concluded with the owner of the device, and in most cases, the process is performed by the latter. As a result, the device and relationship between the parties serve to fulfill the main activity of the company i.e., construction. While it may not be economically feasible for the company to acquire such device/equipment and hire additional manpower to operate it, by the definition of condition (d) the company may now be forced to conclude employment agreement with the service provider. Therefore, this new change may lead to the restriction of small businesses.
Another example is engagement of external experts (local or foreign) for performance of services for project implementation. Most of the times, due to the nature of such assignments these experts do not intend to be bound by internal regulations and work regime of the organization, and, therefore, choose to conclude civil law contracts rather than employment.
The market is abundant with other examples of such relations. In practice, there is a significant risk that the relationship between an individual contractor and client may be reclassified by the court as employment in connection with either tax disputes or the applicability of certain rights and protections for employees under the Labor Code.
In Russia, for instance, labor legislation provides that all uncertainties regarding the nature of an agreement are to be interpreted in favor of employment relations. Azerbaijani courts also tend to hold a decision that mostly protects employee rights and favors employment relations over civil law contracts, even if neither of the parties initiates such assessment.
Essentially, there is a thin line between employment and civil law relations. Below we have summarized main differences of employment vs service contracts.
Employment relations are based on the principle of subordination.
Civil contract (or service agreement) is based on the principle of equality.
Subject is labor activity or employment process itself.
Subject is the result of the work or service to be performed (i.e. deliverables).
Work/service is related to the main activity of the company and such work can be carried out by internal labor force.
In most cases, service provider’s activity is not related to the main activity of the company and the service is either one-off service or has periodical nature.
Work/service is carried out at the Employer’s workplace(s) or the places specified by the Employer.
No workplace requirement for the service providers.
The goods and materials used by the employees during the performance of labor functions are provided at the Employer's expense.
Such goods and materials are usually acquired at the expense of the service provider, unless otherwise is agreed in the agreement.
Employer is obliged to create a workplace and working conditions satisfying sanitary and hygienic standards to protect Employee’s health and ensure safety at work. Employer must also provide personal protective equipment.
Company does not have such obligation.
Employee implements job functions himself/herself and cannot assign his/her rights and obligations to third parties.
Nature of the services under the service agreement can be assignable.
Concluded for indefinite period or for fixed-term in the circumstances specified by law.
Concluded for specific term or for a period until full and final completion of the services.
Employee abides by internal disciplinary rules and working regime of the Employer.
Service provider is independent and may not observe working regime of the company. Service provider follows internal rules of the company to the extent agreed in the agreement.
Under the employment agreement, the party causing damage to the property, health, commercial interests or the legally protected rights of the other party, is liable for financial damages as prescribed by labor law (in amount of average monthly salary unless there is a full financial liability agreement between the parties).
Parties to the service agreement are fully liable for the damage caused.
Salary is paid on a monthly basis (no more than twice in a month) and not less than the minimum average salary specified by law (250 AZN as of September, 2019).
Service fee is paid based on the quality and quantity of services/works performed and based on timesheets or the handover act.
While discussing the Azerbaijani labor market, it is worth highlighting recent reforms in European countries as well.
Recently, the United Kingdom (UK) Supreme Court has decided that Uber drivers are “workers” for UK employment law purposes. In the UK, there are three categories of “employment” status: employees, workers and self-employed contractors. Each category has varying levels of protection under the law. Workers have core rights such as paid holidays, rest breaks and the national minimum wage, which makes this category an equivalent of “employee” under Azerbaijani laws.
Additionally, in the beginning of 2021, Spain’s government has reached an agreement with trade unions and business associations over labor reforms that will deem delivery platform couriers as employees. A controversial law regulating delivery workers, requires online delivery platforms operating in the country to classify their couriers as employees, rather than independent contractors.
Similar situation exists in Azerbaijan as well. New business models on modern web platforms are gaining significant market share in the country's economy. Examples include taxi and delivery services. Currently, persons working with/for such platform-based companies operate on the basis of civil law contracts, and are usually young people aged 18-35. Due to flexibility of working hours, remuneration system tied to performed work (deliveries, drives, etc.) majority of these people find this type of cooperation more favorable. It gives them independency of working/rest regime, and they are not bound by company’s internal rules, etc.
In our view, Azerbaijani economy is not ready for such radical and revolutionary approach as in the European countries. Therefore, the recent amendments to the labor legislation should take a relatively moderate position, considering the current financial situation of entrepreneurs and start-ups.
On a contrary, concept of “service sector” perceived in the market is quite broad, which have in the past led to abuse of the gap in the legislation and, further, employee rights. We believe that recent amendments to the Labor Code will serve to prevent such cases.