Understanding Employment Contracts vs. Contracts for Services: A Guide for Entrepreneurs and Employees

Distinguishing Employment Contracts from Contracts for Services

Many often inquire about the difference between an employment contract and a contract for services. This post aims to clarify these two types of work relationships, assisting in making informed choices.

Understanding Employment Contracts:

An employment contract, as defined by the Employment Contracts Act, is presumed until proven otherwise. It's where one party works for another in exchange for payment. The onus lies on the employer to prove the existence of a different type of contractual relationship, especially in disputes. Even if a contract is titled as a ‘Contract for Services’, it's deemed an employment contract if it exhibits characteristics of an employment relationship.

What is an Employment Contract?

An employment contract is governed by the Employment Contracts Act. It involves the employee working under the direction and control of the employer, who sets the work's location, time, and method. Such contracts can be fixed-term or indefinite, and employees typically work 8 hours a day, 40 hours a week, for a periodic salary. They use tools provided by the employer and are subject to a trial period unless agreed otherwise. Employees are entitled to expense reimbursement for business trips.

What is a Contract for Services?

A contract for services is based on the Law of Obligations Act. It involves a service provider (contractor) and a client, where the provider is obligated to create or modify an item or achieve a result. There's no subordination between the parties; the work, its deadline, and payment are specified. Unlike an employment contract, a service provider isn’t required to use personal tools or resources and isn’t subject to a trial period or entitled to business trip expenses.

Comparing Risks: Employment Contract vs. Contract for Services

A contractor bears different risks compared to an employee, including self-provision of tools, managing workflow, and sole responsibility for the quality of work and rectification of errors. They are also responsible for their own training, administration, and covering costs during work interruptions.

Vacations and Health Insurance

Employees under employment contracts are entitled to statutory holidays and health insurance coverage. In contrast, those under a contract for services have health insurance based on the payment received and are not entitled to statutory holidays.

Taxes and Contract Termination

Income under both contract types is subject to income tax. Social security and unemployment insurance contributions are also applicable. The termination of an employment contract can occur through mutual agreement, expiration, initiative of either party, third-party demand, or independent circumstances. For a contract for services, it concludes upon delivery and acceptance of the work, adhering to contract specifications.

For detailed information, refer to the Estonian Employment Contracts Act and Law of Obligations Act.