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Recently, there has been a lot of discussion about the difference between contractual employment relationships, as people working under a contract of obligation do not have the social guarantees associated with an employment contract. However, under certain conditions, it is possible for individuals working under a service contract or a mandate agreement to establish an employment relationship and thus gain access to social guarantees. Hugo.legal legal platform lawyer Ülle Aliorg explains what distinguishes contracts made for work purposes and how to identify an employment relationship.
Employment Contract
According to the Employment Contracts Act, the parties involved are the employee and the employer, and the subject of the contract is performing work – acting according to the employer’s instructions. The employment contract is mainly distinguished from other contracts by the subordinate relationship – the employee follows the employer’s orders, meaning they carry out assigned tasks, and the working hours and location are typically fixed. The employment contract is generally executed personally – this means that unless the employee and employer have agreed otherwise, the employee cannot hire someone else to do their work or send a substitute. For example, a person working as a customer service representative in a store or a gym cannot work under a mandate or service contract, even if the contract carries such a name – this customer service representative has specific duties, working hours, and a location where they must perform their duties.
Service Contract
In the case of a service contract, the parties involved are the client and the contractor, and the purpose of the contract is to achieve a pre-agreed result – for example, to build a house or sew a suit. The client cannot influence how and when the contractor performs the work; the contractor has freedom in managing their work process – the only important factor is achieving the expected result. It is also assumed that the contract does not have to be performed personally – for example, a builder or tailor may hire an assistant or have someone else perform the work to achieve the desired result. In summary, with a service contract, the important factor is the achievement of the agreed result – how that result is achieved is generally not important.
Mandate Contract
The parties to a mandate contract are the principal and the mandatary. The subject of the mandate contract is the provision of services by the mandatary based on their knowledge and abilities, with the goal of benefiting the principal in the best possible way. The difference between a mandate contract and a service contract is that in a mandate contract, the process is important, not the result – it is not always possible to guarantee a specific result, such as a lawyer cannot guarantee a court victory. Similarly to a service contract, the mandatary determines their own working time and location. Unlike an employment contract, there is no subordinate relationship – although the mandatary must follow the instructions of the principal, the principal cannot provide detailed instructions on how or under what conditions the work should be performed.
How to Identify an Employment Relationship?
To identify an employment relationship, one must approach a labor dispute authority, such as the Labor Dispute Committee or the court. The applicant must prove the basic criteria of an employment contract: work as a continuous process (the employee and employer bind themselves through the employment contract and there is an expectation for the employee/work to exist for a longer period), subordination of the employee to the employer’s management and control, meaning the employee is obligated to follow the orders given by the employer in carrying out their duties, and the employer has the right to supervise the employee’s performance (the employer determines the place, time, and manner of work), periodic payment for work (obligation to pay the salary at least once a month). Additionally, the following apply:
- Work is performed personally
- The employer’s tools, materials, and equipment are used to perform the work
- The employee participates in the activities of the employer’s company (works in the employer’s premises, follows work rules, participates in joint events with colleagues)
- The employee’s business risk is mitigated, for example, with a notice period for terminating the relationship and, in some cases, compensation for the termination
- The obligations arising from the contract restrict or require the employee to act even outside the employment relationship (e.g., non-compete clauses)
The employment contract must be concluded in writing according to the Employment Contracts Act, and as a lawyer, I strongly recommend doing so. However, the employment contract is also considered concluded if the employee has started working, and the employer has accepted it.
Social Guarantees in the Absence of an Employment Contract
Since April 6, companies can submit wage compensation applications to the unemployment insurance fund, provided that an employment contract has been concluded between the employee and the employer. However, if a person works under a contract of obligation, such as a service contract or mandate agreement, in some cases, it is possible to identify an employment relationship, which in turn guarantees the person social benefits – the right to vacation or vacation compensation and, in the case of redundancy, severance pay. According to the Tax and Customs Board, 53,200 employees in Estonia work under contracts of obligation, 25,800 of them under only contracts of obligation. This means that, in all likelihood, these people rely solely on income derived from service or mandate contracts. However, the nature of their work often meets the criteria of an employment contract, and if an employment relationship can be identified, people who have worked under a contract of obligation are also entitled to social guarantees. The reason why some employers prefer to conclude contracts of obligation is that such contracts do not require the employer to provide paid vacation and severance pay in the event of termination, and the termination of the contract is generally simpler than with an employment contract. According to Hugo.legal lawyer Ülle Aliorg, people apply to the Labor Dispute Committee or the court to identify their employment relationship if they have worked for remuneration, and it is not clear whether they have done so under an employment contract or a contract of obligation. ‘Identifying an employment relationship is an everyday task for a labor lawyer, but in today’s exceptional situation, it matters more than ever – a large number of people are in a difficult financial situation, and receiving support is crucial for them. People working under contracts of obligation do not have access to social guarantees and compensations; these are only available with an employment contract. If a person working under a service or mandate contract feels that their work resembles the characteristics of an employment contract, they can attempt to establish an employment relationship,’ said Aliorg. Aliorg adds that generally, people seek to establish an employment relationship in order to access social guarantees and compensations. ‘There is nothing strange about this process – if a person has worked under a contract of obligation, but their work relationship is similar to an employment relationship, they are entitled to the same compensations. In addition, if the employer breaches the employment contract, the employee can claim compensation from the employer,’ Aliorg advised.
Conditions for Identifying an Employment Relationship:
- Subordination to the other party, fulfilling predetermined work instructions
- Working at a set time or according to a schedule
- Working at a specified location
If these three criteria exist in the work relationship, one can turn to the Labor Dispute Committee or the court to identify an employment relationship – you are likely working under an employment contract, even if the agreement is named as a service or mandate contract. In such cases, the employee is also entitled to vacation or vacation compensation and severance pay in the event of redundancy. Aliorg concludes by noting that lawyers are facing an increased workload. ‘The exceptional situation has caused a lot of confusion in people’s lives, and many questions remain unanswered. Since people are financially struggling, the cost of legal assistance and the state’s support for legal assistance is now very important – for example, our platform’s 45 lawyers can assist people with the state’s support, meaning the first two hours of help are free of charge for those in need. I strongly recommend using this opportunity while it lasts,’ Aliorg concluded.
