Employment or commercial agreement?

July 17, 2015

A company does not always need to employ personnel for carrying commercial its activity, as sometimes the nature of work requires one-time engagement for one-time works or short time servicing.

In this case, the laws provide that one can sign an agreement for provision of services pursuant to the article 683 Civil Code or so-called civil or commercial agreement. Under such agreement for provision of services, the executor undertakes to provide services as per the instructions of a customer (to perform certain works and carry out certain activity), and a customer should pay for these services. The civil laws admit application of general legal provisions on contract to compensated services agreement.

It is necessary to note that a commercial agreement can be signed with the individual entrepreneurs or individuals, not registered as entrepreneurs and it has a material effect when an engaging company pays the fee for the provided services. If an executor is registered as an individual entrepreneur, a company does not have to make any deductions from his/her fee under the agreement (article 177 Tax Code of the Republic of Kazakhstan). In case, when an executor is not registered as individual entrepreneur, an engaging company should deduct an individual income tax from his/her fee under a commercial agreement, i.e. income of an individual, pursuant to article 168, the Tax Code. In this case, an engaging company does not make and deduct any other payment and does not bear any expenses, such as pension deductions, social insurance payment, mandatory insurance of civil liability of an employer against damage to an employee that could be caused during his/her employment duties.

Thereby the employers are often tempted of optimizing their employment expenses for personnel, i.e. salaries, pension deductions, social, and other types of insurance etc. and optimization can be implemented by suggesting the personnel registering as individual entrepreneurs and, consequently signing commercial agreements. Although in fact, such relations between an engaging company and an individual are employment relations and fall under regulation of labour laws.

In order to prevent employers’ abuse and protect rights of employees, the Labour Code establishes clear distinction of employment relations and agreement from other relations and agreements.

Employment and other relations, directly connected with employment one, are regulated by an employment agreement, i.e. a written agreement between an employer and employee, under which an employee undertakes to perform certain work (employment duties), follow the rules of employment order, whilst an employer undertakes to provide certain work and agreed employment duties, provide employment conditions in compliance with the Labour Code, laws and other legal acts of the Republic of Kazakhstan, collective agreement, acts of an employer, pay salary timely and in full (article 1, article 24 Labour Code).

Distinction of an employment agreement from other commercial ones lies in its content and whether it includes such conditions: performance of employment duties as per certain qualification, speciality, profession and job position; personal performance of employment duties under internal labour regulations, i.e. an employee cannot dispose his/her time during employment duties; receipt of salary for his/her work (article 27 Labour Code of the Republic of Kazakhstan).

It should be noted that the period of works performance (validity period of an employment agreement) is not a main distinctive feature of an employment agreement from a commercial agreement, as an employment agreement can be made for indefinite and definite period of not less than one year, and for the time period of certain work, for the period of substitution of temporarily absent employee, for the time period of seasonal work (article 29 Labour Code of the Republic of Kazakhstan). However, permanent entering and re-entering into services agreement with the same person are indicative of employment relations between the parties.

The essential difference between an employment and commercial agreement lies in the subject of an agreement – performance of works (employment duties) or provision of services, pursuant to article 29 Labour Code of the Republic of Kazakhstan and in this case, we opine that the subject of a commercial agreement must be clearly specified and have a detailed description of services to provided, rights and obligations, performance of work under the internal labour regulations or at an employee’s disposal, receipt of a salary or fee for under a commercial agreement for provision of services.

Think, for instance, if an engaging company refers to internal regulations of an employer in a commercial agreement for provision of services (job description) and imposed on executor employment duties and this answers to the nature of an employment agreement and employment functions rather than a commercial for provision of services. In connection with aforementioned, we opine that description of services/works in a commercial agreement should be clearly specified and detailed, an executor should not follow internal work order rules, except for operation regime of a company and safety rules.

Therefore, when considering engagement of individuals the parties should determine what relations will be between them – employment or commercial with due regard of requirement of labour laws as to the content of an employment agreement and commercial agreement for provision of services.

It should be noted that interested third parties, i.e. governmental bodies namely procurator’s office, regulating labour governmental agency, tax bodies and executor/employee can bring a lawsuit in a court on recognition the relations as employment duties and this can consequently result in compulsory additional payments and pension deduction, fine for untimely pension deduction, payment of individual income tax, fine for untimely tax payments and administrative penalties.

Vyacheslav Chernyakov