In the modern labor market, employers engage individuals on various legal grounds. In practice, it often happens that insufficient attention is paid to the differences between specific types of contracts when choosing the appropriate form of engagement, even though such a choice may have significant legal consequences for both parties.

In particular, the distinction between an employment contract and a service contract has proven to be contentious in practice.

Although both contracts involve the performance of certain work or services in exchange for remuneration, there are significant differences between them, primarily in terms of their legal nature and, consequently, the rights and obligations of the contracting parties.

With the above in mind, this article examines the key differences between employment contracts and service contracts, as well as the criteria relevant for their proper distinction in practice.

Labor Law Aspect

An employment contract constitutes the basis for establishing an employment relationship between an employee and an employer, for the purpose of performing tasks within the employer’s business activity that are continuous or of a lasting nature, and it is governed by the provisions of the Labor Law. Based on this contract, a natural person acquires the status of an employee.

On the other hand, a service contract is concluded outside of an employment relationship and represents an obligation-law relationship governed by the Labor Law as well as the Law on Obligations. Under this contract, one party (the contractor) undertakes to perform a specific task outside the employer’s business activity, typically on an occasional basis, such as the independent creation or repair of a thing or the performance of certain physical or intellectual work, while the other party (the client) undertakes to pay remuneration.

In relation to the requirement that the work must be outside the employer’s business activity, uncertainty often arises in practice as to what constitutes such work, i.e., for which tasks it is lawful to engage a person under a service contract. This issue has been clarified in case law, which has taken the following position:

A service contract may be concluded exclusively for tasks that are outside the employer’s business activity and are not systematized within the employer’s organization. This means that the subject of a service contract cannot be tasks falling within the employer’s business activity, whereby such tasks include all activities the employer performs or may perform, regardless of whether they fall within its predominant activity. (Supreme Court judgment Rev2 2711/21 dated September 1, 2022)

Within the meaning of the above, engagement based on an employment contract entails the exercise of employment rights, including, among others, the right to salary, annual leave, paid and unpaid leave, rights in case of temporary incapacity for work, protection in case of dismissal or termination of employment, and others.

Conversely, a person engaged under a service contract does not enjoy labor-law protection characteristic of an employment relationship. Although such engagement provides certain rights related to work (occupational safety and health, protection against workplace harassment), it does not include core employment rights. Essentially, under a service contract, the contractor is entitled to remuneration, while other aspects such as duration of the contractual relationship, leave, deadlines for completion, and termination, depend on the agreement between the parties.

A key feature of an employment contract is subordination. The employee performs work according to the employer’s instructions, within the employer’s organizational structure, at a specified time and place, under the employer’s supervision and control.

In contrast, a service contract does not involve subordination or integration into the client’s organizational structure in the same way as an employment relationship. The focus is primarily on the result of the work, i.e., the completion of a specific task. The contractor independently organizes how the work will be performed and is not part of the client’s internal organization.

Another difference concerns the status of the engaged individual.

With regard to employment contracts, the Labor Law imposes certain limitations, providing that a person may be employed full-time with only one employer.

Since a contractor under a service contract does not establish an employment relationship, legal provisions do not impose specific limitations as to who may be engaged on this basis. In practice, this means that a service contract may be concluded with a person who is already employed by another employer.

Tax Aspect 

The differences between these two types of contracts are significant not only from the perspective of labor law but also from a tax standpoint, in accordance with the Law on Personal Income Tax, the Law on Mandatory Social Security Contributions, and the Law on Health Insurance.

In the case of an employment contract, the employer is obliged to pay:

• Personal income tax on salary at a rate of 10% of the tax base;
• Pension and disability insurance contributions at a rate of 24%;
• Health insurance contributions at a rate of 10.3%; and
• Unemployment insurance contributions at a rate of 0.75%.

With regard to a service contract, the employer is obliged to pay:

• Tax on other income at a rate of 20% (the tax base is the gross remuneration reduced by standardized costs in the amount of 20%);
• Pension and disability insurance contributions at a rate of 24%; and
• Health insurance contributions at a rate of 10.3% (if the individual is not insured on another primary basis, such as an employment contract).

Conclusion

Taking into account all the differences outlined above between employment contracts and service contracts, particularly regarding employment rights and the duration and termination of the contractual relationship, it can be observed that, from the employer’s perspective, a service contract is often a more attractive basis for engaging individuals.

For this reason, in practice, employers often resort to concluding service contracts even in situations where the nature of the relationship actually indicates the need to establish an employment relationship.

In such cases, a person is formally engaged under a service contract, while in reality performing work and establishing a relationship with the employer that has all the essential elements of an employment relationship. In these circumstances, the individual is effectively in the position of an employee but does not enjoy the rights arising from employment, meaning that the service contract is used to conceal an employment relationship.

Accordingly, disputes often arise concerning the protection of the rights of such engaged individuals, typically in the form of labor disputes aimed at establishing the existence of an employment relationship.

In this regard, case law has established a clear and consistent position – the title of the contract is not decisive for the legal qualification of the relationship between the parties, rather, the actual nature of the relationship is of crucial importance. In other words, courts assess whether the elements of an employment relationship, as defined by the Labor Law, are present in a given case. When making decisions, courts evaluate precisely the circumstances that distinguish these two types of contractual relationships.

Therefore, in practice, it is of particular importance to carefully assess the true nature of the work and the relationship established between the parties when engaging individuals, in order to ensure both adequate protection of employees’ rights and lawful conduct by employers.

This article is to be considered as exclusively informative, with no intention to provide legal advice. If you should need additional information, please contact us directly.