Contract for Contractor and Employer

A contract is a tool that regulates the relationship between the contractor and the customer in work. This type of contract is especially relevant in the modern world, where IT companies seek to optimize their business processes and taxation. The contract becomes particularly important in the context of the Hi-Tech Park, which has become a center of attraction for innovative startups and companies. It not only determines the rights and obligations of the parties but also affects the business’s financial structure within the framework of specific tax regimes operating in a given economic zone. In this article, we will look in detail at what a contract is for a contractor and an employer and what such a contract must pay taxes for IT companies in the Hi-Tech Park.

How does work under a contract differ from work under an employment contract

Work under a contract and an employment contract have several key differences that need to be taken into account by both workers and employers. 

1. Legal status: 

• Under an employment contract, an employee becomes an employee with established rights and obligations regulated by labor regulations.
• The contract implies that the contractor is an independent contractor who performs work in accordance with civil law norms.

2. Regulation of working hours:

• The employment contract outlines the working hours and schedule the employee must comply with.
• There is no such obligation in the contract. The contractor determines how and when to perform the work, which increases its independence.

3. Labor remuneration and social guarantees:

• Under an employment contract, wages are paid regularly, at least twice a month. The employee is entitled to various social guarantees (vacation, weekends, holidays, etc.).
• Under the contract, payment is made upon completion of the work or in stages, based on the act of work performed. The contractor is not entitled to leave from work. Weekends and holidays are usually not considered when drawing up a work schedule. On its initiative, the employer can create a work schedule that considers such days. Sometimes, the contractor may receive payment based on a temporary disability certificate (sick leave).

4. Working conditions:

• In the case of an employment contract, the employer usually creates working conditions and is responsible for compliance with working conditions, workplace safety, and other aspects of work.
• In the contract, the contractor is responsible for the quality and safety of the work performed. The contractor performs the work outside the employer’s location and is obliged to complete the work on time and in accordance with the terms of the contract. The contractor performs the work in the place provided by the employer when this is specified in the contract.

5. Taxation:

• The employer must withhold taxes and contributions to the Social Protection Fund for the employee under the employment contract.
• When working under a contract, a contractor who is an individual entrepreneur or a professional income taxpayer is responsible for paying taxes and is not insured by the employer. When a work contract is concluded with an individual, the employer closes tax issues.

6. Duration of the relationship with the employer

• An employment contract is usually concluded for a minimum of one year.
• The contract is concluded for the duration of performance of the work specified in the contract, which can be at least one day without limiting the maximum period.

7. Liability for non-performance of the contract

• An employee is subject to disciplinary liability in an employment relationship. The state determines disciplinary measures, but the employer cannot devise its own measures of responsibility.
• In case of non-performance of the contract, the contractor bears the responsibility specified in the contract. The amount and type of liability is defined in the contract. This may include, for example, a fine, free elimination of defects, penalties.

8. Features of early termination of the agreement

• An employment contract can be terminated prematurely only in cases stipulated in the state requirements for employment relations or by agreement of the parties.
• The contract can be terminated prematurely in cases listed in the contract.

These differences emphasize that the choice between a work contract and an employment contract depends on the specific goals of the parties and the nature of the work performed.

What should the contractor pay attention to when entering into a contract?

The contractor should understand that in the case of work under a contract, they are not subject to the requirements of the company’s Labor Regulations, as well as the guarantees that are inherent in an employment relationship:

1. There is no work and rest mode
The contractor must refrain from observing the start and end times set by the company. Weekends and holidays do not automatically release the contractor from work, as in hiring under an employment contract.
2. No vacations
The contractor is not granted labor or social leave at his own expense or at the employer’s expense.
3. Remuneration is paid upon completion of work
Unlike the salary the employer is obliged to pay at least 2 times a month, remuneration under the contract is paid within the time limits set out. Usually, payments are made at the end of work after drawing up an act of completed work or a stage of completed work.
4. You need to organize your work
The contractor is not bound by the employer’s working hours. Therefore, he needs to have self-organization and the ability to plan his working hours and rest time in such a way as to meet the deadlines for completing work defined in the contract.
Also, a performer who is not an individual entrepreneur needs to know that if the customer does not pay for his work, he can be charged a penalty of at least 0.15% of the unpaid amount for each day of delay.

What should an employer pay attention to when hiring a contractor under a contract?

A contract is only sometimes a safe way to hire staff. When hiring staff, you need to consider some of the risks associated with the registration method of relations with personnel and choose the safest registration method.

1. Do not enter into a contract when there is a corresponding position in the staffing table
Entering a contract with an employee on probation can be risky for the employer. In such a scheme, the employees’ interests suffer: they do not have the guarantees provided by labor regulations. For example, three months of probation under a work contract are not included in the work period required for labor leave: instead of 6 months, an employee will have to work for nine months to get labor leave. Government agencies usually evaluate schemes such as avoiding employment relationships, replacing them with civil ones, and penalizing employers who use such hiring schemes.
2. Do not include in the contract of employment conditions on working and rest hours and other conditions specific to employment contracts
The inclusion in the employment contract of conditions that are inherent in the employment contract and even mandatory for the employment contract usually proves the substitution of civil labor relations. This applies, among other things, to the conditions of working and rest hours and the contractor’s obligation to comply with the Internal Labor Regulations established by the employer.
The consequences for the employer can be fines and court.
3. Do not issue pay slips under the contract; do not draw up other documents that are mandatory in the employment relationship with the contractor.
Pay slips are typical in labor relations. Therefore, for government agencies to which an employee may complain or who will conduct an inspection, the payment forms will hint at replacing the employment relationship with a civil one.
You also don’t need to keep track of working hours (fill out timesheets) and develop job descriptions for performers.
4. Do not make payments to performers that are provided for in the labor regulations
The employer does not have to pay the performer “vacation pay” (average earnings during labor leave) or provide financial assistance.
5. Formalize the results of the contractor’s work with an act of completed work
At the end of the term of the contract or stage of work provided for in the contract, the employer and the contractor sign the act of work performed. This is the primary accounting document on which the employer’s accounting department pays for the contractor’s work.
6. Do not enter into contract agreements with dismissed employees to perform the same work that they performed before the dismissal
This situation may indicate a substitution of labor relations. For example, companies are prohibited from cooperating for three years after being dismissed with former employees who pay a tax on professional income.

Taxation of contract payments in IT companies in the Hi-Tech Park

An IT company can enter into contract agreements with individuals and entrepreneurs, as well as payers of professional income tax (NAP). Taxation is different in each of these cases.
1. Contract with an individual
If the company enters into a contract with an individual who is not an individual entrepreneur or a payer of the NAP, the employer pays for the following:

• Income tax is 13% of the amount of remuneration under the contract. The tax is paid to the budget on the day of payment of compensation.
• Contributions to the Social Protection Fund of the Population – 1% of the contractor’s remuneration amount under the contract and 34% – at the employer’s expense: 35% are paid to the budget on the day of payment of remuneration.
• Contribution to Belgosstrakh for compulsory insurance against industrial accidents and occupational diseases – 0.6% per quarter of the payments. The employer pays this fee only if, under the contract terms, it provides a place for the contractor to perform the work.

2. Contract with an individual entrepreneur
An individual entrepreneur reflects his income in the tax return and pays taxes independently. The tax rate depends on the tax system applied by the individual entrepreneur. This can be a single tax in a certain amount or a 10% (20%) under the general tax system.
3. Contract with the NAP payer
The NAP payer enters their income in the mobile app and pays the NAP itself every month, which the app automatically calculates. The NAP includes social security contributions and income taxes.