The Online Services Era: Employment Contract vs Civil Contract

Today businesses providing online services are most likely to resort to recruiting personnel based on a civil contract rather than on an employment. The coronavirus pandemic has accelerated the transition to the digital world, and we started to use online services every day like never before, including taxi, couriers, delivery of food and other products.

Our firm is a legal consultant of, among others, a large European food delivery service, which is also using civil contract model for its workers, i.e. independent workers. Pursuant to the official statistics "Main Socio-Economic Indicators of the Republic of Kazakhstan" published on the website of the Bureau of National Statistics of the Agency for Strategic Planning and Reforms of the Republic of Kazakhstan, there are 9,180,800 registered labor force units at the age from 15 and over in 2020:

-        6,686,700 are employees, which are approximately 73% of the total labor force; and

-        2,045,400 are self-employed workers, which are 22% of the total labor force in the country.

As we can see from the numbers above, independent workers represent a significant percentage from the total labor force in Kazakhstan, hence regulation of their activities is more important than ever.

In 2019, the California government introduced a new law affecting the independent contractors working for online aggregators, the so-called Assembly Bill No. 5 ("State Law No. 5"). The law is aimed to determine whether workers are employees or independent contractors and the latter is defined as:

-        being free from control by the employing company;

-        performing work that is not the main activity of the employing company;

-        independently conducting trade, business or other activities in the course of performing work under a contract on a regular basis.

The workers, who do not fall under the above criteria are considered as hired employees, and this imposes a number of obligations on the employer: material liability, insurance payments, etc.

Kazakhstan law is yet silent on any similar specific regulations. Online businesses are free in making their choice as to how formalize the relationships with their workers. This piece of publication presents the main differences between employment relations and civil contract-based relations from a legal perspective, identifies pros and cons of each option as well as things worth paying attention to by recruiters and employers.

Employment vs civil contract: why do online businesses opt for a civil contract?

An employment contract in Kazakhstan is defined as a written agreement between an employee and an employer, whereby the employee undertakes to personally perform certain work (job duty), to comply with the work schedule, and the employer in its turn undertakes to, among others, provide the employee with the work, to ensure the work conditions being in compliance with the law, collective agreement, the employer’s orders, and to pay wages in a timely manner.

Key elements of employment relations are:

1)    Provision by the employer of a specified job duty

2)    Provision by the employer of work conditions

3)    Performance by the employee of his/her job duties personally

4)    Compliance of the employee with the work schedule.

The above conditions are fundamental elements of an employment contract, thus companies using civil contracts with independent workers usually avoid having those elements in civil contracts. The latter are civil contracts between service companies and independent workers on provision of paid services, whereby the contractor agrees to perform services according to the client’s instructions and the client undertakes to pay for these services.

Civil contract may be very similar to an employment contract, given that under each of them services can be provided by qualified contractors performing their work based on a specific qualification. At the same time, they differ due to the following aspects:

-        Names of the parties (employee and employer vs client and contractor). The civil contract usually does not provide for a specific position and/or qualification of the worker;

-        Civil contract does not provide for a specific work schedule, while under the employment contract the work is performed according to the work schedule. Kazakh employment regulations envisage disciplinary measures for employees: warning, reprimand, fine, dismissal, etc., that are not relevant for a contractor under a civil contract;

-        Receipt of salary by an employee in a prescribed manner under an employment contract, while civil contract is free in terms of any payment scheme.  

Payments under contracts

The amount of payment for services under a civil contract can be of any amount, while under the employment contract the employee must be paid at least KZT 42,500 on a monthly basis.

Taxes and fees

The contractor receives a payment for the provided services under a civil contract, excluding the following taxes and contributions:

*  compulsory pension contributions (hereinafter - "CPC") in the amount of 10% of the total amount;

*  contributions for compulsory social health insurance (hereinafter - "CCSHI") in the amount of 2% of the total amount; and

*  individual income tax (hereinafter - "IIT") in the amount of 10% of the amount formed after deducting CPC and CCSHI from the total amount.

The employee is entitled to a monthly salary under an employment contract. The employer pays the following taxes and contributions:

*  social tax in the amount of 9,5%;

*  social contributions in the amount of 3,5%;

*  contributions for compulsory health insurance in the amount of 2%.

At the expense of the employee, the employer also pays:

*  CPC in the amount of 10%;

*  CCSHI in the amount of 2%;

*  IIT in the amount of 10%.

Termination of contracts

The client is entitled to unilaterally terminate the civil contract with the contractor. The terms of termination can be stipulated in the civil contract itself. The Civil Code allows the client to refuse to fulfill the civil contract, provided that it pays for the actual costs incurred by the contractor.

The situation is more complicated with the termination of the employment contract. The Labor Code protects the rights of the employee and provides the exhaustive list of grounds for unilateral termination of the employment contract by the employer.

Things worth paying attention to

1. Recognizing civil contracts as hidden employment relationships

Such risk can at most arise due to the filing by independent workers a court claim or a claim to authorized bodies in the labor field, as well as in the case of an inspection by a state inspector. This risk may entail i) administrative responsibility for admitting a person to work without entering into the employment contract, ii) receiving an order to enter into the employment contracts with all contractors under the civil contract and iii) paying all taxes and contributions, starting from the date the contractor actually fulfills his/her obligations. Consequently, employers should avoid having fundamental elements of an employment contract in their civil contracts with independent workers.

2. Liability Insurance

Online services in Kazakhstan are offered a choice in terms of building relationships with contractors/employees and such freedom more often involves the important question of compulsory liability insurance. In fact, the client does not choose a contractor when the client orders taxi or food delivery, the company (online services aggregate) makes such choice for him.

Russian courts have already considered such cases when companies refused to bear responsibility for the actions of their contractors hired based on the civil contracts. The Moscow City Court in its decision in 2019 came to the conclusion that the driver himself did not place the order from the passenger, the carriage contract was entered into with the company, not the contractor, respectively, the company was liable for committing an offense.