An employment contract defines the terms of the employment relationship and is therefore of paramount importance for both legality and transparent operation. However, the document must meet certain legal requirements.
An employment contract is a vital document for both the employer and the employee, defining the terms and conditions of the employment relationship. This written agreement not only provides the legal basis for the employment relationship, but also clearly states the rights and obligations of the parties, ensuring that employment operates within a transparent and legal framework. Stay tuned if you are interested in what is definitely worth paying attention to if your company has employees.
What is an employment contract?
The employment contract is concluded by the employer and the employee in writing, and the fact that it is in writing is of considerable importance, since in the event of a missing written employment contract, only the employee can invoke invalidity within 30 days of starting work. There are mandatory content elements prescribed by the Labor Code that every employment contract must contain, including the job title, the basic salary and the place of work. In addition, it is worth specifying the tasks to be performed by the employee, the start of the employment relationship, the time of work, the method of payment of the salary, and other conditions deemed important by the parties. It is also important that, in connection with certain circumstances, the employer is obliged to provide information within 7 days of the start of the employment relationship, including, among other things, the person exercising the employer’s authority, the rules related to the termination of the employment relationship, the number of days of leave, and the scope of benefits in addition to the basic salary.
What distinguishes an employment contract from an agency and business contract?
When establishing an employment relationship, several problems may arise that have serious consequences. One of the most important issues is that the employment contract should truly establish an employment relationship and not be classified as an agency or business contract, i.e., it should not be a so-called sham contract. Based on the employment relationship, the employee regularly and continuously performs the work in accordance with the employer’s instructions, for which the employer pays wages/salary. In contrast, in the case of an agency, the agent undertakes to perform a given task, but is not obliged to perform it personally and does not fit into the client’s organization; in the case of a business contract, the entrepreneur undertakes to achieve a specific result and performs the work with his own means and at his own risk. In order to make a proper distinction, it must be clear that the contract is not aimed at a specific task, but at the continuous performance of a given job. In addition, it is necessary to record the working hours since, in the case of an employment relationship, the employer is entitled to determine this, while an agency or business contract is primarily related to the performance of an activity. It focuses on the goal to be achieved and it is actually irrelevant here how much time the agent or the contractor spends on it. In addition, an important aspect is the subordination structure that appears in the employment relationship, and the resulting right of the employer to instruct and control, which also appears in the case of both the client and the customer, but is not as extensive as in the employment relationship.
The significance of delimitation lies primarily in the fact that the tax authorities often examine employment contracts and, if they are deemed to be sham contracts, employers can be subject to heavy fines or be required to pay unpaid taxes, or even the reclassification of the legal relationship is conceivable as a sanction. Although it is more common for a business or agency relationship to be reclassified as an employment relationship (since employment imposes significant tax burdens on businesses, therefore „evading” the establishment of an employment relationship is a common solution), the opposite is also possible, so it is worth paying attention to the elements aimed at delimitation in the case of an employment contract as well.
What would NAV investigate?
During its compliance audits, the tax authority primarily checks the authenticity of certain economic events included in the contract, during which it examines, among other things, the content of the contract, the circumstances of the work, the documents of performance and the documents related to the payment of the consideration for the activity based on the relevant records, documents, invoices and certificates. It also takes into account the results of the negotiations prior to the conclusion of the contract, the legal statements made when concluding the contract and during the work, and the nature of the actual work, in which it should be emphasized that the name of the contract (i.e., the fact that it states „employment contract”) is of no significance.
Summary
As we have tried to point out in our article, proper emphasis should be placed on employment contracts. This is not only a legal requirement, but also essential for the transparency of your company’s operations. It is therefore worth carefully drafting these documents to avoid later disputes and legal consequences applied by the Tax and Customs Administration.
