The service contract represents work outside the employment relationship, which the employer can sign with another person. This is the type of contract where the working person does not have employee status.
A service contract is concluded with a working person pertaining to one-time work performance and which will be carried out on the agreed remuneration. The money the worker receives for the work undertaken is not treated as a salary, but an agreed remuneration, which is also taxed.
The service contract is not a work contract, and the hired person does not have employee status, therefore, no employee rights. This means that the worker:
- has no right to a vacation,
- has no right to a sick leave and maternity leave,
- has no right to a break,
- has no defined working hours,
- has no paid transport costs,
- has no accommodation and food on a business trip,
- has no other employee rights.
The subject matter of the service contract may be:
- an independent construction or repair,
- an independent manual or intellectual work.
A service contract can be concluded exclusively for work outside the scope of company operations. If it is concluded for work from the defined scope, it is not valid. If a worker is hired to perform these regular tasks (related to the company’s main business), an employment contract must be signed.
On the other hand, a service contract cannot be established for:
- jobs belonging to the business of the employer,
- jobs belonging to a subsidiary or predominant activity,
- jobs that are planned by the systematization and organization of job positions.
Example:
A company dealing with programming can have a service contract with an individual, or a person for Internet marketing services (unless defined by the activity code and systematization of job positions). However, it cannot hire a new programmer with a service contract, if, for example, the already employed programmer takes sick leave, and this job position post is left vacant.
Contracting parties
A service contract is concluded between the contracting parties – the contracting authority and the contractor. The contracting authority may be a legal or natural person and the contract may be concluded with any natural person. The contractor may be:
- an employed person (whether employed by the contracting authority or by another employer),
- an unemployed person,
- a pensioner,
- a student,
- an artist or cultural sector worker,
- an owner of the company (entrepreneur, founder),
- a farmer.
Service contract – form and content
The service contract is concluded in written form and contains the following data:
- on the contracting parties – the contracting authority and the contractor,
- date of the conclusion of the contract,
- the subject of the contract – type, and description of work,
- the amount of compensation.
The contract can also define other items such as ways of doing business, place, material for work, working conditions, exact deadline, compensation for arrival and departure from work, compensation for travel expenses and the like. But, it is important to note that the employer is not required to indicate any of the listed items.
Obligations of the contracting parties
When signing a service contract, the contracting parties acquire certain rights, but they also have certain obligations. The contracting authority undertakes to pay the agreed remuneration for the completed work, and the contractor undertakes to do the work, according to the rules and instructions.
Also, paying taxes and contributions to the state are obligatory.
If an entrepreneur or a legal entity hires a worker then he/she is obliged to assess and pay taxes and contributions. In fact, a taxpayer is a natural person who generates income – compensation, but the employer is the one who assesses and pays those costs.
If a natural person or an individual is the one who orders the job, the person who will perform the work – the contractor – will be obliged to pay taxes and contributions. But in practice, the work price is always agreed upon in the net amount, and the rest, for tax and contributions, is paid through the agreed fee.
One more thing happens in practice, the tax and contributions are always assessed and paid by an accountant or an accounting firm and earnings assessment agency, which can give you the best advice related to tax situations.
Service contract – taxes and contributions
Hired workers receive a contracted fee for their work, and this fee is subject to taxes and contributions, which must be paid. These include:
- the income tax,
- the contributions to the Pension and Disability Insurance Fund,
- the contributions to health and social insurance.
The income tax and contributions to the Pension and Disability Insurance Fund are always paid, regardless of whether the hired worker is employed or not. Contributions to health care are paid only for workers who do not have health insurance.
The income tax is paid on the realized income from the service contract and is taxed at the rate of 20% with the recognition of 20% of the standardized expenses (the standardized expenses are reduced from the gross income at a rate of 20%). Contributions to the Pension and Disability Insurance Fund are paid at a rate of 26%, and to health insurance at a rate of 10.3%.
Contributions to health and social insurance are not paid in special cases, which depends on the status of the worker with whom the service contract is concluded:
- if the worker is unemployed (uninsured on any basis), everything is paid – the income tax, contributions to the Pension and Disability Insurance Fund and health insurance,
- if the worker is employed, the owner of the company and the like (if he/she is insured on any basis), only the income tax and the contribution to Pension and Disability Insurance Fund are paid.
The only way for the employer to find out the true status of the person he/she will be hiring is to get a statement from him/her on whether he/she is insured on some other basis or not.
In very rare and exceptional cases, contributions to Pension and Disability Insurance Fund and health insurance are not paid:
- for a worker who received a confirmation from the Pension and Disability Insurance Fund on paid contributions to the maximum base estimated for that year,
- for a foreign citizen who meets the requirements to not pay contributions.
Termination of the service contract
The contracting authority may terminate the service contract before the agreed deadline and without explanation but must pay the agreed compensation to the worker.
Also, the contracting authority may terminate the service contract if the contractor fails to respect the deadline if the work is not performed in accordance with the contract, if the work is poorly done, and in this case, there is no obligation to pay for the work.
Abuse of the service contract
In practice, abuse often occurs when employers hire a worker to perform jobs within the company’s regular activities and sign a service contract with him/her (for example, when a worker is on maternity leave). This is a huge violation, and the only valid contract, in this case, is the work contract.
This is very important because the hired worker has the right to report the employer and his case to the labor inspector, while the fines for this are high.
