Situation of economically dependent workers

The boundaries between dependent employment and self-employment have increasingly become blurred in some sectors in recent years, in a context of changing labour markets and the spread of practices such as outsourcing and contracting-out. This process has led to a growing interest in ‘economically dependent workers’ – workers who are formally self-employed but depend on a single employer for their income. In Latvia, little use is made of economically dependent work, as the concept is not officially recognised and no regulation exists in this area. However, service contracts between contractors and employers acting as customers are becoming more common, mainly because they offer certain advantages to the employer. In some cases, these relationships may correspond to economically dependent work where the worker is largely dependent on the employer as customer. So far, no debate has taken place in relation to this issue, although trade unions are observing the implications for workers of increased use of service contracts in the labour force.

Employment arrangements

In Latvia, the employer may hire a person on the basis of a standard employment contract or on the basis of a service contract, sometimes known as a ‘work task contract’. Work may also be performed according to other legal relations, for example, an authorship contract. However, the area of application for an authorship contract is rather specific and is not discussed here.

A person participating in employment relations on the basis of a service contract may be classified as an ‘economically dependent worker’; workers on such contracts have the following characteristics:

  • they are likely to be formally self-employed;
  • they may depend on one single employer for their income or a large part of it;
  • they are not clearly distinguishable from employees in terms of the organisation and the content of their jobs.

Nevertheless, in Latvia, these workers are not specifically identified as being economically dependent.

Legal framework

The employment contract is the main form governing the legal employment relationship. This is provided for by the Latvian Civil Law, Chapter 15 (Claims arising from employment relations), Sub-Chapter One (Employment contract), and by the Labour Law. However, the Civil Law provides that if the aim of obligations is not a continuous volume of work, but rather a particular work outcome such as completion of a specific product or project, then the contract shall not be regarded as an employment contract but rather as an undertaking (Civil Law, Chapter 15, Sub-Chapter One, Section 2179). Legal relations under an employment contract are regulated by the Labour Law, while those under a service contract are regulated by the Civil Law, Chapter 15, Sub-Chapter Three (Service contract), Sections 2212–2229.

The Labour Law, Part A (General provisions), Chapter 1, Section 3 stipulates that an employee is a natural person who, on the basis of an employment contract, performs certain work under the guidance of the employer against an agreed remuneration.

The Civil Law provides that, under a service contract, one of the parties (contractor) undertakes to provide for the other party (customer) a specific order, to produce a defined product or to implement a particular project. The customer pays an agreed remuneration but the contractor uses his/her own tools and equipment. The regulations on employment contracts are applicable to service contracts (Civil Law, Chapter 15, Sub-Chapter I), to the extent that they do not contradict the provisions of the subsequent sections of the Civil Law.

The subsequent sections of the Civil Law regulate the responsibilities of the contractor, the responsibilities of the customer and the procedure of terminating the service contract.

Differences between service and employment contracts

A service contract can be concluded if the contractor has to perform certain work for another person (the customer), for example, translation of certain materials, design of buildings, or carrying out repairs. If the contract does not specify that the contractor shall perform the contract himself or herself, and if such provision may not be regarded as being tacitly accepted, then the contractor at his or her own risk may entrust the performance of the order to a third party.

Conversely, the Labour Law provides that the employee undertakes to perform work subject to certain rules for work and directions given by the employer, while the employer agrees to pay the agreed salary and to provide fair and safe working conditions. The employee must perform the work in person.

The employment contract provides for more lasting and stable legal relations between an employee and an employer than a service contract provides between a contractor and a customer. However, in the case of the latter, if another order is to be performed by the contractor, a new contract may be concluded, thereby extending the collaboration.

Tax implications of employment status

The contractor who is a party to the service contract may or may not be a self-employed person. A person who is not self-employed may not be officially employed at all or may be employed by another employer. A person acquires the status of a self-employed person through registration with the State Revenue Service (Valsts Ienemumu dienests, VID) as a payer of individual income tax on income gained from economic activities.

The status of a contractor (self-employed or not) affects the payment of taxes. Employment relations are associated with two taxes – individual income tax and state social insurance mandatory contributions. Both taxes have to be paid on the remuneration received by a contractor who is a natural person since, in the understanding of the Law on State Social Insurance, a person employed on the basis of a service contract is treated like an employee.

If the contractor is not registered with the State Revenue Service as being self-employed, these payments from the remuneration must be withheld by the customer and paid to the state budget. Contractors who are registered as self-employed make the tax and social insurance payments themselves.

Likewise, the provisions of the Law on Mandatory Social Insurance against accidents at work and occupational diseases equally apply to employers and to customers who pay for the work of natural persons on the basis of a service contract.

Legal cases or proposals

There is, as yet, little awareness of the issue of economically dependent work in Latvia, and the definition of ‘employee’ is not currently a topic for discussion. Thus, no significant labour disputes, grievances or case law have addressed the demarcation between ‘employee’ and ‘non-employee’ status with a view to granting to the latter the protections and rights granted to the former. However, employers mainly have highlighted the advantages of a service contract in terms of savings on time and money, while others have noted the potential disadvantages in respect of fewer guarantees for workers.

No legislative drafts or proposals have emerged thus far on the regulation of economically dependent employment.

Data on economically dependent workers

Little statistical data are available on workers working on the basis of a service contract, and no study exists on this issue.

In 2005, 60,800 people declared themselves as self-employed in their main job: 34,400 men and 26,400 women. This total represented a decline compared with the figure for 2004. Furthermore, 20,100 people were self-employed in a secondary job – up from 9,500 people in 2004. However, it is not known how many of these self-employed workers, as well as those employed with another employer, worked on the basis of a service contract.

Moreover, no relevant statistics and studies have documented the extent and development of service contracts. Nevertheless, increased use of such contracts has been facilitated by the fact that the existing Labour Law, effective since 1 July 2002, provides for only two kinds of employment contracts – for a fixed period and for an indefinite period – but does not provide for an employment contract for the period of completion of a particular work. Thus, employers are more likely to avail of service contracts when they require a specific project to be done.

Generally, the employment contract must be made for an indefinite period, apart from cases provided for by Section 44 of the Labour Law, where it is possible to conclude the employment contract for a fixed period in order to complete a short-term job. The latter includes: seasonal work; work in such areas where the employment contract, because of the specific type of work, is usually not concluded for an indefinite period; staff replacement; odd and temporary jobs; urgent work; and employment of unemployed people in salaried temporary public works. Since recent Labour Law amendments came into force in October 2006, a contract concluded for a fixed period may not have a term lasting over three years (LV0611019I).

A service contract is allowed in special cases for short-term work with a specific project outcome. Therefore, it is used more frequently in such areas as printing work, culture, education and science, state governance and construction; and among certain professions, such as designers, programmers, lawyers, accountants, photographers, journalists or artists.

Issues of work organisation

Motives for hiring

While there is little awareness of the concept of ‘economically dependent worker’, such workers are increasingly being hired as a means to reduce costs and enhance companies’ flexibility, although they are not always part of a company restructuring strategy. Occasionally, such workers may be hired as a substitute for dependent employees or as a possible selection mechanism for future recruitment on a permanent employment contract.

Place of work and representation

According to the service contract, contractors must perform the work with their own tools and equipment, meaning that they themselves are responsible for arranging the place of work. The contractor may lease the tools and equipment required for the work, including from the customer.

The rights of persons working under a service contract to join an employer organisation are defined in the Law on Employers’ Organisations and their Associations. This law defines that a natural person or a legal entity, employing at least one employee under an employment contract, may become a member of an employer organisation. Thus, it is unlikely that an economically dependent worker could join such an association, as generally such workers are understood to have no employees themselves.

Wages and working time

Workers on employment and on service contracts may, or may not, receive the same pay. However, the overall labour costs are lower when hiring workers on the basis of a service contract, as the employer saves on employer social insurance and other employment costs.

Contractors usually regulate their own working time; under a service contract, working time is not regulated.

Regulating economically dependent employment

No special legislation exists in Latvia regulating economically dependent employment. As already noted, performance of work under a contract which is not an employment contract is regulated by the Civil Law. This law does not provide for such matters as wage levels, working time, illness and sick leave, holidays, maternity, parental or sabbatical leave, collective representation, training, health and safety, but it does provide for termination of contract and for terms of payment under a contract.

The service contract thus differs from the employment contract in that it does not include clauses on working time and job responsibilities, and does not require the employer to assume obligations towards the worker. The customer (employer) has no obligation to pay for vacation time or for the national public holidays. As part of an employment contract, the employee receives a monthly salary, whereas in the case of a service contract, the worker receives remuneration for the completed work.

Under a service contract, the legal relations between the parties are terminated on completion of the contract.

Debate on economically dependent workers

As noted earlier, no debate is currently taking place in Latvia regarding the issue of economically dependent workers, and the need to provide formal recognition of their particular status. Indeed, the concept is almost unused in Latvia, and no discussions have arisen in relation to the economic dependency of workers on an employer when working on the basis of legal relations which do not form part of an employment contract. There are no plans to introduce a specific employment status for these workers, and the notion of extending employee rights to them is not an issue.

The only issue that has been debated thus far is in terms of copyright in the case of a service contract.

Nevertheless, the trade unions are observing the possible implications for employees of increasing use of service contracts, although, so far, protection of workers on such contracts has not been among the priorities of trade unions.

Advantages of service contracts

The employers support the use of service contracts in the permitted areas of work, since it allows employers to save time and money.

It should also be noted that self-employed people who work under a service contract and pay their own taxes enjoy certain advantages over those working under an employment contract:

  • self-employed persons need not pay taxes if their income does not exceed the minimum provided for by the law, set at €770 a year or €65 a month;
  • if their income exceeds the minimum provided for by the law – of €65 per month – they may pay the mandatory social insurance contributions only from the sum of €65, disregarding their actual income;
  • the rate of social insurance contributions is lower for self-employed persons, at 32.59% of remuneration for work;
  • persons who have been registered as individual income tax payers may reduce their taxable income by justified expenditure, such as transport or telephone costs.

As economically dependent work has not yet emerged as an issue in Latvia, no trade union activity has taken place in this area thus far in relation to extending coverage, representation or collective bargaining specifically to these workers.

Comparative overview

A comparative overview of the situation in 16 European countries (15 Member States and Norway) was published in 2003 and is available online: Economically dependent workers, employment law and industrial relations. This article, compiled from the same questionnaire, serves to highlight the situation in one of the new Member States.

Raita Karnite, Institute of Economics, Latvian Academy of Sciences

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