Concern over rise in number of service contracts

Latvian firms are increasingly replacing employment contracts with ones not bound by labour legislation, the State Labour Inspectorate has reported. These more flexible contracts, such as service contracts or author contracts, can have advantages both for company management and for employees, but only labour legislation guarantees safe working conditions, fair wages, employee representation and protection. It also creates the legal basis for social dialogue.

Two types of labour legislation

In Latvia employment relations may be based on two unrelated types of legal framework – labour law and civil law. The 2002 Labour Law was passed with a related package of employment protection legislation. Legislation stemming from the Labour Law creates a legal basis for social dialogue as it includes rules regarding employee representation and the rights of employee representatives.

However, in special cases, employment can be covered by a service contract or an author’s contract governed by civil law. A service contract can be agreed between a company and a worker for performing a specific task. The contract specifies the one-off task, the pay procedure, and the rights and responsibilities of both parties. An author’s contract covers the sale of an author’s work (an article, translation, or lecture). Thus civil law offers more flexible ways of legally regulating work. In contrast to the Labour Law, which concentrates on employment relations, civil law regulates employer-worker agreements of buying/selling with the same norms pertaining to the protection of the worker and employer. In some types of contracts governed by civil law, the employer, as the buyer of a service or piece of work, may opt not to make social security payments, leaving them to the discretion of the ‘seller’, the employee.

New trends in the use of labour regulations

However, the State Labour Inspectorate (VDI) is reporting that economic conditions have led to companies concluding service contracts instead of employment contracts.

The first such recorded case was in 2006, when the Jelgava Bus Fleet (JAP) concluded service contracts with minibus drivers, taxi drivers, and cashier-attendants. These workers had registered themselves as self-employed, but provided their services using vehicles belonging to JAP. Inspectorate officials were called in when employees complained and, after considering the counter-plea filed by the company, concluded that the jobs in question were equivalent to permanent employment and that the content of the service contracts was also equivalent to an employment contract. JAP was then ordered by the inspectorate to issue employment contracts to the workers. The company appealed the decision, but this was rejected by the Regional Administrative Court on 30 March 2010.

JAP Chair Pēteris Salkazanovs said in newspaper interviews that the number of company employees had been cut from 64 to 22, and that their salaries had also been reduced. However, the money saved from this had meant the company could upgrade its fleet and improve working conditions and business culture. Bus drivers received special uniforms, and bus stops and passenger information systems were improved.

However, in 2011, the VDI discovered that the company had not complied with any of the court rulings. It expressed concern that other companies might also make improper use of civil employment contracts. Service contracts are widely used in small and micro-enterprises. These constitute almost 98% of all Latvia’s companies and the number of SMEs is likely to rise due to state support.

Commentary

It is difficult to identify cases in which an employment contract has been replaced by a service contract, because contracts are confidential. Misuse of service contracts usually comes to light when the VDI carries out an inspection, or when an employee lodges a complaint. Service contracts, although flexible, relieve the employer of responsibility for proper working conditions and work safety, and from compliance with regulations governing working hours, rest periods, and employee representation. Employees with service contracts are not usually covered by collective agreements. The VDI’s concern about the excessive use of service contracts is therefore justified.

Raita Karnite, EPC Ltd.

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