Hiring an employee or purchasing a service - which one to choose?
If you are an entrepreneur whose workload is overwhelming, or if you need help in a field where you lack expertise, you inevitably need to seek assistance from a third party. However, it is often not clear whether to choose hiring an employee or purchasing a service. Below, we describe the legal differences between the respective contractual relationships - an employment contract and a service provision contract - and share some thoughts from a law firm's perspective that may help you decide between the two.
The Employment Contracts Act applies to an employment contract, while the contractual provisions of a service provision contract, which may take the form of a contract for services or a mandate contract, are governed by the Law of Obligations Act. The decisive difference is that a contract for services is, according to the principle of freedom of contract, almost entirely up to the parties to determine, whereas a deviation from the provisions of the law in favor of an employee under an employment contract is null and void. To obtain the necessary legal assistance, it is advisable to engage a law firm.
The most important feature of an employment contract is that the employee is subject to the employer's management and control. The parties to a contract for services are the client and the service provider, the latter of whom carries out the work with their own resources and is responsible for the manner in which the work is performed. Therefore, there is no employment relationship if the person performing the work is significantly independent in the choice of method, time and place of work. To determine the nature of the contract, it is possible to assess, for example, who organized and directed the work process, who paid for the use of tools, materials or equipment, whether payment for the work was made periodically or depended on achieving certain results, whether the employee was independent in choosing their working hours or whether there was a specific time allotted for the work, etc.
Factors to consider when making a choice
The cost of hiring an employee or purchasing a service depends on the scope of the work - of course, the hourly rate for purchasing a service is several times higher, but if the need is temporary and smaller in scale, it makes more sense to purchase a service. However, in addition to simply studying the cost table, you should also evaluate other important factors, such as the following:
- Hiring an employee is primarily advantageous because you have greater control over how and when the work is done. It is easier to assign and direct the employee's tasks. If there is a need to significantly and repeatedly change the objectives of the work during the course of the work, while abandoning previous objectives, you still have to pay the service provider for all the work done so far, which is now useless to you. This applies, in general, to employees as well, but it is primarily reflected in the wasted working time, which is usually cheaper for you.
- When it comes to hiring an employee, you can be sure that in case of urgent or unexpected tasks, you have a person on hand to assign them to. On the other hand, if you buy a service, the service provider may not be available at all, even though their skills may be essential. Of course, you can make different arrangements with a service provider, but in such cases, they may demand additional compensation for daily availability and charge significantly higher fees for urgent work.
- With an employment contract, questions related to working hours are regulated by law. There are restrictions on working hours and rest time, mandatory holidays, etc. Although this means that the employee may not be available at certain times and a contrary agreement is not possible, it still provides some certainty when planning work.
- Buying a service may be more reasonable when work is project-based or irregular. In such a situation, the employee's legal guarantees, such as rest time, minimum wage, or notice periods for termination of employment, may be harmful to you. While it is possible to hire a part-time employee, it may be challenging to find employees interested in such work, especially if it is not simple labor.
- The process of hiring an employee itself can take a lot of time and resources, so it is sometimes more beneficial to order a service, which involves only the hassle of requesting quotes and some preliminary work regarding the provider's competence. With an employee, there may also be a need to train them, while trusting and hoping that the time invested in them will not be wasted if they decide to leave the next month. Buying a service may also be more reasonable if the work needs to be done quickly, making it impossible to train an employee.
- An employee may be preferred if loyalty and dedication are important to you, for example, if you want to keep your work processes or customer relationships confidential. Although it's possible to agree with both an employee and a service provider to maintain confidentiality and non-compete obligations, it's crucial to note that a service provider typically offers the same service to multiple clients, whereas an employee only provides their work time to one employer. While it's possible to prohibit the dissemination of specific trade secrets through a contract, a service provider will inevitably indirectly share knowledge and skills acquired while working with you with their other clients, who may be your competitors. On the other hand, a post-employment non-compete clause can be added to an employee's contract, which requires payment to the employee but may be more advantageous to you than the employee becoming a competitor's assistant. Employee loyalty can be motivated by linking the company's long-term success to bonuses for the employee.
- The hiring of each individual employee can also be evaluated in the context of all the company's employees. It's easier to form a team of people who work together and are directed toward the same goals from among the employees. Within a collective of employees, you can maintain the necessary knowledge and skills for your company as older employees teach newer ones specific work skills and the unique needs of your organization. Service providers, on the other hand, operate more independently, and while they can be made to collaborate on projects, it may be more optimal in the long term to decide in favor of employees.
Entering into and interpreting contracts with the assistance of a law firm
The legal provisions that correspond to the actual content of the contract apply to the contract, even if that content differs from the legal terms used in the contract. This should also be kept in mind when entering into employment contracts and service agreements, where the parties often have an interest in choosing a form that does not correspond to the content for the purpose of optimizing costs. If the rights and obligations stipulated in the contract are characteristic of an employment relationship, then it is an employment contract even if the parties have labeled it as a contract for services and used the terms of the client and contractor.
An employment contract is special in this respect because, based on the principle of protecting the employee, any ambiguities are interpreted in favor of the employee. Thus, the Supreme Court has found that in a situation where a contract has both the characteristics of an employment contract and a contract for other civil-law services, it must be assumed that an employment contract has been entered into, and if the employer claims otherwise, it is their obligation to prove it. The court may find that the parties did not enter into an employment contract only if it is obvious.
Even long-standing practice in a certain field may not mean that the employer is acting correctly in assessing the legal relationship. The Uber case, where the UK court found that people providing services through the ride-sharing platform Uber are not independent service providers but rather Uber employees and are subject to all the rights typical of employees, is well known from recent disputes. The European Parliament is also considering a directive on improving the working conditions of platform workers, which could affect the interpretation of legal relationships in Estonia as well.
Due to the above, when choosing a contractual relationship, it is reasonable to take into account the actual content and purpose of the legal relationship and to include it in the contract, rather than providing a different contractual relationship solely for profitability reasons. This may come back to haunt you in a later legal dispute.
Lepmets & Nõges is a law firm in Estonia that is providing help with interpreting an existing contract or entering into a future contract. If it raises questions or concerns, you can confidently turn to our attorneys.