Employment contract or civil law contract: when it gets reclassified

Choosing between an employment contract and a civil law contract in the Republic of Uzbekistan looks like a question of saving money and turns out to be a question of risk. The saving is smaller than assumed, and the consequences of reclassification are counted over the whole life of the relationship rather than from the date of the inspection.

The difference between the two contracts lies not in the title or the wording but in what the parties actually do.

What is the fundamental difference?

An employment contract covers the work process: a person performs a job function, follows internal labour rules and is paid for labour. A civil law contract covers a result: the contractor delivers work or a service and is paid for it, remaining independent.

Employment relations are governed by the Labour Code of the Republic of Uzbekistan, civil law ones by part one of the Civil Code of the Republic of Uzbekistan of 21.12.1995.

What makes a relationship look like employment?

An inspector looks at the facts, not at the text of the contract. The features that together point to employment:

• the contractor works to the company's schedule and on its premises;
• the work is continuous rather than a one-off result;
• payment is regular and fixed, unrelated to the volume delivered;
• the contractor holds a place in the structure: reports to a manager, joins planning meetings, has a corporate mailbox and access rights;
• the company provides equipment and materials;
• the contract is renewed month after month with the same subject.

One feature settles nothing. Three or more, with no acceptance certificates naming a specific result, is the standard picture of reclassification.

What does reclassification cost?

The consequences run over the whole period during which the relationship was in substance employment.

1. Assessment of personal income tax and social tax under the Tax Code of the Republic of Uzbekistan for the whole period, with a late payment charge for each day.
2. Restoration of employment guarantees: leave, compensation, length of service. The employee can claim these, and time works against the company.
3. Administrative liability for breaching the rules on formalising employment relations.
4. Loss of the reduced rate at an IT Park resident: if the team was moved to contracting, the reduced 7.5% rate was applied without grounds and the difference is assessed.

The saving is modest in any case: social tax at 12% is charged on the payments under the general rules, and contributions to individual funded pension accounts are charged on civil law contracts too. The arithmetic is set out in the material on payroll taxes.

Why does contracting fail an IT Park resident?

Here the saving works against you twice.

The reduced personal income tax rate of 7.5% at a resident of the Technological Park of Software and Information Technologies (IT Park) applies to payments under employment contracts. Moving developers to civil law contracts removes that effect: the payments are taxed at the general rate of 12%.

The second effect concerns the application. The directorate assesses whether the company runs the declared activity with its own resources, and staffing data forms part of the package. A company whose entire development is subcontracted has to explain that separately. The IT Park residency quiz checks your position against this and the other criteria.

When is a civil law contract appropriate?

Contracting is a normal instrument when it reflects reality.

• A one-off task with a measurable result: an audit, a design mock-up, a translation, implementing a specific module.
• The contractor works independently: own equipment, own schedule, other clients in parallel.
• There is an acceptance certificate describing the result, not "services for the month".
• The relationship is not extended indefinitely with the same subject.

The test for sound contracting is simple: if the contractor delivers early and leaves, the contract is performed. If that is impossible, the relationship is employment.

What comes next

The form of engagement is worth reviewing not at hiring but when the nature of the work changes: a contractor who started with a one-off task is often, six months later, working as a member of staff on the original contract.

TheBux runs HR administration and payroll for companies in the Republic of Uzbekistan, including engaging foreign employees — the scope is set out on the service page.