Can a services contract replace an employment contract in Lithuania?

No, not if the relationship is in fact an employment relationship. What decides is not the name of the contract but how the person works. If they perform a work function for your benefit, under your control, and are paid for it, that is an employment contract. The rules on services contracts apply only where there is no subordination. If a services contract is signed to cover an employment relationship, the rules of the relationship the parties really intended apply. A services contract fits when the person works independently: they choose how to carry out the order and they answer for proper performance of the contract themselves.

How to put an employment contract in place and when to notify Sodra (the State Social Insurance Fund Board) of a new employee, we have already answered in the FAQ on our labour law consultations page (in Lithuanian). A company’s head has rules of their own; we wrote about them in does the head of a UAB need an employment contract. This article is about where the line runs between employment and services.

How an employment contract differs from a services contract

Article 32(1) of the Labour Code of the Republic of Lithuania (DK) defines an employment contract: the employee undertakes to perform a work function while subordinate to the employer and for the employer’s benefit, and the employer pays wages for it.

The key word is subordination. It means that the employer has the right to control or direct the whole work process or part of it, and the employee follows the employer’s instructions or the rules in force at the workplace (DK Article 32(2)). In addition, the commercial, financial or production risk arising from the work function falls on the employer (DK Article 32(3)).

An employment contract is treated as concluded once the parties agree on its essential terms: the work function, the pay terms and the workplace (DK Article 33(2)). So what counts is what the parties actually agreed, not what they called the document.

Article 6.716(1) of the Civil Code of the Republic of Lithuania (CK) defines a services contract: the service provider supplies certain services on the client’s order, and the client pays for them. Part 2 of the same article draws the line: the rules on services contracts apply only to services where no employment or other relationship of subordination arises between the provider and the client (CK Article 6.716(2)).

What an independent service provider looks like can be seen from CK Article 6.717:

• while keeping to the contract, they are free to choose the ways and means of performing it (CK Article 6.717(2));
• unless the contract provides otherwise, they provide the services personally (CK Article 6.717(1)), but they may engage third parties and remain answerable to the client for performance (CK Article 6.717(3)).

An employee, by contrast, works under the employer’s rules and instructions (DK Article 32(2)).

What is looked at when the relationship is assessed

In our practice, when it is checked whether something is employment, the objective features of the actual relationship are assessed. The questions are whether the person performed a work function for the company’s benefit, whether they acted on instructions and were subordinate, whether they were paid, and whether working time and a place of work were set for them. What decides is not what the parties called the relationship or how they explained it later, but how it actually worked. So an explanation written afterwards that “it was a service” usually does not change the picture.

Signs that in practice point to employment:

• the person works at hours set by the company and at a place it names;
• the company gives them work equipment, tools or protective gear;
• they receive tasks and instructions on how to do them, not just an order and a result;
• they are introduced to the company’s internal work rules. That is an employer’s duty towards its employees: the employer allows an employee to start work only after introducing them, against signature, to the working conditions and the labour law rules governing order at the workplace (DK Article 42(4));
• they receive a fixed monthly payment regardless of the result;
• they work only for this company, as part of a team of other employees.

No single sign proves anything on its own. The whole picture is assessed.

A common situation: someone starts working “on trial”, without any contract yet, and the contract is promised later. In our view, such a “trial of services” does not protect against the relationship being treated as employment. If at the time of an inspection there is no services contract, no document showing that the person carries on self-employed activity and no payment records, the undocumented work is in practice treated as concealing an employment relationship. The Labour Code provides for a trial period inside an employment contract: the parties may agree on it when they conclude the employment contract (DK Article 36(1)).

What happens if the relationship is given the wrong name

The Labour Code says this directly: the parties may not conclude civil-law agreements on exercising the rights and duties set by the Code, and labour law rules apply to such agreements (DK Article 33(5)).

Article 1.87(1) of the Civil Code (CK) provides that where a transaction is concluded to cover another transaction, the rules of the transaction the parties really intended apply. If employment is hidden behind a services contract, labour law rules apply.

Several consequences follow:

• Duties of the employer. The conclusion of an employment contract and the hiring of an employee must be notified to the State Social Insurance Fund Board at least one working day before the planned start of work (DK Article 42(2)). When a services contract is signed, such a notice is usually not filed, so once employment is established this duty remains unfulfilled.
• Supervision. Compliance with labour law is supervised by the State Labour Inspectorate (Valstybinė darbo inspekcija) and other institutions (DK Article 18).
• Claims by the person. Labour disputes concerning rights are heard by the Labour Disputes Commission (darbo ginčų komisija) and the court (DK Article 216(1)). The body hearing the dispute may order the other party to restore the rights that were infringed and award pecuniary or non-pecuniary damages (DK Article 217(1)). It awards wages and other employment-related payments taking into account the limits in the Code and the limitation rules (DK Article 219(1)). An application to the Labour Disputes Commission must be made within three months, and in cases of unlawful dismissal within one month, from when the person learned or should have learned of the infringement (DK Article 220(1)).
• Other liability. Liability for failing to perform duties under the Labour Code is set not only by the Code but also by other laws (DK Article 20). We do not cover fines or tax consequences in this article; we assess them case by case.

In our practice, disputing that the person was an employee makes sense only where they really did work independently and this can be shown with documents: the contract, records of their self-employed activity, invoices, work for other clients. Without such evidence, it is usually wiser to correct the situation than to argue.

When a services contract is the right choice

A services contract is a lawful and often convenient form where the relationship is genuinely independent. In our practice, examples include:

• a lecturer who teaches an agreed training course to their own programme and by their own methods;
• a specialist who carries out a defined task and hands over the result, deciding themselves how and when to work;
• a consultant who works for several clients at the same time.

When we draft such a contract, this shows in the text. The contract describes the result or scope of the services, not job duties. It sets no working time and no subordination. Payment is linked to the services provided. But the text helps only if it matches what actually happens. If the contract says one thing and the person works like an employee every day, reality is what is assessed.

What to check before signing

Before choosing a services contract, answer a few questions:

1. Does the person decide how and when to do the task, or do you?
2. Do they receive instructions on the work process, or only an order?
3. Do they work with your equipment, at times you set and at your premises?
4. Does their pay depend on the services provided, or is it a fixed monthly payment?
5. Could they hand the task over to someone else, if the contract does not prohibit it?

If most answers point to your instructions, your hours, your equipment and a fixed monthly payment, the relationship is most likely employment, and an employment contract is the safer choice.

How to start

Send us the draft contract, or describe briefly what the person will do, how their work will be organised and how they will be paid. We will assess which contract fits and draft it.

Phone +370 5 212 1506, email info@linden.lt

More about this service: labour law consultations.