Civil Law Contract vs Employment Contract in Uzbekistan: Taxes and Risks

The fundamental difference

Under Article 11 of the Labour Code, employment is an agreement on the employee personally performing a job function for pay, subject to internal labour rules, with the employer providing working conditions. The employee is hired to a position and has a schedule, a manager and a workplace.

A civil law contract is governed by the Civil Code. Under a works contract, the contractor undertakes to perform specific work on the customer's assignment and hand over the result by the deadline, and the customer undertakes to accept and pay for the result; the work is at the contractor's risk. Under a paid services contract, the provider renders services that have no tangible form and the customer pays for them. The key word is a result or a specific service, not working a position.

• employment contract: a job function (position), subordination to internal rules, regular pay for work, Labour Code guarantees — leave, sick pay, limits on working time;
• works contract: specific work with a result and a deadline, payment for the accepted result, risk on the contractor;
• services contract: specific actions or activity without a tangible result (consulting, training, information services), payment for services rendered.

Taxes: almost the same

The main myth about civil contracts is tax savings. The Tax Code includes in income in the form of remuneration for labour payments to individuals under civil law contracts for work and services (except income from entrepreneurial activity, i.e. payments to individual entrepreneurs).

Two conclusions follow. First, under a civil contract with an ordinary individual the company is a tax agent: it calculates, withholds and remits PIT at 12% for residents. If the tax is not withheld, the agent pays it from its own funds with a late-payment penalty. Second, the social tax base is the amount of payments under Article 371 of the Tax Code — so social tax at the general 12% rate is also charged on civil contract fees.

• PIT: 12% for a resident — under both an employment and a civil contract (Article 381 of the Tax Code);
• tax agent — the legal entity or IE paying the income (Article 386);
• social tax: base — payments under Article 371, rate for most payers 12% (Articles 404, 405);
• exception — payment to an individual entrepreneur for their business activity: this is not income in the form of remuneration for labour.

What a civil contractor does not get

Labour legislation applies to individual employment relations between an employee and an employer. A civil contractor is not an employee, so the Labour Code rules on working time, annual leave, overtime and holiday pay, and dismissal guarantees do not apply. Their rights are set by the contract and the Civil Code.

That is why courts and inspectors look closely at civil contracts under which a person in fact works "like staff": in that set-up the person is deprived of guarantees they are entitled to.

Reclassification risk

Article 11 of the Labour Code expressly prohibits civil law contracts that in fact govern employment. If such a contract is concluded, a court recognises the relationship as employment (Article 33). The employment contract is then deemed concluded on the date of the civil contract, and the relationship is employment from the day work began. The contractor may go to court even after the contract ends — within the procedure and time limits for individual labour disputes.

For the company this means granting all employment guarantees retroactively: compensation for unused leave, recording length of service and so on. In addition, violating labour law leads to a fine on the official under Article 49 of the Code of Administrative Responsibility — five to ten times the BCV.

• the contract is for a "position" rather than specific work or a service;
• the contractor follows internal labour rules and works to the company's schedule;
• pay is fixed monthly and does not depend on an accepted result;
• acceptance certificates are a formality or missing;
• the contract is renewed again and again for the same "work", and the contractor performs the same functions as staff.

When a civil contract is appropriate

If the person is needed permanently for a function in the staff schedule, the right form is an employment contract, including a fixed-term, part-time or remote work contract. If the contractor is registered as an individual entrepreneur, the contract is concluded with them as an entrepreneur and the company has no PIT tax-agent obligation.

• one-off work with a clear result: build a website, renovate premises, translate a document;
• a service not tied to a position: deliver training, a consultation, research;
• the contractor decides how and when to do the work and bears the risk of the result;
• payment is made for the result accepted under a certificate.

How to keep a civil contract a civil contract

• describe specific work or a service and its result in the subject of the contract, not a position;
• set a deadline and an acceptance procedure;
• link payment to certificates of work performed or services rendered;
• do not put the contractor on the schedule, timesheet or internal labour rules;
• withhold PIT and charge social tax on fees paid to an individual — this is a Tax Code requirement, not a sign of employment.