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Employment Contract, Civil Law Contract or FOP?

As AI has not yet taken over all the jobs, we still have weekdays and holidays to distinguish between working days and weekends. As you hire employees to launch your product line or to provide certain services in Ukraine, you need to choose the right form of labor relations - i.e., cooperation under an employment contract, a civil contract (CCP or CPC - a civil law contract) with a natural person, or cooperation with a private entrepreneur (FOP). The obligation to keep military service records adds to the pressure on companies. In this article, we are looking on the differences between these three forms of cooperation.


Employment Contract

An employment contract is an agreement between the employer and an employee:  

  • The employee undertakes to perform work according to the profession, position, specialty, and qualification specified in the contract, while adhering to the internal work schedule. 
  • The employer undertakes to pay salary to the employee and to provide the appropriate working conditions as stipulated by the labor regulations and by the collective agreement. 
  • The employment contract can be concluded in written or oral form.




When working under employment contract, the employees are entitled to remuneration which must be not less than the minimum wage (paid regularly at least twice a month), standardized working hours, social guarantees in accordance with the collective agreement, payments from the social insurance fund in case of sick leave/maternity leave/childcare leave, vacation, etc. Besides, the employees obtain work history insurance records which give them later the right to pension. 

Civil Law Contract

A civil law contract, or a civil contract, is an agreement signed by two Parties, usually the Client and the Contractor:

  • One party undertakes to perform services, while the other Party agrees to accept and pay for them. 
  • These relations can be established between any legal or natural persons and are not subject to the provisions of labor laws. 
  • A civil law contract must be concluded only in written form. 
  • The Contractor commits to completing the specified work and to provide a service completion document (Act), and the Client commits to paying for the results.
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When cooperating under a civil law contract, the working hours are not recorded, the contractor must not adhere to the client's schedule and is not entitles to social guarantees, vacations, or sick leave. Such cooperation can be good for both parties as it allows a lot of  flexibility and independence.

In other words, employment contracts are about controlling the process of working, whereas civil law contracts are about controlling the result of the work.  It is worth noting that usually, the duration of civil law contracts is rather short, as the goal is to accomplish a specific task and to achieve certain results. This could be one, two, six months, or longer. Although the laws do not provide for minimum or maximum duration of such contracts,  it is better not to make them longer than six months to avoid disputes with tax authorities. 
man and woman talking

Cooperation with Private Entrepreneurs (FOP)

According to the legislation, a Private Entrepreneurs (FOP) independently conduct their business activities, keep accounting records, file reports, and bear the responsibility for their actions and possible risks. Collaborating with a Private Entrepreneur (FOP) saves costs, as companies does not have any tax obligations like they have when hiring staff under an employment contract  (withholding 18% Personal Income Tax (PIT) and 1.5% military fee (MF) from each employee's income, and paying the Unified Social Contribution (USC), which is 22% of the employee's salary) . In total, when cooperating under an employment contract, the employer pays 41.5% in payroll taxes.

Instead, a Private Entrepreneur (FOP) who is a Single Tax payer, only pays  5% of their income  (or 3% of their income + 20% VAT) quarterly, and the Unified Social Contribution amount, which in that case is 22% of minimum age (1474 UAH in 2023) monthly. 

Some companies tend to use contracts with Private Entrepreneurs (FOP) as a way to hire permanent employees without entering into an employment contract (and having to pay the relevant taxes and bear the responsibility for workplace safety). It is worth noting that in such cases, regulatory authorities may impose additional tax liabilities if they find out that the relationship with a certain Private Entrepreneur is, in fact, a permament employment relationship. According to the Ukrainian legislation, companies have the right to engage in business relations with Private Entrepreneurs (e.g., with service providers) . However, if a Private Entrepreneur has been providing services to one organization exclusively for long period of time, this may raise the concern that this Private Entrepreneur is in fact a permanent employee. 

State Labor Service Inspections and Penalties 

When choosing between these three contracts, the employers must analyze if the contract they chose complies with the actual goals of cooperation and with the company's needs. Considering the possibility of State Labor Service inspections, making a wrong choice may lead to some dire consequences. The penalty for hiring an employee without any employment contract is 10 minimum wages for the first violation, or 30 minimum wages for repeating the violation within 2 years.


Please note that companies must keep military service records only for the employees working under employment contracts. In other words, neither business relations with service providers under civil law contracts, nor relations with Private Entrepreneurs (FOP) oblige companies to keep any military service records.

We hope that this article has helped you understand the differences between these three types of cooperation and choose the right option for your company.  If you have any questions, or if you are looking for an outsourced accounting partner, the Accountor Ukraine experts are happy to help. 

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