SERVICE VS. EMPLOYMENT CONTRACT: WHAT YOU MUST KNOW

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In business practice, enterprises frequently enter into consultancy contracts, collaborator agreements, or service contracts with individuals to perform professional work. However, choosing a particular contract title does not automatically mean that the relationship between the parties is classified as a civil relationship. Where the terms of the agreement and the actual manner in which the work is performed reflect the nature of an employment relationship, the enterprise may still be required to fulfill its obligations to participate in compulsory social insurance (hereinafter referred to as “compulsory social insurance”) on behalf of the individual.

This article analyzes the criteria for identifying an employment contract, distinguishes it from a service contract, examines the associated legal risks, and proposes solutions for enterprises when entering into and performing contracts.

1. Does the Contract Title Determine the Obligation to Pay Compulsory Social Insurance Contributions?

In production and business activities, engaging individuals to provide consultancy, marketing, brand development, corporate management, or other professional services has become increasingly common. Rather than recruiting employees under employment contracts, many enterprises choose to enter into service contracts or consultancy contracts to access external professional resources while maintaining flexibility in their business operations.

In principle, this is an exercise of the parties’ freedom to agree on and select the form of contract in civil transactions. In practice, however, there are cases in which an agreement is titled a “service contract” while the individual performing the work regularly receives periodic payments and is subject to the enterprise’s management and direction in a manner similar to that of a regular employee.

This raises the need to correctly determine the legal nature of the relationship between the enterprise and the individual providing the services. Does an individual who signs a long-term consultancy contract, receives monthly service fees, and performs work for an enterprise automatically fall within the category of persons required to participate in compulsory social insurance? Where is the boundary between an independent service provision relationship and an employment relationship? What should enterprises consider to minimize their legal risks?

2. Legal Grounds for Determining the Obligation to Participate in Compulsory Social Insurance

2.1. The Principle of Determining Employment Relationships Based on Their Actual Nature

One of the fundamental principles of Vietnamese labor law is that an employment relationship must be determined based on the substance and actual nature of the agreement, rather than solely on the title of the document.

Under Point a, Clause 1, Article 2 of the 2024 Law on Social Insurance, individuals working under indefinite-term employment contracts or fixed-term employment contracts with a term of at least one month are subject to compulsory social insurance.

This provision also applies where the parties use another name for their agreement, provided that its contents reflect work for which remuneration or wages are paid and one party exercises management, direction, and supervision over the other.

This provision is consistent with Clause 1, Article 13 of the 2019 Labor Code. Accordingly, where the parties use a different name for their agreement but its contents demonstrate work for which remuneration or wages are paid, together with the management, direction, and supervision of one party, the agreement is still classified as an employment contract.

Based on these provisions, three fundamental legal elements should be considered:

First, the performance of work: The individual performs one or more tasks in accordance with the enterprise’s requirements and the parties’ agreement.

Second, the payment of remuneration or wages: The enterprise is obligated to pay the individual an amount of money in exchange for the performance of the agreed work.

Third, management, direction, and supervision: The individual is subject to the enterprise’s control during the performance of the work, rather than merely being subject to checks on the results or quality of the services provided.

Among these elements, management, direction, and supervision are particularly important in distinguishing an employment relationship from an independent service provision relationship.

It should be noted that periodic payments or the performance of work over an extended period do not automatically establish an employment relationship. Conversely, merely describing an individual as an independent service provider in the contract is insufficient to exclude compulsory social insurance obligations if the actual working arrangements demonstrate the essential characteristics of an employment relationship.

2.2. Distinguishing Service Contracts from Employment Contracts

Under Article 513 of the 2015 Civil Code, a service contract is an agreement between parties whereby the service provider performs work for the service user, and the service user is obligated to pay the service fee.

In essence, a service contract focuses on the provision of specified work or service results as agreed by the parties. Within the scope of their commitments, the service provider has the right to independently organize and select the methods of performing the work, and is responsible for the quality, timeline, and results of the services provided.

By contrast, an employment contract establishes a relationship between an employee and an employer, under which the employee performs work subject to the employer’s management, direction, and supervision and receives wages in accordance with the agreement.

The main distinguishing characteristics can be summarized as follows:

Criteria	Service Contract	Employment Contract
Subject matter	Work or services as agreed by the parties	Work assigned or arranged by the employer
Degree of independence	The service provider independently organizes the performance of the services within the agreed scope	The employee is subject to the employer’s management and direction
Working time and location	Generally determined by the service provider	May be determined or agreed upon by the enterprise
Payment mechanism	Service fees based on workload, stages, or results	Wages paid in accordance with the agreement and applicable payment arrangements
Main responsibility	Ensuring the quality, timeline, and results of the services	Performing assigned work and complying with obligations under the employment relationship
Compulsory social insurance	Does not arise solely from the execution of a service contract	Arises when the statutory conditions for compulsory participation are satisfied

The above table is intended only as a general reference for identifying the nature of a contractual relationship. No single characteristic is decisive in every case. Classification must be based on an overall assessment of the contractual terms, relevant supporting documents, and the actual arrangements for organizing and performing the work.

3. Identifying an Employment Relationship Through a Practical Case Study

3.1. Overview of the Case

An enterprise operating in the trading and interior decoration sector enters into a consultancy contract with an individual to provide marketing consultancy, brand development, and business strategy services.

The contract is signed for an extended term and stipulates a fixed consultancy fee of VND 45,997,200 per month, payable between the 25th and the 30th day of each service period.

Notably, the contract does not specifically stipulate fixed working hours, a fixed workplace, leave entitlements, internal labor regulations, or disciplinary measures. However, it contains a provision requiring the service provider to be subject to inspections and to regularly report on the work performed to the enterprise.

In addition, the enterprise withholds 10% personal income tax from payments made to the individual. The individual does not participate in social insurance at another entity and has no other source of income during the year under consideration.

Following a comparison of tax and social insurance data, the social insurance authority issues a notice requesting that the enterprise review its participation in and payment of social insurance for the individual.

This situation requires two issues to be assessed simultaneously: the legal nature of the consultancy contract and the corresponding obligation to participate in compulsory social insurance.

3.2. The Contract Term and Payment Method Are Not Decisive Factors in Determining the Nature of the Relationship

First, it should be affirmed that a long-term contract is not, by itself, an independent ground for determining the existence of an employment relationship.

For professional, strategic, or ongoing consultancy services that require monitoring over a certain period, it is entirely possible for an enterprise to enter into a consultancy contract lasting six months, twelve months, or even longer.

Similarly, paying service fees on a monthly basis does not automatically establish an employment relationship. The parties may agree to make payments according to specific stages, service periods, or the progress of service provision to facilitate financial management.

However, it is necessary to distinguish between periodic payments for services and periodic wage payments to employees.

If an amount is paid in exchange for an individual’s regular performance of work under the enterprise’s assignment and control, without being linked to any identifiable service deliverable or result, this may indicate that the actual relationship has the nature of an employment relationship.

Conversely, if the payment represents the value of a service package and is linked to the scope of work, implementation schedule, deliverables, and acceptance responsibilities, there are stronger grounds for classifying the relationship as an independent service provision arrangement.

Accordingly, for long-term consultancy contracts, enterprises should clearly specify the total service value, implementation stages, acceptance criteria, and corresponding payment methods. This helps demonstrate more clearly that the payment mechanism is based on a civil contractual relationship.

3.3. Does the Service User’s Right to Inspect and Supervise the Work Constitute the Right to Manage Employees?

This is one of the issues most likely to give rise to disputes when determining the legal nature of a contract.

Under the characteristics of a service contract, the service user has the right to require the service provider to perform the agreed work properly, inspect progress, assess quality, and request reports on the results of the work.

Therefore, a contractual provision requiring the service provider to be subject to inspections or to submit regular reports does not automatically demonstrate the existence of an employment management relationship.

However, the content and scope of such inspection rights must be carefully examined.

Where the enterprise only checks the progress, quality, and conformity of the service results against the agreed requirements, this constitutes supervision of the performance of a service contract. In such circumstances, the service provider retains the right to independently select the methods, timing, and manner of performing the work within the agreed scope.

Conversely, if the enterprise regularly assigns specific tasks, determines how the work must be performed, requires the individual to comply with fixed working hours, be present at a designated location, obtain permission for leave, and submit to direct management throughout the working process, these factors may indicate that the enterprise is exercising its authority to manage an employee rather than merely inspecting service results.

Accordingly, in the case described above, the provision on work inspections and reporting is insufficient, on its own, to conclude that the consultancy contract is substantively an employment contract. The enterprise should further review the actual arrangements for coordination, work assignment, and supervision to determine whether the individual genuinely maintains independence in providing the services.

3.4. Do Personal Income Tax Withholding and the Individual’s Non-Participation in Social Insurance at Another Entity Determine the Enterprise’s Social Insurance Obligations?

The enterprise’s withholding of 10% personal income tax from payments made to the individual is not a decisive factor in determining the legal nature of the contract.

Similarly, the fact that the individual does not participate in social insurance at another entity or has no other source of income does not automatically establish an employment relationship with the enterprise that has entered into the consultancy contract.

Such information may be relevant data when reviewing tax and social insurance obligations. However, it cannot replace an assessment of the elements constituting an employment relationship under Article 13 of the 2019 Labor Code and Article 2 of the 2024 Law on Social Insurance.

Therefore, enterprises should not rely solely on tax withholding documents, payment methods, or the individual’s social insurance participation status at another entity to determine their obligations. The decisive factors remain the substance of the agreement and the actual manner in which the parties perform the work.

4. What Should Enterprises Do to Minimize Legal Risks?

Based on the above analysis, enterprises should consider the following matters to minimize legal risks when entering into service contracts, consultancy contracts, or collaborator agreements with individuals:

First, correctly identify the need for outsourced services and the nature of the relationship with the individual.

Before entering into a contract, the enterprise should clearly determine whether the individual is being engaged to provide independent services or to perform regular work within the enterprise’s organizational structure. Where the enterprise intends to recruit and manage personnel in the capacity of employees, it should consider entering into an appropriate employment contract.

Second, clearly define the scope of work and service deliverables.

A service contract should specifically describe the work to be performed, deliverables, implementation schedule, evaluation criteria, and acceptance procedures. Clearly defining the subject matter of the services helps distinguish the obligation to provide agreed results from the obligation to perform work under an employer’s assignment and direction.

Third, ensure the independence of the service provider.

Within the scope of the agreement, the enterprise should respect the service provider’s autonomy in selecting the methods, timing, and manner of performing the work. Inspections and supervision should focus on the progress, quality, and results of the services. The enterprise should avoid managing the individual as if they were an employee where the parties have established an independent service relationship.

Fourth, review the consistency between the contractual terms and actual performance.

The enterprise should retain the contract, appendices, work reports, acceptance records, invoices, and payment documents as evidence of the service provision process. In particular, the actual manner in which the services are performed must be consistent with the nature and terms agreed upon in the contract.

Fifth, fulfill compulsory social insurance obligations where the actual relationship is an employment relationship.

Where a review establishes that the individual performs work under an agreement involving remuneration or wages and is subject to the enterprise’s management, direction, and supervision, and the statutory contract-term conditions are satisfied, the enterprise should enter into an employment contract and register the individual for compulsory social insurance in accordance with applicable laws.

5. Conclusion

In conclusion, determining whether an agreement is a service contract or an employment contract does not depend entirely on its title. Instead, it must be based on the contractual terms and the actual nature of the relationship between the parties during performance. In particular, three elements must be considered: the performance of work, the payment of remuneration or wages, and the management, direction, and supervision exercised by one party.

In the consultancy contract scenario discussed above, the long contract term, monthly payment of service fees, 10% personal income tax withholding, and contractual requirement to submit work reports are insufficient, on their own, to establish that the relationship between the enterprise and the individual is an employment relationship. The enterprise must further assess the individual’s degree of independence in performing the work, particularly their autonomy over working time, working methods, and the extent of the enterprise’s control.

Therefore, enterprises should exercise caution when selecting the appropriate contractual form and ensure that the agreed terms are consistent with the actual manner in which the work is performed. Correctly identifying the legal nature of the relationship from the outset not only helps enterprises fulfill their social insurance obligations but also minimizes the risk of disputes and other related legal liabilities.

If your enterprise encounters difficulties in distinguishing between service contracts and employment contracts, determining compulsory social insurance obligations, or reviewing contracts already entered into with individuals, TLA Law Firm is ready to provide legal advice, assess relevant documents, and recommend appropriate solutions in accordance with applicable laws.

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TLA Law Firm is one of the leading law firms, with a team of lawyers and experienced legal professionals in criminal law, civil law, enterprise law, marriage and family law, and other practice areas. We are ready to assist and address your legal concerns. If you have any questions regarding this matter, please contact us for further advice.
Lawyer Vu Thi Phuong Thanh, Chairwoman of the Members’ Council, TLA Law Company Limited, Hanoi Bar Association, Email: vtpthanh@tlalaw.vn
Lawyer Tran My Le, Director, TLA Law Company Limited, Hanoi Bar Association, Email: tmle@tlalaw.vn
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