Gig-contract: 5 pitfalls in a contract with gig-specialist

It is now heard from everywhere about Diia.City. Some support and have already entered the new regime, while others criticize it and fear gig contracts. Is there anything to fear, and what pitfalls can gig-contract hide in it? Let’s understand together in this article.

Let’s start from the beginning

On August 14, 2021, the Law of Ukraine “On stimulating the development of the digital economy in Ukraine” (hereinafter – the “Law”) entered into force. In December 2021, the law on amendments to the Tax Code of Ukraine was adopted to prepare the tax basis for the law operation.

And already on February 8, 2022, the official launch of Diia.City (or “Diia City”) took place. Since then, a special legal regime designed to develop the IT industry has operated in Ukraine.

Diia City is a single economic and legal space for IT. Companies that join this legal regime become residents of Diia City.

Diya City is a special legal regime designed to create comfortable conditions for IT business development in Ukraine. The critical goal of Diia City is to increase the investment attractiveness of the IT sector of the Ukrainian economy.

First, it will be ensured by creating favorable tax conditions, where taxes are only slightly higher than those payable in case of cooperation with an individual entrepreneur. Instead, such transactions will be completely legal, and Diia City residents can breathe easily without fear that cooperation will be recognized as labor.

The peculiarity of the regime is that not only companies operating on the territory of Ukraine can become residents. Instead, one of the requirements for a resident of Diia City is the presence of registration on the territory of Ukraine. At the same time, the location and place of business activity must not necessarily be Ukraine.

Only legal entities can become residents, while private entrepreneurs do not have this opportunity.

Other requirements for a Diia City resident are:

• having IT business activity types codes (KVED) (performing one or more types of activities defined by law);
• the average monthly remuneration of the involved employees and gig specialists is not less than the equivalent of 1,200 EUR;
• the average registered number of employees and gig-specialists of a legal entity is at least nine people;
• the amount of qualified income is at least 90% of the amount of total revenue (for the first three months and a year);
• absence of “negative” criteria.

We already wrote about Diia City in more detail in our other article.

And there is also an exciting webinar on our YouTube channel:

So, what is a gig contract?

Currently, the most common form of cooperation with IT specialists, whether a developer, tester or designer, is the establishment of contractual relations with such specialists as individual entrepreneurs. Diia City’s new legal regime has every chance to change that radically.

A Diia City resident can cooperate with the following:

• employees based on employment agreements (contracts);
• gig specialists based on gig contracts;
• contractors and executors, including private entrepreneurs (PEs), based on civil and commercial contracts.

Thus, a gig contract is not the only reason for cooperation with a Diia City resident. The options of the model with PEs or labor relations establishing remain. Companies, in turn, have the right to choose one cooperation model or combine several.

However, it is reasonable to expect that companies that become residents of Diia City seek to take full advantage of such status. And gig contracts are concluded more often. That is why we will focus on this further.

Legal nature

The Law defines a gig contract as a civil law agreement under which a gig specialist undertakes to perform works and/or provide services by the tasks of a resident of Diia City as a customer. A resident of Diia City, in turn, undertakes to pay for the work performed and/or services provided and provide a gig specialist with proper conditions for performing work and/or providing services and social guarantees provided by the Law.

Simply put, a gig contract combines employment and civil law agreements.

Parties

A gig contract is a bilateral agreement in which the parties are:

• gig specialist, and
• Diia City resident.

A gig specialist is an individual who is a contractor and/or executor under a gig contract. She has a separate status, not as an employer or an individual entrepreneur but as a gig specialist.

In addition, a gig specialist can remain an individual entrepreneur (if he had this status before concluding a gig contract) or be registered as an individual entrepreneur, as the Law does not contain restrictions on this matter.

Agreement form

The gig contract is concluded in written or electronic form. The Law does not provide the possibility of concluding a gig contract orally.

One more nuance: the agreement will not be considered a gig contract if it is not explicitly stated! Thus, not only is the content important, but compliance with the name “gig contract” is simply mandatory when concluding it.

Key terms of a gig contract

What to write in a gig contract?

Any contract must contain essential conditions. Since a gig contract is a civil law agreement, we first consider essential conditions defined by the Civil Code of Ukraine as such.

These include:

• subject matter;
• term.

In addition to these general essential conditions, the Law also defines several conditions that must be specified in a gig contract:

• the validity period of a gig contract;
• rights, obligations, and responsibilities of parties;
• gig specialist’s remuneration;
• terms of gig contract termination.

So, does a gig contract differ from a regular agreement with an individual entrepreneur?

Yes, a gig contract differs from a regular agreement with an IE, primarily in providing social guarantees. It has the characteristics of both an employment and a civil law agreement.

A gig contract is a combination of the flexibility of freelancing and basic social security.

In addition, gig specialists can work on the client’s equipment legally and without risks of labor relations recognition. This will significantly facilitate the registration of the equipment transfer process.

Contracts are the basis of cooperation and the guarantee of successful interaction of an IT company – Diia City resident- with clients and the gig team.  See the information below to learn about the critical points of such contracts for a company engaged in IT outsourcing / outstaffing.

By default

The gig contract leaves enough room for the parties to agree on individually developed conditions. But what happens if essential issues remain unresolved?

The Law already has an answer. The legislator has defined several points that will be considered agreed upon by the parties to the gig contract in this way by default unless they agree otherwise or unless otherwise established by law.

Here are some of them:

• The indefinite term of the gig contract. A gig contract is concluded for an indefinite period.
• Auto-renew. If the parties continue to perform the gig contract after its expiration, it is considered extended for the same period and under the same conditions.
• Work hours. A gig specialist performs work (provides services) for 40 hours weekly.
• The form of giving tasks to a gig specialist. The appropriate form is electronic communications provided by a resident of Diia City and its representatives (including e-mail, computer programs, and online services).
• Equipment provision. The resident of Diia City provides the gig specialist with equipment and other means necessary for the performance of work (providing services);
• Intellectual property rights. A Diia City resident acquires intellectual property rights to a work created in connection with the performance of a gig contract at the moment following the creation of such work.

Social guarantees

The critical advantage of concluding a gig contract for freelancers used to providing services as an IE is the presence of basic social guarantees, unlike the agreement for providing services.

A gig contract fixes the fundamental guaranteed rights. For example, the Law provides an analog of leave for a gig specialist, which is in labor relations.

So, a gig specialist has the right to:

• an annual paid break in the performance of work (provision of services) lasting at least 17 working days;
• temporary disability benefit;
• a break in the performance of work (providing services) due to pregnancy and childbirth;
• and other guarantees provided by the Law.

Pitfalls of gig contract

And yet, panic is spreading on the Internet about the gig contract terms. Sometimes, you can find comments that criticize it, considered as almost slavery.

We analyze whether such concern is justified further in our webinar:

Indeed, you should not look at the gig contract with rose-colored glasses because there are also somewhat restrictive obligations following attractive social guarantees.

1. Non-disclosure agreement (NDA)

The Law provides the possibility of concluding a non-disclosure agreement with a specialist (both with a gig specialist and with an employee within the labor relations framework).

According to the non-disclosure agreement, the specialist or other person undertakes not to disclose trade secrets and/or other confidential information that belongs to or is about the Diia City resident.

And are there any fines?

This agreement may be gratuitous and provide compensation in case of its violation. Such compensation is analogous to a fine.

The Law does not limit the amount of such compensation; therefore, determining its amount remains at the discretion of a Diia City resident. On this point, you should be especially vigilant so as not to agree to excessive compensation in the event of a violation.

Such clauses can also be written in the employment contract with the Diia City resident, i.e., not only in the gig contract. In this case, the provisions of the labor legislation will not apply to such a contract.

2. Non-competition

Finally, we come to what has caused the most significant wave of outrage in the IT community.

As part of Diia City, concluding a non-competition agreement with the specialist is possible.

Such an agreement must necessarily be remunerative and executed in writing. Specific compensation is paid to the specialist for implementing such a contract. At the same time, the Law does not provide any requirements for the amount of such compensation. That is, there is room for manipulation by companies that can set a symbolic amount of compensation for formal compliance with the Law.

According to the Law, competitive actions are:

• conclusion of employment agreements (contracts), gig contracts, or other civil-law or economic-law contracts with other persons who carry out activities similar to the activities of such Diia City residents (competing activities);
• performing competing activities as an IE;
• directly or indirectly owning a share in another legal entity that carries out competing activities;
• holding the position of a member of the management body of another legal entity that carries out competing activities;
• performance of other competitive actions stipulated by the agreement.

Such an agreement forbids the specialist to carry out competing activities, including as an IE.

It is essential that the refusal to enter into a non-competition agreement cannot be a reason for terminating an employment agreement (contract) or a gig contract. That is, the specialist always has a choice as to whether to enter into such a contract.

However, companies may abuse this provision and not start cooperation without signing a non-compete agreement.

It is no secret that non-competition clauses are standard among IT companies today. As a rule, they are “sewn up” in privacy. They say: “You can’t work for someone else because you learned everything from us, which will violate our confidentiality.”

To what extent such provisions work is another question. But the famous thesis about the inconsistency of the Constitution may not always be enough. Courts decide such cases ambiguously. We wrote more about NCA here.

So, forbidding competitive activities is not new for IT contracts. In any case, it is necessary to carefully read all the conditions stipulated in the agreements for your future cooperation and not to agree to too onerous conditions.

3. Term of termination

By default, a party wishing to terminate a gig contract must notify the other party of its decision 30 calendar days in advance.

However, a Diia City resident has a little more authority in this matter than a gig specialist. At his discretion, a Diia resident has the right to reduce the notice period to the gig specialist about the unilateral gig contract termination, replacing it with a compensation payment. The gig contract determines the amount of such payment but cannot be less than the daily remuneration of the gig specialist for each working day of the reduction of the notice period.

For the gig specialist, there is a risk that the contract will be terminated before the agreed period for advance notice. On the other hand, a gig specialist is protected due to the obligation to pay compensation, the minimum amount of which is directly linked to the remuneration of one.

4. Liability

Financial liability may be imposed on a gig specialist and deducted from his remuneration.

But there is no reason to panic because such responsibility can arise only in case of damage to the property of a resident of Diia City due to fault.

Such deductions are capped at 20% of the monthly salary to protect the gig specialist.

5. Smile, you are being filmed!

Compared to the usual cooperation with IEs, Diia City residents have some extended rights to control the quality of work, including with the help of video cameras.

Such video surveillance can be carried out in public places, provided there is no interference in the personal and family life of the gig specialist.

Importantly, it is not considered an intrusion into the privacy of a gig specialist to monitor the use of equipment owned or used by a Diia City resident. So, you should be careful when using computers and other equipment the customer provides because he has every right to remove and check, for example, what resources were used.

As for video surveillance, cameras can be installed in any other company outside the legal regime of Diya City. Of course, taking into account the legally established restrictions.

Conclusions

Diia City is a special legal regime that offers special conditions for the comfortable functioning of the Ukrainian IT market.

A gig contract combines the flexibility of freelancing with the provision of basic social guarantees, such as an analog of vacation or “hospital.”

To avoid falling into one of the traps of a gig contract, carefully read the conditions before signing it. Check the gig contract for excessive amounts of compensation and obligations you will not be able to fulfill. Do not hesitate to coordinate them, building individual arrangements.