Legal Relationships between Startups and Talents: Three Common Types of Labor Service Contracts

In addition to our previous articles discussing about some crucial factors that startups should be aware of when recruiting employees and entering into the employment agreement with employees , we would like to introduce some alternative legal mechanisms that startups may consider when they recruit talent.

Primer for Startups: How to Enter Into Proper Documentation with Employees

Characteristics of Employment Agreement, Mandate Agreement and Independent Contractor-ship

With respect to contracts for labor services, the rights and obligations may vary depending on level of subordination between labor service providers and recipients. In practice, three most common types of labor service contracts are: (1) employment agreement, (2) mandate agreement, and (3) independent contractor-ship. There are also some mixed-type contracts between/among these types of contracts. However, in order to provide a clear comparison between the above three-most-common types, we will set aside the mixed type, and introduce the characteristics and differences of these three most common types only.

(1) Employment Agreement

To be more specific from the legal perspective, “labor contract” and “employment agreement” are not the same. However, in practice, most employment agreements under the Civil Code can be regulated as “labor contract” under the Labor Standards Act (LSA). Hence, we will refer to such agreements collectively as the “labor and employment contract.”

The main characteristic of a labor and employment contract is the high extent of direction and supervision, that is, the service provider (referred to as “employee”) is under a relatively high extent of direction and supervision of the paying party (referred to as “employer”). The employee must comply with the workplace rules made by the employer, must work at the time and place designated by the employer, and is subject to employer’s evaluation of the performance, etc. Both full-time employees (who work five days a week and eight hours a day) and part-time employees (who work only on a part-time basis) are under this category.

(2) Mandate Agreement

A mandate agreement usually involves a principal assigning a service provider (referred to as the “mandatary”) to handle specific matters. The mandatary has the right to decide on the method or approach to handle the assigned matters. Generally speaking, the LSA does not apply to a mandate agreement. Instead, a mandate agreement is subject to the Civil Code, according to which either party may unilaterally terminate the mandate agreement at any time, provided that certain damage liabilities may be imposed on a case-by-case basis. The relationship between CPAs or legal counsels and their clients usually falls within this category. General managers and officers of a company, if being assigned with independent judgment and discretion, are usually also considered having a mandate relationship with the company.

(3) Independent Contractor-ship

Under an independent contractor-ship agreement, the service provider (referred to as the “independent contractor”) provides the agreed service within a definite scope to the paying party (referred to as the “proprietor”), and the proprietor pays the independent contractor after the completion of the service. In general, an independent contractor has the freedom to determine its own labor activities and working hours, and bears the risk of the business, with a low level of subordination to the proprietor. The LSA does not apply to independent contractor-ship either. An independent contractor-ship agreement is also subject to the Civil Code, and under the Civil Code, the proprietor may unilaterally terminate the contract at any time prior to the completion of the service, provided that certain damage liabilities may be imposed on a case-by-case basis. Independent contractor-ship is quite common in the startup world. For example, when a startup outsources certain development and maintenance of certain functions of their products to external engineers, or when it hires a cybersecurity firm to perform vulnerability assessment and penetration test, etc.

We summarize the above distinguishing features of the above three types of labor service contracts as follows:

The Differences among Labor and Employment Contract, Mandate Agreement, and Independent Contractor-ship

Under Taiwan laws, the LSA only applies to labor and employment contract, while Civil Code governs mandate agreement and independent contractor-ship. This is because employees under labor and employment contracts are considered as “internal” members of companies and highly subordinate to their employers, and should be provided with certain basic protections. Hence, LSA is enacted to provide minimum standards for working conditions, protect workers’ rights and interests, strengthen employee-employer relationships and promote socioeconomic development.

With respect to the mandatary of mandate agreement and the independent contractor of independent contractor-ship, it is considered they have greater discretion over how services are provided and the arrangement of their working hours, and they bear business risk on their own. Most of the time, the mandatary and the independent contractor stand on an equal footing with their counterparties; therefore, the parties enjoy greater extent of freedom of contract to negotiate and determine the content of contracts under the applicable laws.

Our Advice to Startups

Although the three labor service contracts are governed by different rules under the applicable laws, there are often cases where contracts combine one of the labor service contracts with the other(s) and make it difficult to conclude which type of labor service contracts they are. For example, there have been controversies surrounding the legal relationship between insurance companies and their salespeople, and the legal relationship between food delivery platforms and their delivery drivers. Different courts’ judgments also vary in the characterization of these legal relationships. Therefore, we recommend that entrepreneurs consult with professional lawyers when they plan to recruit talent, so as to understand the differences between different labor service contracts, have a basic knowledge of employment laws and regulations, and select the appropriate type of contract to safeguard the interests of both parties.