Contractor Agreement or Employment Contract? Classifying the Working Relationship Correctly in Latvia in 2026

Contractor Agreement or Employment Contract? Classifying the Working Relationship Correctly in Latvia in 2026

"Let's just sign a contractor agreement, it's simpler for both of us" — we hear this a lot when a company is about to bring someone new on board. If the contractor is registered as a self-employed person (a person performing economic activity) and genuinely works independently, a contractor agreement can mean a different tax and cost structure from employment: the contractor pays tax on their own profit, and the company has no employer obligations for annual leave or sick pay. But that depends on the contractor's status and the actual relationship — if the contractor isn't registered as self-employed, they already count as an employee for social-contribution purposes and the client has to pay social contributions as an employer.

The problem arises when the contract's title doesn't match what actually happens day to day. The State Revenue Service (VID) and the courts look not at what the contract is called, but at how the relationship actually works.

Key takeaways

• What matters is not the contract's title but the actual relationship — whether the person works within the employer's organised working procedure and follows its instructions, or independently carries out a specific order. For employment-law purposes the relationship is assessed as a whole.

• Tax law has a separate test: if even one of the six factors in Article 8, Part 2.² of the Personal Income Tax (PIT) Law is present, the payment is taxed as payroll income and the contractor counts as an employee for social contribution purposes.

• If the contractor is not registered as self-employed, the client already has to pay social contributions (VSAOI) as an employer and withhold PIT from the payment, and the contractor can't deduct business expenses — in that case a contractor agreement doesn't reduce taxes significantly.

• If VID finds that the wrong tax regime was applied, PIT and social contributions can be recalculated for the period established in the audit (subject to the applicable statute-of-limitations rules), with late-payment interest and fines.

• If the employer doesn't provide a written employment contract and the parties can't prove other terms, Article 41 of the Labour Law presumes that the employee has worked for three months, with normal working hours and the minimum monthly wage.

Which contract usually fits:

Two different types of contract

A contractor agreement and an employment contract aren't two versions of the same thing — they are governed by different laws and carry different tax and employment-law consequences.

A contractor agreement (uzņēmuma līgums) is a Civil Law instrument: one party (the contractor) undertakes, for payment and with their own tools and equipment, to carry out an order, make an item or complete an undertaking (Civil Law, Section 2212). If the contract is to process material, the client supplies it; if the contractor supplies the material and the client only pays for the finished item, the Civil Law treats it as a sale, not a contractor agreement (Section 2214; exceptions include, for example, construction work). In the tax test, however, the contractor not owning the materials and fixed assets used is one of the PIT Law factors (see below). The order must be carried out according to the contract and handed over to the client (Section 2213) — the handover can be documented with an acceptance certificate or another suitable document. The contractor usually sets their own working hours, methods and often location.

An employment contract is a Labour Law instrument: the employee undertakes to perform specific work, following the set working procedure and the employer's instructions, while the employer pays the agreed wage and provides fair, safe and healthy working conditions (Labour Law, Article 28, Part 2). The point is not whether the work has a specific result, but whether it's done within a process organised and directed by the employer.

Labour Law, Article 28, Part 3: "The provisions of the Civil Law apply to an employment contract insofar as this Law and other laws and regulations governing employment relationships do not provide otherwise." This rule sets out how the Civil Law supplements an employment contract. Whether a specific relationship is employment is judged by its actual substance — whether the work is done under the employer's direction (Article 28, Part 2) — not by the contract's title.

Source: Labour Law, Article 28

What actually determines which relationship it is

One of the most important indicators is subordination — whether the person works within the employer's set working procedure and under its instructions, or independently organises how their own work gets done. For employment-law purposes, though, all indicators are assessed together:

In employment-law classification, no single indicator automatically decides the type of relationship — the more indicators from the middle column, the higher the risk that a formal contractor agreement will be treated as employment. Tax law, however, has a different and stricter test — see the next section.

The Personal Income Tax Law's six-factor test

Article 8, Part 2.² of the Personal Income Tax Law provides that an individual earns income subject to payroll tax if at least one of the following factors is found:

1. the person's economic dependence on the party they provide services to;

2. not bearing financial risk if the work turns out unprofitable or debts go unpaid;

3. the person's integration into the company they provide services to — the law explains this as having a workplace or rest area, being required to follow the company's internal rules, and similar signs;

4. the person actually having days off and holidays, with how they're taken tied to the company's internal work procedure or other staff's schedules;

5. the person working under another's direction or control, without the possibility of bringing in their own staff or using subcontractors;

6. the person not owning the fixed assets, materials and other assets used in the activity (this doesn't apply to a personal vehicle or individual personal tools used for the work).

Source: Personal Income Tax Law, Article 8, Part 2.²

These factors serve a different purpose from the employment-law assessment. In employment law the relationship is assessed as a whole, but to establish payroll income it's enough that at least one of the listed factors is present. This is a tax test — it determines how the payment is taxed, but on its own it doesn't turn a civil-law contract into an employment contract under labour law. It also has social-insurance consequences: Article 1, Point 2(k) of the Law on State Social Insurance treats a person with a contractor agreement to whom even one of these factors applies as an employee.

Tax situations to keep apart

From here on, a "registered self-employed person" means a self-employed person under the general PIT regime; a person performing economic activity may also be under a different tax regime, such as microenterprise tax.

Sources: Law on State Social Insurance, Article 1, Point 2(d) and (k); Personal Income Tax Law, Article 8, Part 2.², Article 11, Part 18, and Article 17, Part 10, Point 7

What happens if there's no written contract at all

Article 41 of the Labour Law governs what happens if an employment contract isn't made in writing. If the employee and the employer, or at least one of them, have started performing their agreed obligations, an oral employment contract has the same legal effect as a written one, and the employee can demand that it be put in writing. If the employer hasn't provided a written contract and the parties can't prove a different duration, working time and pay, the employee is deemed to have worked for three months, with normal working hours and the minimum monthly wage. These are the consequences of not using written form for an employment contract — not a rule that any civil-law contract automatically becomes an employment contract.

Source: Labour Law, Article 41

Tax cost comparison, with numbers

Let's compare both options, assuming the company plans the same total budget for a specific person — €2,472.16/month — and that the contractor is a self-employed person under the general PIT regime to whom none of the six factors applies. This is a simplified example, not a universal net result for contractor agreements.

Option A — employment contract, gross salary €2,000/month:

Option B — contractor agreement, self-employed under the general PIT regime, paid €2,472.16/month (annual calculation):

Notes: Option A assumes this is the employee's main job (payroll tax booklet submitted), they have no dependants and aren't in a special social-contribution category (e.g. a pensioner or a person with a disability); the business risk state duty (€0.36/month per employee) is included where it applies to the employer. Option B assumes this is the contractor's only income for the whole year and that there are no business expenses; a self-employed person's PIT is calculated in the annual return, deducting social contributions paid and the non-taxable minimum from annual income. The general self-employed social contribution rate (31.07%/10%) is used; the rate can differ for certain categories of people.

On these assumptions, the contractor ends up with an average of €201.60 more per month than the same person would net as an employee. If the contractor isn't registered as self-employed, Option B isn't possible in this form — the client then has to pay social contributions as an employer. The cost difference alone doesn't determine the type of contract: if the actual relationship matches the signs of employment or the PIT Law factors, applying the wrong tax regime creates a reassessment risk. Under Option B, the contractor also doesn't get employee protections — paid annual leave, employer sick pay, or Labour Law protection. In this example, the self-employed person's sickness, maternity and disability insurance contributions are also paid only on €780 (above that, 10% goes to pension insurance), so those benefits would be lower than for an employee earning €2,000, and a self-employed person isn't insured against unemployment or accidents at work (Law on State Social Insurance, Article 6, Part 3).

Administrative cost comparison

VAT registration

Under the general rule, the VAT registration threshold is €50,000 — it applies to the total value, excluding VAT, of goods supplied and services provided domestically by the contractor in a calendar year, from all clients, not just you (VAT Law, Article 59). In some cases registration is required regardless of this threshold — for example, when providing services to a VAT-registered business in another EU member state (where the place of supply is determined under Article 19, Part 1) or receiving certain services from foreign providers. An unregistered contractor who receives such services from abroad or buys goods in the EU must register under a special procedure beforehand (Article 139.²). And if the threshold was exceeded in the previous calendar year, the right not to register doesn't apply in the current year (Article 59, Part 10). If you work with a contractor who is at or near the threshold, check their VAT status, since it affects whether VAT needs to be added to their invoice.

Consequences if VID finds the wrong tax regime was applied

If a VID audit concludes that the relationship is in substance employment, or that even one of the factors in Article 8, Part 2.² of the PIT Law applies to the contractor (even where the contract itself isn't treated as an employment contract), the consequences typically include:

• A tax reassessment — PIT and social contributions can be calculated as for an employee for the period established in the audit, subject to the applicable statute-of-limitations rules, with late-payment interest.

• Fines under the Law on Taxes and Fees — their size depends on the specific circumstances, so we deliberately don't give a fixed percentage here.

• Suspension of business activity — VID can suspend it, for example, if persons working without a written employment contract make up 50% or more, but no fewer than three, of the people working at the inspected site; if more than one person works without a written employment contract; or if income is paid that isn't recorded in the books and the VID report (Law on Taxes and Fees, Article 34.¹, Part 1, Points 1 and 4). For a Point 4 violation VID first issues a written warning; for a Point 1 violation it decides on suspension without a prior warning (Article 34.¹, Parts 2 and 3). These grounds concern work without a written employment contract — with a contractor agreement they only become relevant once the relationship is found to be employment.

Source: Law on Taxes and Fees

Depending on the specific reassessment, the contractor may also need to correct previously declared business income and tax records.

A practical example

Let's say SIA "Dizains" brings Anna on under a "contractor agreement" for graphic design work. Anna works every business day from 9:00 to 17:00 at the company's office, using the company's computer and software, gets daily tasks directly from the project manager, and doesn't work for any other client.

Here almost every indicator points to an employment relationship, regardless of the contract's title — the employer's working procedure, its resources, regular instructions, integration into the team. Several PIT Law factors are also present (integration into the company, working under another's direction, using someone else's fixed assets), and for tax purposes just one of them would be enough.

By contrast, if Anna worked from home, chose her own hours, used her own equipment, could bring in helpers, was paid for a finished result (say, a logo by a set deadline) and bore the risk of having to redo the work at her own expense, that would match a genuine contractor agreement.

Common mistakes

• Relying only on the contract's title. Calling it a "contractor agreement" doesn't protect you if the actual relationship is employment in substance.

• Signing a contractor agreement with an unregistered person to save on taxes. Such a contractor counts as an employee for social-insurance purposes — the client has to pay social contributions as an employer.

• Engaging one contractor full-time, long-term, on a "contractor agreement" while using the company's resources. This combination, especially together with the employer's working procedure, instructions and integration into the company, creates a higher reclassification risk.

• Not keeping records of how the work is actually organised. If a dispute or audit arises, documents that objectively show the actual work organisation and what the parties agreed are what matter.

• Assuming the contractor's own consent ("I wanted it this way") protects against reclassification. VID and the courts look at the objective circumstances, not what the parties wanted to call it.

Do it yourself or bring in a specialist?

Frequently asked questions

Is a contractor agreement always cheaper than an employment contract?

No. A significant tax difference only arises if the contractor is registered as self-employed and none of the six PIT Law factors applies. With an unregistered person, the client has to pay social contributions as an employer. And if the relationship is actually employment, the "saving" can turn into a tax reassessment with late-payment interest and fines.

How do VID and the courts decide whether it's employment or a contractor relationship?

For employment-law purposes they assess the actual relationship as a whole, especially subordination to the employer's instructions and working procedure. For tax purposes, the six-factor test in Article 8, Part 2.² of the PIT Law also applies, and one factor is enough.

Can we sign a contractor agreement with someone who works only for us?

Formally yes — a contractor agreement can exist with a single client. However, that can indicate economic dependence on the client, and economic dependence is one of the six PIT Law factors, so such an arrangement deserves a particularly careful assessment.

What happens if the employer doesn't conclude a written contract at all?

An oral employment contract has the same effect as a written one. If the parties can't prove other terms, the employee is deemed to have worked for three months, with normal working hours and the minimum monthly wage (Labour Law, Article 41).

What happens if VID finds that the wrong tax regime was applied to a contractor agreement?

Typically a reassessment of PIT and social contributions for the period established in the audit, with late-payment interest, plus fines under the Law on Taxes and Fees; in certain cases VID can suspend business activity.

Does it matter if the contractor themselves wanted to work as a "contractor"?

No. VID and the courts look at the objective circumstances of how the work is organised, not what the parties wanted or agreed to call it.

How can a company protect itself from this risk?

Before signing, check the contractor's registration and honestly assess the actual work organisation against both the Labour Law criteria and the PIT Law six-factor test — the absence of the six factors alone doesn't guarantee the relationship isn't employment. Document the contractor's independence (own equipment, own choice of hours, ability to bring in helpers, financial risk) and, if in doubt, get advice before signing, not after.

What is the Personal Income Tax Law's six-factor test?

It's the list in Article 8, Part 2.² of the Personal Income Tax Law: if even one of six factors is found (for example, economic dependence on the client, or working under another's direction without the possibility of bringing in your own staff), the payment is taxed as payroll income. It determines the tax regime, but on its own it doesn't turn the contract into an employment contract under labour law.

Does a contractor working under a contractor agreement need to register for VAT?

Under the general rule, yes — if the registration conditions in the VAT Law are met, including domestic supplies of goods and services exceeding €50,000 in a calendar year. In some cases, for example when providing services to a VAT-registered business in another EU member state (where the place of supply is determined under Article 19, Part 1), registration is required regardless of this threshold. When receiving services from abroad or buying goods in the EU, registration under a special procedure may be required (VAT Law, Article 139.²).

Conclusion

Choosing between a contractor agreement and an employment contract isn't just a formality — it's a legal classification that VID and the courts can assess regardless of the contract's title, and for tax purposes one of the six PIT Law factors is enough. A clear understanding of the actual indicators and of the contractor's status is the best protection against unexpected tax reassessments.

If you're not sure how to classify a particular working arrangement, it's better to find out before signing than after a VID audit starts.

You can calculate the employment option for your own figure with our salary calculator.

Related reading

See also: SIA vs. IK vs. self-employed, freelancer guide — self-employed or SIA, payroll taxes for employers, and hiring your first employee in Latvia.

Legal sources and references

• Labour Law, Articles 28 and 41

• Civil Law, Sections 2212–2214

• Personal Income Tax Law, Article 8, Part 2.², Articles 11 and 17

• Law on State Social Insurance, Articles 1 and 6

• Law on Taxes and Fees, Article 34.¹

• VAT Law, Articles 59 and 139.²

• Regulations on the business risk state duty in 2026

• VID: Non-taxable minimum (in Latvian)

• VID: Self-employed social contributions (in Latvian)

• VID: Social contribution rates (in Latvian)

• VID: Microenterprise tax (in Latvian)

• VID: Special VAT registration for small businesses (in Latvian)

Not sure whether your working arrangement with a specific person is classified correctly? Get in touch — we'll assess the risk and recommend the right approach.

Last updated: 27 September 2026. This article is a general explanation and does not replace individual legal advice. The classification of a specific relationship and its associated risks need to be assessed case by case.