Difference: Malta Employment Agreements And Services Agreements

What's Inside

This article explains in detail the different legal treatment and implications of Employment Agreements and Service Agreements undertaken in Malta, giving rise to marked differences in regards to employer and employee rights and obligations.

1. Employment Regulation in Malta

In Malta,labour and employment matters are regulated by the provisions of the Employmentand Industrial Relations Act (hereinafter referred to as the ‘Act’) andmore than a hundred subsidiary laws enacted under the authority conferred bythe Act as well as laws arising from the Civil Code. This statutoryframework sets out a number of employer and employee rights, enables parties tosafeguard their rights if threatened, and also seek redress in the case of abreach.

A party seeking to engage the services of another may do so through one of the following contractual arrangements:-

1. An employment agreement; or
2. A services agreement.

An employment agreement is generally used where one party (the employee) undertakes to perform work or services under the direction and control of another party (the employer) in exchange for remuneration. This type of relationship is characterised by elements such as the employer’s authority to determine how, when, and where the work is carried out. Employment relationships are subject to statutory protections and obligations, including those relating to working conditions, leave entitlements and termination rights, amongst others.

By contrast, a services agreement is typically used where an independent contractor or service provider undertakes to deliver a specific service to a client, usually with a greater degree of autonomy as to how the services are performed. This arrangement does not create an employment relationship, and the service provider is generally not subject to the same level of control as an employee. As a result, services agreements do not ordinarily attract the employment protections afforded under labour law, and the parties’ rights and obligations are primarily governed by the terms of the contract.

3.1. The written requirement

An employment agreement may be entered into in either written or oral form; however, the fundamental legal protections afforded to employees apply irrespective of the form chosen.¹ That said, Maltese law imposes clear transparency obligations on employers. In particular, employers are required to provide employees with written confirmation of the principal terms and conditions of employment within eight (8) working days from the commencement of employment.²

In practice, this means that even where the parties initially agree to an employment relationship orally, the employer remains legally obliged to formalise key aspects of that relationship in writing. This written statement must include information relevant to the employee, such as the nature of the work, remuneration, working hours, and other core terms governing the engagement.³ This requirement ensures that employees are adequately informed of their rights and conditions from the outset, thereby promoting transparency and legal certainty in the employment relationship.

3.2. The term of duration of an employment agreement

The employer and employee may structure their contractual relationship for either a definite or an indefinite term.⁴ Each form of engagement gives rise to different legal considerations, particularly in relation to duration, expectations, and termination.

A definite (fixed term) employment agreement is one which is intended to subsist for a specific and pre determined period or until the occurrence of a clearly identifiable condition. For such agreements to be validly characterised as fixed term, they should expressly provide that the employment will terminate upon the occurrence of one or more of the following:

1. a specified date;
2. the completion of a particular task; or
3. the occurrence of a defined event.⁵

This type of arrangement is often used where the employer’s need for the role is temporary or linked to a specific project or contingency. Given its finite nature, the terms governing renewal and early termination are significant.

By contrast, an indefinite (open ended) employment agreement does not stipulate any pre determined end date or condition for termination. Rather, it is intended to continue until it is lawfully brought to an end by either party. In such cases, termination is not automatic but is instead subject to a regulated framework, including statutory notice periods and, where applicable, the requirement for justifiable grounds. This reflects the legislator’s objective of safeguarding both employee security and employer flexibility within an ongoing employment relationship.

Both definite and indefinite employment agreements may be subject to an initial probationary period, as outlined in section 3.3 below, during which specific termination rules apply.

3.3. Term of probation

Employment agreements are generally subject to an initial probationary period of six (6) months.⁶ On the other hand, definite employment agreements are subject to a probationary period which is proportionate to the duration of the contract and the nature of the work.⁷ This period serves as an opportunity for both the employer and the employee to assess the suitability of the engagement in practice.

During the probationary period, either party may terminate the employment relationship without the need to invoke the standard rules governing termination.⁸ This provides a greater degree of flexibility at the early stage of the employment relationship.

Notwithstanding the above, where the employment has subsisted for at least one (1) month during the probationary period, the party seeking to terminate the agreement is required to give the other party a minimum of one (1) week’s notice prior to termination.⁹ This ensures a basic level of protection and predictability, even within the more flexible probationary framework.

Upon the expiry of the probationary period, the employment relationship becomes fully subject to the applicable statutory and contractual rules governing termination, as outlined in the below sections.

3.4. Termination of a definite term employment agreement

Where the parties enter into a definite (fixed term) employment agreement, the governing principle is that the agreement is intended to run its course until the occurrence of the agreed terminating condition. As a general rule, neither party should terminate the agreement prior to such occurrence. Accordingly, premature termination may give rise to significant legal consequences, including the payment of compensation as prescribed by law.¹⁰

An exception to this principle exists where the employment is terminated for a “good and sufficient cause” in terms of the applicable legislation. However, this exception is interpreted restrictively by the Maltese Industrial Tribunal, and reliance on it should be approached with caution. In practice, parties entering into fixed term arrangements should proceed on the basis that early termination is limited and may carry financial and legal implications.

3.5. Termination of an indefinite term employment agreement

A different framework applies to indefinite employment agreements, reflecting their ongoing nature. An employee may terminate such an agreement at any time and is not required to provide a reason for doing so, subject to compliance with the applicable notice period requirements. These notice periods are determined by law and generally increase in proportion to the employee’s length of service.¹¹

By contrast, an employer’s right to terminate an indefinite employment agreement is more strictly regulated. Termination by the employer is only permissible in limited circumstances, notably in cases of redundancy or where there exists a good and sufficient cause.¹²

This distinction reflects the legislator’s intention to balance flexibility in employment relationships with the protection of employee rights, particularly in the context of ongoing engagements.

3.6. Obligations of an employer

At the outset, an employer must ensure that it is appropriately registered with the Commissioner for Revenue. Furthermore, upon engaging an employee, the employer is required to notify the relevant employment authority of the engagement in accordance with applicable procedures.

In addition to initial registration obligations, employers are subject to ongoing payroll and reporting responsibilities. In particular, employers are required to withhold, on a periodic basis, the employee’s income tax and social security contributions directly from the employee’s remuneration, and to remit such amounts to the competent authorities. Employers are likewise responsible for contributing their own share of social security contributions in respect of each employee.

Beyond these payment obligations, employers must also comply with a range of administrative duties, including the submission of periodic returns and the maintenance of accurate employment records. Non-compliance may expose employers to regulatory action and financial penalties.

As an alternative to an employment agreement, a party requiring the services of another may opt to enter into a services agreement. Under this arrangement, the service provider undertakes to deliver specified services in favour of the client, typically in exchange for an agreed fee.

A key distinguishing feature of a services agreement is that the service provider operates as an independent contractor, and not as an employee of the client. As such, the relationship does not attract the statutory framework applicable to employment relationships, including the obligations and protections outlined in section 3 above. Instead, the parties’ rights and obligations are primarily governed by the terms of the agreement itself, subject to general principles of contract law.

From a termination perspective, greater flexibility typically applies in the context of services agreements. While it is common for such agreements to include express termination provisions, the absence of such clauses does not preclude termination. In certain circumstances, a services agreement may be terminated without notice, subject to the applicable legal framework and any limitations agreed between the parties.

Upon termination, the service provider may be entitled to recover payment for services rendered and expenses properly incurred in the performance of the contract.

Given these considerations, it is essential for parties entering into services agreements to clearly regulate matters such as scope of services, payment terms, and termination rights, in order to ensure legal certainty and minimise the risk of disputes.

Footnotes

1 Article 2(1) of the Act

2 Regulation 4 of theInformation to Employees Regulations (S.L. 452.83)

4 Article 33 of the Act

5 Section2(1) of the Contracts of Service for a Fixed Term Regulations (S.L. 452.81)

6 Article 36(1) of the Act

7 Article 36(1a) of the Act

8 Article 36(2) of the Act

9 Article36(2) of the Act

10 Article 36 (11) and (12) ofthe Act

11 Article 36(5) of the Act

12 Article36(14) of the Act