Service contracts. Case law draws the line between legality and unlawfulness.

The recent judgment of the Italian Supreme Court. Criminal Section III (dated May 4^th 2023, no. 18530) addressed the issue of service contracts – increasingly used by companies – marking the boundary between those defined as lawful operational tools and the unlawful supply of manpower.

It shall be noted that labour contracting belongs to those working relationships where there is a distinction between the final user benefitting from the service (the principal) and the de facto employer (the contractor), as is the case for the supply of labour through employment agencies and secondment: outside of these hypotheses, the intermediation of labour is considered unlawful.

In work contracts such as the one at issue, the contractor assumes the relevant business risks and uses its own means, thus also retaining the powers to direct and organise the activity of its employees in the performance of the work or service commissioned. On the other hand, the contractor will benefit from the product of such activities without intervening directly in its realisation.

The facts: the Chairman of the Board of Directors of a company operating in the catering business was convicted for his complicity – with the sole director of a company operating in business support services –circumventing mandatory rules of law or collective agreements applied to employees. The Judge of the Court of first instance stated that the two had entered into a contract for the provision of services with the object of "kitchen service, restaurant service", which allowed several employees to be de facto employed by the catering company, thus concealing a labour supply agreement in the absence of the requirements of the law.

The defence argued that the mentioned agreement provided for the contracting company to execute its activities by organising its own means at its own risk and carrying them out state-of-the-art, remaining "free to determine the manner and terms of execution of all the operations and activities that it deems necessary, useful and functional for the realisation of the service".

According to such a defence, the contract’s elements should have been enough to consider the latter lawful.

On the other hand, the Court of first instance passed a conviction judgment (later confirmed by the Italian Supreme Court as well), according to which the negotiation between the parties was, in fact, a mere provision of labour of employees formally hired by the contractor. In the Court’s opinion, the latter had only provided the manpower necessary to execute the activities agreed upon under the relevant contract while not assuming any relevant economic risk, as the employees were included in the business organisation of the client, which planned the work shifts and managed their requests for leave, holidays and rest periods.

Concluding remarks: the case at issue highlights great relevance when assessing whether a company about to enter into a contract might expose itself to the risk of criminal and civil law disputes.

As anticipated, service contracts are characterised by the organisation of means and the relevant risk-taking. More specifically, the term "means" must hereby refer to elements of a material nature (e.g., equipment) and of an intangible nature (e.g., contracts; labour relations), of which the contractor shall be the owner or have the availability and management autonomy.

Furthermore, a specific category of contracts –defined as “labour-intensive” – show the predominance of the labour aspect, as they use elements of a material nature only to a small extent (as is the case for catering or cleaning services, like the matter at issue). In such scenarios, the organisation of the work by the contractor and the exercise of the typical employer's powers by the latter become the main features (including the power of organisation, direction and control, and disciplinary power).

When these instances occur – given that the aspect related to the ownership of the tangible assets is missing – the contractor’s exercise of the typical employer's powers must be enhanced, especially from an evidentiary standpoint.

Consequently, it will be possible to prove that the principal played no role in recruiting the employees, in deciding on their number or personal identity, nor that it issued directives, defined the activities to be performed on a day-to-day basis, and directly exercised sanctioning power over the contractor's employees. This requires companies to pay close attention to both the negotiation and the execution phase of the agreement.

Possible consequences: about the possible sanctions in case of an unlawful supply of manpower, employees whom the contractor formally employs may take legal action against the principal to ascertain the employment relationship with the principal since the beginning of the contract and to obtain the relevant formal establishment.

Furthermore, in such cases, the contractor and the principal could be sanctioned with an administrative fee amounting to EUR 60.00 for each employee involved and for every working day (which increases to EUR 70.00 in case of relapse within three years). However, the fee must range from a minimum of EUR 5,000 to a maximum of EUR 50,000.

Moreover, if the unlawful contracting involves the exploitation of children, a criminal offence occurs sanctionable with a fine up to EUR 360.00 for each child employee and for each working day (up to EUR 420.00 in case of relapse within three years), besides the custodial sentence up to 18 months. 

More specifically, in the case at issue, the unlawful contract was put in place for the specific purpose of circumventing mandatory rules of law or collective agreement applied to the employees involved: such a scenario falls within the scope of Section 38-bis of Legislative Decree no. 81/2015, governing the offence of fraudulent supply of manpower. This provides the penalty of a fine of EUR 20,00 for each concerned employee and each working day, in addition to the administrative sanctions indicated above.

Finally, when unlawfully contracted, the involved employees have to challenge such conditions and claim before the competent court their right to establish the relevant employment relationship with the principal to obtain it. On the other hand, the fraudulent contract is automatically considered null and void due to the unlawfulness of its primary cause and, therefore, the involved employees must be regarded as, to all intents and purposes, to be employed by the principal, regardless of their judicial initiative.