Contract Of Service VS Contract For Service

Introduction

With the increase in activities in the economic environment all over the globe, the needs of regularizing the system, introducing regulations conforming to the ethical and legal requirements and harmonizing the varying systems have increased too. The world has become an increasingly sensitive place as far as employee-employer’s relation is concerned. The employees wish to ensure that their “right to livelihood” is secured and mentioned in every legal document that defines their relationship and commitment towards the company. Similarly, the employers are keen to establish the details of every possible job task in black & white that the employees may ever be expected to undertake. The relations in business world are not based on trust but on the written words, printed and signed by both parties. These contracts may either be between the employee and employer within a same organization or between a management and client outside organization. Within the organization, however, there may be certain types of employees who are hired to perform various tasks under various conditions for the company. These employees or members of the task force are required to be hired via a legal process that ensures their protection as well as employer’s in order to ensure delivery of results and payments in return accordingly.

In any business environment, the job scope and job hiring policies may vary according to the need and trend of the business. There are organizations that seek long term, committed and loyal employees to devote their experience and time to the organizations till forever. On the other hand, there are organizations that do not seek long term committed employees but members who are hired for a temporary purpose and who are relieved from services upon completion of the tasks. In between these two scenarios, there maybe organizations that may hire employees on both long term and short term periods. It is in the best interest of the organizations and employees to establish a detailed contract among each other in order to avoid any misunderstanding and legal complications.

Contract Of Services

In simple business terms, “Contract of Services” illustrates a contract that is established between the employer and employee for a long term services offered by the employee in return of substantial benefits and social security. The relation is often considered as a Master-Slave relationship, with obvious reference to employer as master. The contract of services allows the employee and employer to deliberately discuss and agree upon terms and conditions for a long term period. Termination of services or the service period is usually not mentioned. In cases when the validity period of contract is mentioned, it is mostly accompanied by an article for extension of services for the employer upon mutual agreement. The contract of services covers all the job scope, however generally, that an employee is expected to undertake during his tenure with the organization. These job scopes may not underline or mention the projects that he may be required to complete but the job related scopes are mentioned in order to provide him a guideline as well as to ensure obedience to organization’s goals and objectives by the new member.

The employee is made to undertake the oath to follow company policies, timings, regulations and other codes of ethic for the duration of time he is hired. Few of the terms of the contract of services are applicable even after the completion or termination of services by the employer. These may include sharing company matters, secrets and other procedural details that may affect or harm company in any way later. That is the reason the employee under contract of services is entrusted with more details and information in a company as his actions are prosecutable even when he is not member of the team. The employer bestows more benefits upon the employee as he considers him to be a long term member of the organization working in the best interest of the company. Incentives, on job training and other facilities are often rewarded to the employees hired under contract of services. It is the preferred scenario for those seeking long term commitment at their and company’s end. However, for many professionals, contract of services may not be the preferred scenario. They may opt to be affiliated with the company for specific goals and objectives and may like to be relieved upon successful completion of those goals or tenure.

Conditions To Terminate Contract Of Services

When a contract of service is terminated, the employer can remove an employee immediately from the position. A contract of service is considered broken under various conditions. These conditions are mentioned in the contract when it is signed by both the parties. Situations like absenteeism from job for over a specified time, extra leave than quota, absenteeism without prior notice or approval, prejudice, malice within company and any other legal or ethical controversy can result in the termination of the contract of services. An employer may terminate the contract of service if the employee is found guilty of misconduct, misdemeanor or negligence as well. Similarly, the employee also has the right to end the contract of service if the employer fails to fulfill his part of the contract of services such as failure to pay wages, unequal treatment and inappropriate working conditions. A contract of service can also be terminated without notice under following circumstances:

Payment to the other party or indemnity in lieu of notice

In case of a willful breach by any party of a term or condition of the contract of service (Payroll, 2010)

Contract For Services

The contract of services, on the other hand, is a term that defines the contractual obligation between two businesses or a business with a self employed individual, which in legal world is considered to be an entity when entering the contract for services. In basic terms, contract for services is a contract between two entities that binds them together for a definite period of time, for specific goals and objectives and the contract is deemed terminated upon completion of those tasks, goals or objectives. The contract of services, as understood by both parties, is for a temporary purpose, even if the duration of such a contract may last over years upon mutual agreement. But, successful completion of the objectives entitles either party for a smooth and clean break away from the contract, without jeopardizing future relations with the other party. In terms of a contract between a business and a self employed person, he/she may hire others to carry out and assist in the work and he/she is solely responsible for the satisfactory completion of the job. The contract for services is signed between the two entities to fulfill the objectives within legal means. How and who achieves those is not considered to be important at company or employer’s end. The basic concerns are with the delivery of the goals in the predetermined time period. The “employee” or the hired business is not required to follow the policies, ethics and norms of the hiring business or the “employer” unless mentioned otherwise in the contract for services. Similarly, the employee is not functioning towards the greater objectives of the organization. They are hired to fulfill or complete a small segment or portion of the business to assist it achieve its ultimate goals via employees who are hired under contract of services. The contract for services offers more freedom of operations, flexibility of working hours and liberty to finish job prior to the given period at the same payments decided earlier. The employee under contract for services is able to accept few of such contracts, contrary to an employee under contract of services who is only allowed to operate for one such contract. Though contract for services offer greater flexibility, it reduces the long term commitment and security provided by the employer or the hiring business. The employers are at liberty, mostly, to terminate the services upon completion of one such contract. They do not have to find relevant reasons or excuses to remove such hired person under contract for services. As a result, the organizations are expected to understand the compromise they have to make on the quality of workforce and the cost it may incur to them as, usually, the services offered under contract for services cost higher than the regular services offered under contract of services. The decision, at the end of the day is with the organizations to choose the mode that suits best their needs and budget.

Difference Between Contract Of Services & Contract For Services

In order to study the importance of the two, importance of the differences of the two and importance of the implication of the two, we must first realize what the differences between the two types of contracts are. In the following paragraphs, we will study the significant differences. In each of these types of contract, both parties have specific rights and responsibilities, which differ according to the type of contract in place. Contractors should be aware of their rights and responsibilities when they have a contract for services between their limited company or contractor umbrella company and their agency or end-user client.

Employer - Employee Contract = Contract OF Service

Permanent employees have a contract of service with their employer. If a worker has a contract of service with an organization, they are considered to be an employee of that organization. “Contract of service” relates to a person in employment (as in the case of a domestic servant who is described as being “in service”). The term “contract of service” is, however, referred to in the employment and tax legislation. A person who works under a contract of service is:

an “employee” for payrolls and

an “employee” for employment rights (Labour Law, 2009)

The prime rights and duties of employees under a contract of service are:

The employee operates under the supervision of their employer – they must perform the tasks they are instructed to by their management according to their job scope.

The employee is expected to work at a specific place during specific hours on specific days as mentioned in his contract of services.

The employee must present himself for work and is not allowed to send substitute for himself.

Employees have statutory rights to holiday pay, sick pay, maternity and paternity rights and redundancy payments

Employees have statutory rights regarding how they can be asked to leave their employment.

Employees enjoy a range of additional benefits, which can vary according to the employer, but might include company cars, private health insurance, staff canteens, health clubs and gyms.

Employees are not personally liable for any errors they make when completing work for their employer, nor are they expected to make good in their own time (Labour Law, 2009).

Another relationship between an employee and employer is called ‘mutuality of obligation’, often referred to in shorthand as ‘MOO’ (Abdul Aziz, 2006) Mutuality of obligation is one of the key tests of employment status and whether a contract is inside or outside of IR35. Mutuality of obligation states that an employer is obliged to provide work for an employee, and the employee is obliged to complete the work. Within the scope of their job description, employees have to complete the work that ‘comes down the pipe’, which is one of their fundamental distinctions from a contractor. If the employee fails to fulfill his obligations, the employer can take action that may ultimately result in the employee’s dismissal. Similarly, if the employer does not fulfill their obligation to the employee, the employee can take action that might result in an industrial tribunal.

Contractor - Client Contract = Contract FOR Services

Contractors have a contract for services with their client or agency. To be more precise, the contractor’s limited company or an umbrella company has a contract of service with the client or agency. “Contract for services” relates to a person who is self-employed and who provides services to clients. At the same time, self employed or free lancing individuals may also have a contract for services with the companies and businesses. A contract for services is a strictly business to business contract between two firms on a buyer and supplier basis. In case of a free lancing individual, the individual is considered to be an entity and the contract is signed by him or her as such. The client, or agency, is a buyer and the contractor’s limited company or an umbrella company is the supplier or service provider Abdul Aziz, 2006). There is no question of any employment relationship. Contractor’s companies that enter into a contract for services with another organization (including public sector organizations or not-for-profit companies) have clear rights and obligations. The key rights, obligations and responsibilities that a contractor’s limited company has under a contract for services include:

An obligation to supply services to the client according to the contract specification

An obligation to complete the project according to the contract schedule

An obligation to provide services as per the standards required by the client as agreed in the contract

An obligation to make right any errors or defective work, without additional remuneration

Liability for any errors or defects in work completed for clients, and this may expand to personal liability (assuming the contractor is a director) for worst-case scenarios, such as corporate manslaughter

The right to be paid the rate agreed in the contract, assuming the services have been provided according to the contract’s requirements

The right to be paid according to the terms agreed, such as within 7 days, or 30 days depending on the terms agreed in the contract

The right to provide a substitute to complete the work specified in the contract

Often the contractor is required to abide by any health and safety and security arrangements when working on the client’s site

The client is obliged to provide a safe working environment for the contractor.

As directors of their own limited companies, contractors also have a range of duties, responsibilities and potential liabilities under company law, which employees do not have. Self employed individuals entering the contract for services are also responsible in the same way as the directors or employees of a hired services company. If either party fails to fulfill their obligations under the terms of the contract, they are in breach of contract and can take legal action to remedy the situation. In effect, the relationship between a contractor’s limited company and the client or agency is no different from a major international corporation’s relationship with its suppliers. Contractors who are aware of the full range of issues surrounding contracts of service and contracts for service are in a much better position to judge whether their employment status is affected by IR35, and can seek professional assistance accordingly. A person who works under a contract for services, i.e. a self-employed person, is neither an employee nor a worker. There is no requirement for an employer to put such a person on the payroll; rather payment may be made on invoice. There is no entitlement to any of the employment rights available to employees and workers. Other factors, however, have been taken into consideration when courts and tribunals have endeavoured to distinguish between employment and self-employment. These include:

whether the individual must perform the work personally, or is able to send a qualified substitute

the nature of the pay and benefits that are provided by the employer

whether or not the individual has a business structure

who decides on how the contract should be performed

the extent of the financial risk borne by the individual

who provides the materials and equipment necessary for the work.

The duration of the contract is also important; the longer the engagement, the more likely it is that the relationship is employment. However, it is not a hard and fast rule. There are many contracts for services that have duration longer than many other basic contracts of services. Another simple way of distinguishing contract of services from contract for services is to consider what that the employer is “buying”:

If the employer buys an employee, there will be a lengthy recruitment process in order to find just the right person, thus contract of services will take place

If the employer buys a service, the person who will provide the service is likely to be selected by recommendation or simply by choosing an ad and, hence, the contract for services will be implemented.

A person or entity involved in one contract for services with one business may have few more contracts with other businesses at the same time. Similarly, a person who is self-employed in one kind of work may also be an employee in some other kind of work. A plumber may have various contracts with offices and buildings at the same time. A free lancer designer may be providing his services to various businesses at one instant. The individual or a firm under contract for services, in fact, opts for such contract in order to have more options and more scopes of expansion. Their nature of services allows them to handle few clients at the same time. This is one of the flexibilities of contract for services. A person’s employment status cannot be properly identified unless the whole picture is considered. One particular factor, such as whether the employer or the individual provides the equipment and materials, does not, in itself, prove employment or self-employment. All of the relevant factors must be considered and, in all cases, it is the employer that must make the decision. The employer has all of the liabilities if a person is wrongly identified as being self-employed.

At the end of the day, however, it is the employer who must decide whether a particular person is working under a “contract of service” or a “contract for services” and would, otherwise, bear the heavy financial consequences of getting it wrong.

Importance To Distinguish Between The Two

As important as it is to distinguish the black from the white, there is a need to clearly distinguish the “Contract of Services” from “Contract for Services”. The two are totally and completely different and must not be confused with each other at any time as the consequences may lead to severe results, including legal proceeding and repercussions. In the following paragraphs, we will be discussing why it is of utmost importance to understand the distinction between both types of the contracts.

Legal Protection

As stated earlier only employees / workers (those employed under a contract of service) get the protections of employment legislation. The employees under contract of services are entitled of commitment and right to livelihood to be provided by the employer. These legally approved rights are by virtue of certain employment acts prevailing in all the states around the globe. The employment acts provide legal protection to the employees in order to secure their job in return of their commitment to the company as well as to ensure their right to livelihood. In case of contract for services, since the loyalties are not related to one single entity, the legal protections in terms of the right to livelihood are reduced or absent in certain cases.

Compensations & Benefits

The companies are not required to pay incentives, benefits and other means of support and appreciation to the employees under contract for services. These benefits are only reserved for the employees hired under contract of services, unless otherwise mentioned in the contract for services. The contract must be carefully designed and it is important to understand the difference between the both as the future compensations would be derived from the terms mentioned in the contracts.

Tax & Insurance Matters

The employees hired under contract of services are required to deduct a part if their salaries as income tax. Under contract of services, the companies hiring them are often responsible for that deduction as the income tax is submitted by the companies. Since the companies are sharing part of their incomes with the employees on permanent terms, tax deductions is a shared responsibility as well. But in case of contract for services, the tax deductions are not ensured by the hiring company or the employer. The company providing services or a free lancing individual is responsible for the tax submissions. Similarly, the insurance matters under contract of services are responsibility of employer but it is contrary in case of contract for services, where the service provider or individual providing services is responsible for the insurance matters.

Health & Safety Measures

In case of contract of services, the employer is directly responsible for the upkeep of safety equipment, measures to ensure safety of its employees and provision of adequate measures in case of any mishap. The employer is required to ensure that the working environment, location and procedures are safe and hazard free for its employees at all times. In case of any incident, the liability falls with the employer and any legal action is possible against him. On the other hand, contract for services does not cover any safety measures for those providing services. Since, in most of the cases, they are working with flexibility of own space and location, the safety measures maintained at the employer’s office does not affect them. Similarly, the routine and standards practiced at employer’s company may not directly affect the service providers under contract for services. Although, it is possible that the hired employees maybe, incidentally, affected by the hazards at employer’s location, but those will not be treated or benefitted as permanent employees. The health and safety benefits provided to the employees under contract of services are far greater than those provided by contract for services. This includes wider protection such as compensation under workers compensation acts and protection under occupational health and safety legislation. The case of Barrett v Patterson & Patterson (1989-94) 2 Vanuatu LR 558 provides an example of a case in which the status of the workers (whether they were employees or company directors) needed to be determined in order to see whether they were entitled to claim for their rights under the Employment Act. Tax and insurance contributions also usually vary depending upon whether someone is an independent contractor or an employee. Vicarious liability usually only applies between employers and employees.

TESTS To Determine The Status

There are various tests designed to identify if an employee is a workman or an independent contractor i.e. if the employee must be treated under contract of services or contract for services. These tests are studies of various elements that may decide upon the status of certain employee at any organization. These various tests are discussed in detail in the following paragraphs.

Multi Factoral Test

These factors determine if the employee must be treated as one under contract of services or contract for services. A detailed study of these factors allows the organization as well as individuals to realize the true status of certain job scopes in any business environment.

Factors

Contract Of Service

Contract For Service

Remarks

Does he have his own equipment?

No

Yes

Does he hire his own helpers?

No

Yes

Is he involved in financial risks?

Yes

No

Is he responsible for investment and management

Yes

No

What is the method of payment?

Monthly / As per contract

Project based payments

What is the opportunity of profiting from sound management in the performance?

Incentives and benefits

None

Is he paid for medical leave and holiday leave?

Yes

No

Control Test

The control test calculates the degree of control the management or employer has over the employee or hired person and then decide the status of contract. The traditional test, how much control is being exercised over the worker by the employer determines the type of contract practiced in the organization. The more control exercised; the more likely it is that the worker is an employee, regardless of what the contract says. Traditionally ‘masters’ exercise actual control over their ‘servants’. However, in the recent times, since professionals are becoming more specialized, it very often happens that employees will know more about the subject area they are working in than their employers. This would mean they have more control over the decision making and implication of it than the normal employee would have under contract of services. The control test does not therefore look at whether the employer is operating actual control, but rather asks whether the employer could exercise control. Following cases are established below that would determine how varying control levels defined the status of a contract between the employer and the employee.

Humberstone v Northern Timber Mills (1949) 79 CLR 389

The plaintiff met an accident whilst changing the wheel on a truck he drove to carry good for the employer. His company sought a claim under the Workers Compensation Act, which depended upon him being an employee. The test of the relation of master and servant is still whether the contract placed the supposed servant subject to the command of the employer in the course of executing the work not only as to what he shall do but how he shall do it. The question is not whether in practice the work was in fact done subject to direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in the performance of his work resided in the employer so that he was subject to the latter‘s orders and directions.

Independence Test

It is opposite of the control test in a way that it determines if the worker has independence in deciding how the work is to be done. Can the worker decide own work hours, subcontract out work, the location to perform the tasks, the timings to follow to complete the task within the given time and other details related to the projects handed to them. The more the independence an employee has, the more “contract for service” oriented the relation between the employee and employer would be.

Integration

It is the level of cohesiveness among the job task of the hired employee or employees within the same setup. The consideration if the work being performed under the contract is integral to the operation of the business structure as a whole, or is it only a work on the side of the main business would determine the status of the contract.

Stevenson Jordon & Harrison Ltd v MacDonald & Evans [1952] TLR 101 (Eng CA)

The employee purported to assign copyright in material he had written, including public lectures he had given and a section written whilst on assignment at a client of his employer. One feature which seems to run through the instances is that under a contract of service, a man is employed as part of the business and his work is done as an integral part of the business; whereas under a contract for services, his work, although done for the business, is not integrated into it but is only an accessory to it.

Intention

This considers what the parties involved actually intended to perform. This test is tricky and must be understood in its clear context. Few suggest that if the contract mentions the relationship is a contract for services then what the contract says is decisive regardless of the amount of control/integration/economic dependence the worker has. Other, however, differ and suggest that employers and employees (contract of service) cannot avoid their obligations by writing a contract to be one for services if their true relationship is that of employment. Thus the intention of the employee and employer can also determine or alter a contract from its original shape and status if both parties have mutual agreement, even if it is against the contract between them.

Cunningham v TNT Express Worldwide (New Zealand) Ltd [1993] 1 ERNZ 695 (CA)

Where persons wish to enter into a contract for services the Court should not frustrate that wish by unswerving adherence to a test which looks to the effect of what they have agreed rather than to the purpose for which they agreed it (per Hardie Boys J at p 715) (Contractor Calculator, 2008)

Ready Mixed Concrete(South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497

Whether the relationship between the parties to a contract is that of master and servant is a conclusion of law dependent upon the provisions of the contract. If the... contract... is that of master and servant, it is irrelevant that the parties who made the contract would have preferred a different conclusion.” (Contractor Calculator, 2008)

Economic Reality

This factor studies if the worker is dependent upon the job for economic survival (can other employment be undertaken, for example). In case other jobs can be undertaken, then the particular job maybe contract for services. If no job can be taken other than the particular one, then the one in question is definitely the contract of services.

Conclusion

The subject of a legal contract between the employer and the employees is a very sensitive issue as a little misunderstanding, misinterpretation and misrepresentation may lead to serious consequences, including legal actions, prosecutions and liabilities. It cannot be determined who has more repercussions in case a contract is misrepresented; either the employer or the employee. The scenarios vary to a great degree in every case and thus the results may vary accordingly. It becomes of utmost importance for both parties to understand and finalize the contracts before realizing those into signed documents. Just when manipulation at one party’s end may be of some benefit in one condition, another situation may turn the benefits into serious consequences for the same party. Therefore, it is fair and just that the role of the hired person must be evaluated in great detail and a contract be signed accordingly for the same role. In case the roles are not clear, it is advisable to seek legal assistance. It is better to seek it before the hiring than seeking it after with threats of legal actions looming large on both parties. Better safe than sorry is the word when it comes to “contract of services” and “contract for services”.



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