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Copy of CONTRACT OF SERVICE VS. CONTRACT FOR SERVICE


A contract is an agreement between two parties which is legally binding, mutually beneficial and clearly defines the obligations and rights of both the parties. A contract of service is different from a contract for service and are terms used to distinguish between the basic nature of service provided by an employee/ worker to the employer/ organization. While the contract of service is between an employer and person who is in employment of the employer where employer has a power of control over the worker and the worker is bound to carry out activities as per the instructions of his employer, contract for service is between an employer/ organization/ client and a person who provides his services i.e. independent contractor where he is only under the order to execute the services and is free to use his methods and discretion. There is a thin line of demarcation between an employee and independent contractor and in order to control the overlap of these concepts, the relationship between the employer and the employee is to be determined according to facts and circumstances of each case such as the nature of the work, wages, power of dismissal, way of executing the services etc. 

This bifurcation between the workers is very significant when it comes to the question of employment, welfare benefits, disputes, dismissal etc. as these actions are only applicable to the employees and not independent contractors. Independent contractors are generally not entitled to any benefits and rights that are provided under contract of service as they have their own business and are ‘self-employed’ where they themselves are liable for what work is to be carried out and by whom. 

The difference between an independent contractor and worker and between contract for service and contract of service is well-understood. A “contractor” is someone, who for his independent business, undertakes to do specific jobs from other persons without submitting himself to their control in respect of the details of the work.

For determining the difference between an employee and an independent contractor, the appropriate test would be to determine what kind of power does the employer retain over its employees for direction of work and control over the manner in which the work is to be done. If an employee is directed, supervised and beholden with respect to the manner of doing the work, he is not an independent contractor but an employee. 

However, the legal position is changing frequently with respect to labour matter, and purpose-oriented interpretations are placed thereon.

Test of Control and Supervision

For distinguishing the ‘contract of service’ (i.e., an employer-employee relationship) from a ‘contract for service’ (i.e., an independent contractor-ship), the Supreme Court of India in the decisions of 1950s has relied upon the test of ‘control and supervision’ which was developed under and by the British jurisprudence. Supreme Court for the first time took the question of whether the person is an “independent contractor” or an “employee” in the matter of Shivnandan Sharma v. Punjab National Bank Ltd and held that “control and supervision” are the crucial point to decide the relationship between two parties. Further, Supreme Court in the matter of Dhrangadhra Chemical Works Ltd. v. State of Saurashtra, decided that the control and supervision test may be taken as prima facie test for determining the relationship of employment. 

Later on it became impossible to define and decide the level of supervision and control as the extent and nature of control varies from business to business. The judicial dicta therefore suggested that correct method of approach, would be to consider whether having regard to the nature of work, there was due control and supervision by the employer. It means the greater the amount of direct control exercised by the employer over the person rendering services, prominently it would be logical to hold that it is a contract of service. The test of “control and supervision was broadly dependent on the parameter that whether the employer had the power to direct and control the work of its employee and the manner in which he is supposed to be doing that work and if this is the case the ‘contract of service’ existed. On the other hand if the working relationship between two persons was where the establishment can only direct the contractor for what is to be done and not the manner in which the work is to be done, the said relationship was considered to be that of ‘contract for service’. 

Test of Organisation

Later on, the emphasis shifted to ‘integration/organisation test’, namely, whether the person in question was a part and parcel of the establishment/ organisation which was also developed under the British jurisprudence. The Supreme Court for the first time observed the ‘integration test’ in Workmen of Nilgiri Co-operative Marketing Society Limited v State of Tamil Nadu and Ors. The basic parameter of the ‘integration/organisation test’ was to evaluate whether the person (worker) concerned was fully integrated into the employer’s organisation, or remained independent of it. As per the ‘organisation test’, if the worker was employed as part of the business, and his work was done as an integral part of the business; the working relationship was of the nature of a ‘contract of service’, whereas, if the worker’s work, although done for the business, was not integrated into it but was only accessory to it; the working relationship was of the nature of a ‘contract for service’.

Current Scenario 

Between the aspects of “complete independence” and “complete control”, a great variety of circumstances may exist, and the law recognizes that there are many matters where the scope of services is so large that the discretion of in what manner the work is to be done is left with the worker, especially in the cases where the worker is a professional. Therefore, there is an absence of direction and control but even in that sense what matters the most is who has the authority to command. Hence, the question left is not whether the control or direction was ‘exercised’ by the employer but whether the employer had a ‘right’ to direct or control and this distinction is very important. 

Thus, the Supreme Court has decided and reiterated in many of its judgments, that for determining the status of a relationship between the organization and worker, each case has to be treated differently with taking its facts and circumstances into mind. And no singular test can be taken as an absolute factor for determining whether the legal relationship between a worker and organization is ‘contract of service’ or ‘contract for service’.

The Supreme Court of India in Silver Jubilee Tailoring House v. Chief Inspector of Shops and Establishment considered this aspect wherein and observed as under:

“The fact that generally the workers attend the shop, which belongs to the employer and work there, on the machines, also belonging to him, is a relevant factor. When the services are performed generally in the employer’s premises, this is the same indication that the contract is a contract for service. It is possible that this is another facet of the incidental feature of employment. This is a sort of situation, when an organisational test could find some application.”

It can be derived from the decisions of the Supreme Court that law is not static in India and the employer’s power of selection of his employee, payment of wages and other remuneration, the right to control, and the rights of suspension or dismissal are other factors recognised in this regard. Supreme Court in the matter of Integrated Rural Development Agency v. Ram Pyare Pandey held that “where the relationship between the employer and the employee is purely contractual, the same cannot be enforced by the civil court.”

Factors such as employer’s power of selection and dismissal, right of control and supervising the method of doing the work, the nature and place of work, the economic control, organisational test and all other relevant facts and circumstances though indefinable, play a significant part in judicial decisions; they can exert their influence in certain boundaries but those boundaries are not fixed and sharply drawn and thus change from time to time, changing the way the relation between the worker and organization is decided.

The current stand of the Indian Courts with respect to relationship between organisation and workmen is that 

  • there can be no magic formula/single test which can be propounded to indicate which factors of the working relationship should be treated as determining ones; and instead; 

  • one should take a pragmatic approach, while weighing all the factors for and against a contract of employment and determining the nature of the work relationship (i.e., whether it is a ‘contract of service’ (employment) or ‘contract for service’ (independent contractor-ship).

These are the days when the measures regarding social status and security are given more attention than the status of contract thus making the right of a worker a matter of social security rather than contract. 

However, in spite of the aforesaid, in the upcoming days there shall be a next phase of reforms in the labour markets where the judiciary and government has to undergo a complete metamorphosis providing the flexibility that is needed in the labour class and for which a difference in the contracts of workforce is a must. 




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