Contract Drafting & Law Course Preview
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<p class="banner-heading-text-two-line"><span>Contract for Service vs. Contract of Services</span><br><span class="banner-sub-heading">Modules IV & V: Deep Dive Into Specific Agreements</span></p>
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<p><span class="padded-dropcap">W</span><body class="c18 doc-content"><p class="c0"><span class="c1">hile drafting a consultant service agreement, it is imperative to understand the difference between a ‘contract for service’ and a ‘contract of service’. A contract for service refers to an agreement with an independent contractor or consultant, where the individual provides services to a client but retains control over how the work is performed, and is not an employee. It is like a service agreement. A contract of service, on the other hand, establishes an employer-employee relationship, where the employee works under the direction and control of the employer.</span></p><p class="c0"><span class="c1">When drafting a consultant agreement, it’s crucial to ensure that the terms align with a contract for service to avoid unintentionally creating an employment relationship, which could trigger obligations such as employee benefits and tax liabilities.</span></p><p class="c0"><span class="c10">In the case of </span><span class="c10 c6">Sushilaben Indravadan Gandhi v. The New India Assurance Company Limited</span><sup class="c10 c11"><a href="#ftnt1" id="ftnt_ref1">[1]</a></sup><span class="c1">, the Supreme Court of India while explaining the difference between a contract of service and contract for service has held that </span></p>
<p class="c14" style="padding-left: 30px;"><span class="c4">“ A conspectus of all the aforesaid judgments would show that in a society which has moved away from being a simple agrarian society to a complex modern society in the computer age, the earlier simple test of control, whether or not actually exercised, has now yielded more complex tests in order to decide complex matters which would have factors both for and against the contract being a contract of service as against a contract for service. The early “control of the employer” test in the sense of controlling not just the work that is given but the manner in which it is to be done obviously breaks down when it comes to professionals who may be employed. A variety of cases come in between cases which are crystal clear — for example, a master in a school who is employed like other employees of the school and who gives music lessons as part of his employment, as against an independent professional piano player who gives music lessons to persons who visit her premises. Equally, a variety of cases arise between a ship’s master, a chauffeur and a staff reporter, as against a ship’s pilot, a taxi driver and a contributor to a newspaper, in order to determine whether the person employed could be said to be an employee or an independent professional. The control test, after moving away from actual control of when and how work is to be performed to the right to exercise control, is one in a series of factors which may lead to an answer on the facts of a case slotting such case either as a contract of service or a contract for service. The test as to whether the person employed is integrated into the employer’s business or is a mere accessory thereof is another important test in order to determine on which side of the line the contract falls. The three-tier test laid down by some of the English judgments, namely, whether wage or other remuneration is paid by the employer; whether there is a sufficient degree of control by the employer and other factors would be a test elastic enough to apply to a large variety of cases. The test of who owns the assets with which the work is to be done and/or who ultimately makes a profit or a loss so that one may determine whether a business is being run for the employer or on one’s own account, is another important test when it comes to work to be performed by independent contractors as against piece-rated labourers. Also, the economic reality test laid down by the US decisions and the test of whether the employer has economic control over the workers’ subsistence, skill and continued employment can also be applied when it comes to whether a particular worker works for himself or for his employer. The test laid down by the Privy Council in </span><span class="c4 c6">Lee Ting Sang</span><span class="c4"> v. </span><span class="c4 c6">Chung Chi-keung</span><span class="c4"> [</span><span class="c4 c6">Lee Ting Sang</span><span class="c4"> v. </span><span class="c4 c6">Chung Chi-keung</span><span class="c8 c4">, (1990) 2 AC 374 (PC)] , namely, is the person who has engaged himself to perform services performing them as a person in business on his own account, is also an important test, this time from the point of view of the person employed, in order to arrive at the correct solution. No one test of universal application can ever yield the correct result. It is a conglomerate of all applicable tests taken on the totality of the fact situation in a given case that would ultimately yield, particularly in a complex hybrid situation, whether the contract to be construed is a contract of service or a contract for service. Depending on the fact situation of each case, all the aforesaid factors would not necessarily be relevant, or, if relevant, be given the same weight. Ultimately, the Court can only perform a balancing act weighing all relevant factors which point in one direction as against those which point in the opposite direction to arrive at the correct conclusion on the facts of each case.”</span></p><p class="c15"><span class="c4">In the case of </span><span class="c4 c6">Ram Singh v Union Territory of Chandigarh</span><sup class="c4 c11"><a href="#ftnt2" id="ftnt_ref2">[2]</a></sup><span class="c8 c4">, the court had laid the following factors for distinguishing between an employee and a consultant: </span></p>
<ul class="indented-list"><li class="c13 li-bullet-0"><span class="c12">Control as a Test</span><span class="c8 c4">: While ‘control’ is an important factor in determining the employer-employee relationship, it is not the only or the sole test.</span></li><li class="c13 li-bullet-0"><span class="c12">Multiple Factors</span><span class="c8 c4">: Other relevant facts and circumstances, including the terms and conditions of the contract, must be considered to get a full understanding of the relationship.</span></li><li class="c13 li-bullet-0"><span class="c12">Pragmatic Approach</span><span class="c8 c4">: A holistic, pragmatic approach is necessary, weighing both the factors in favor and against the existence of an employment relationship.</span></li><li class="c13 li-bullet-0"><span class="c12">Integrated Approach</span><span class="c4">: An </span><span class="c12">integration test</span><span class="c8 c4"> should be applied, examining whether the individual is fully integrated into the employer’s business or remains independent.</span></li><li class="c13 li-bullet-0"><span class="c12">Additional Factors</span><span class="c8 c4">: Several other factors are relevant, such as:</span></li></ul><ul class="indented-list" style="padding-left: 30px;"><li class="c3"><span class="c8 c4">Who has the power to hire and dismiss.</span></li><li class="c3"><span class="c8 c4">Who pays remuneration and deducts insurance contributions.</span></li><li class="c3"><span class="c4 c8">Who organizes the work and provides tools/materials.</span></li><li class="c3"><span class="c4">The nature of the mutual obligations between the parties.</span></li></ul><hr class="c16"><div><p class="c17"><a href="#ftnt_ref1" id="ftnt1">[1]</a><span class="c5 c7"> .</span><span class="c5"> </span><span class="c8 c5 c7">(2021) 7 SCC 151.</span></p></div><div><p class="c17"><a href="#ftnt_ref2" id="ftnt2">[2]</a><span class="c5 c7"> </span><span class="c2">2004 1 CLR 81</span></p></div></body>
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