Supreme Court Lays Down Tests To Determine ‘Contract Of Service' Or ‘Contract For Service'?

Time and again the question has come before the Hon'ble Supreme Court of India (“Supreme Court“) on how to determine whether a person is an employee or not. Through various judgments the Supreme Court has laid out the tests to determine whether a person could be said to be in the employ of the employer. Recently in the case of Sushilaben Indravadan Gandhi & Another v. The New India Assurance Company Limited and Others1 (“Appeal“) the Supreme Court has explained in detail the difference between ‘contract of service' and ‘contract for service' while deciding an insurance claim.

Brief Facts

Dr. Alpesh Gandhi, the deceased husband of Sushilaben Indravadan Gandhi, had entered into a contract for services (“Contract“) as an Honorary Ophthalmic Surgeon with Rotary Eye Institute, Navsari, (“Institute“). The deceased was travelling in a minibus owned by the Institute which met with an accident as the driver lost control of the vehicle. The deceased suffered serious injuries and ultimately succumbed to his injuries. A few months before the accident, the Institute had availed a comprehensive car policy (“Policy“) from The New India Assurance Company (“Company“). The limitation of liability clause in the Policy stated that it covered the insured, but the employees of the Institute would not be covered by the Policy. The Institute had paid an additional premium for endorsement IMT 5 under which the Company would pay compensation for any unnamed passengers other than the insured and/or his paid driver attendant or cleaner and/or a person in the employ of the insured coming within the scope of the Workman Compensation Act, 1923 and engaged in and upon the service of the insured at the time of injury. Thus, even under the IMT 5, employees of the Institute were excluded from the Policy.

The Appellants filed a petition before the Motor Accidents Claims Tribunal (“Tribunal“) under Section 166 of the Motor Vehicles Act, 1988, being MACP No.1326 of 1997, against the driver, the Institute and the Company claiming compensation of INR 1 crore for the death of Dr. Alpesh Gandhi. The Company opposed the petition claiming that the deceased was an employee of the Institute and thereby excluding the liability of the Company as per the Policy. The Tribunal after consideration allowed the petition holding that the Contract was a ‘contract for service', as a result of which the deceased could not have been held to have been in the employment of the Institute at the time of the accident. The Tribunal held all three Respondents jointly and severally liable to pay compensation of Rs. 37,63,100/- (Rupees Thirty Seven Lakhs Sixty Three Thousand One Hundred Only) as determined by the Tribunal to the Appellants.

The Gujarat High Court (“High Court“), however held that the Contract was one of ‘contract of service' and therefore the Company would be liable to pay only to the extent of Rs. 50,000/- (Rupees Fifty Thousand) as per Regulation 27 of the General Regulations of the Indian Motor Tariffs and the rest would have to be borne by the driver and the Institute.

Observations of the Supreme Court

The Supreme Court referred to various judgments and the tests laid down in these judgments to determine whether the Contract is a ‘contract for service' or a ‘contract of service'.

The Supreme Court thereafter made the following observations:

That society having moved away from being a simple agrarian society to a complex modern society in the computer age, the earlier test of control of an employer, has now yielded more complex tests which would have factors both for and against the contract being a ‘contract of service' as against a ‘contract for service'. The test is one in a series of factors to determine if a contract is ‘contract of service' or a ‘contract for service'. Further the control 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.

That whether a person employed is integrated into the employer's business or is a mere accessory thereof is another important test.

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.

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.

The economic reality test laid down by various U.S 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.

It is also an important test determine if a person who has engaged himself to perform services is performing them as a person in business on his own account, in order to arrive at the correct solution.

The Supreme Court noted that no one test of universal application can ever yield the correct result. It observed that a conglomerate of all the applicable tests taken on the totality of the facts in a given case 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'. The aforesaid factors would have to be considered depending on the facts of each case, to determine which would be relevant. Ultimately, the Supreme Court opined that it can only perform a balancing act and weigh all the relevant factors to arrive at the correct conclusion on the facts of each case. The Supreme Court further stated that context in which the finding is made is important. Where the context is one of a beneficial legislation being applied to weaker sections of society, the balance would tilt in favour of declaring the contract to be one of service. However, where the context is not of a beneficial legislation or only in the realm of contract, and the context of that legislation or contract is pointing in favour of a contract for service, and other things being equal, the context would tilt in favour of the contract being construed as one for service.

Thus, in light of the above-mentioned observations, the Supreme Court, after weighing the factors held that the factors to make the Contract a ‘contract for service' far outweighed the factors pointing otherwise. The Supreme Court further held that applying the economic reality test, the Contract is determined as one between the Institute and an independent professional.

On the point of the liability clause in the Policy which stated that the Company was exempt in case of death of a person carried in a motor car where such death or injury arises out of and in the course of the employment of such person by the insured, the Supreme Court relied on the principle of contra proferentum. The principle states that an ambiguous contract be interpreted against the party who has drafted the contract. While citing several judgments relying on this principle, the Supreme Court, held that in this case the expression employment should not be construed widely to include any person who is not a regular employee as argued by the Company. The words ‘in the course of' would include only a person regularly employed by the employer and thus the deceased would not be considered in employment of the Institute.

The Supreme Court thereafter set aside the order of the High Court and restored the order passed by the Tribunal. The Supreme Court thus while passing the judgment, laid down various tests to determine the relationship between an employer and an employee, not only restricting it to the earlier control test, but also taking into account the new, complex modern society and the emergence of independent professionals contracted by employers for providing services.

From India, New Delhi

Dear sir, Order copy is enclosed herewith for the reference. sumit
From India, Ghaziabad

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