Navigating Contract Hiring: What Are the Key Considerations and Legalities?

Dear Friends/Seniors,

Following are some queries which require your expert view/opinion.

1. Specifications for Hiring on Contract

Is there any specification on the type of person who can be hired on contract?

2. Hiring a Consultant on Contract

Whether we can hire a consultant on contract?

a. Up to what period can hiring be made on contract on our payroll?

b. If the contract is extended after every prescribed period, then would the consultant’s tenure result in employment?

i. If so, then from which date would the employment be considered effective? Is it from the start date of the contract, or is it applicable from any specific date, e.g., after the expiry of the specified period which considers it as regular employment?

c. Is gratuity applicable to contract employees as well if the tenure is extended for 5 years or beyond?

3. Provident Fund Coverage for Consultants

While a consultant is hired on contract, should he/she be covered under the Provident Fund?

4. Formalities for Non-Coverage under Provident Fund

If not to be covered under, what formalities are required to be completed at our end so that we comply with norms?

5. Provident Fund for Previously Covered Employees

If a person hired on contract was covered under PF in previous employment, is it mandatory to cover him/her in PF?

6. Contract Hiring for Project-Based Needs

Normally, we hire resources on contract for need-based projects wherein the duration of the project is known at the beginning and it gets extended based on requirements.

7. Service Agreement for Contract Employees

We issue a separate letter of contract to employees, which is termed as a “Service Agreement” stating all conditions of association. Are there any standard terms of contract or service agreement that we have to use?

8. Formalities for Contract Breaks

In case any break is required before continuing the contract, what are the formalities?

9. Resource Allocation for Contract Employees

a. A separate resource code is allocated to employees hired on contract.

b. An official email id is given [Email Removed For Privacy Reasons].

c. Access rights for our shared portal for timesheet and leave.

10. Payment Process for Contract Employees

Payment is made based on the invoice raised by the employee subject to TDS, ESI, etc. Is this the correct way?

11. Leave Policy for Contract Employees

We allow them 1 day of leave (Common Leave) per month while they are on contract.

12. Leave Encashment for Contract Employees

Should any leave encashment be made to them after their contract is over, although they are not entitled to earned leave as per terms?

13. Employment Claims by Contract Individuals

In case an individual claims that he/she was an employee since he/she got associated with the company on contract mode.

14. Work Hours and Days for Employment Status

Is the number of hours of work or the number of days worked in a month important to determine whether the individual is to be considered as an employee or contractual staff?

15. Benefits for Contract Staff

Contract staff is availing all other benefits, e.g., company’s weekly off, holidays, get-togethers, reimbursement of expenses, visiting cards (in specific cases only), if any.

16. Contract Renewal Process

The renewal of the contract is based on inputs received from the concerned manager—whether the contract is to be renewed or not.

17. Hiring Senior Level on Contract

At times, we have to hire a person at a senior level (e.g., Delivery Manager having 20+ years of experience) to avail of his/her services for one of the business units. Can the contract be for a longer duration (e.g., 1 year/2 years/3 years/4 years, etc.) when the individual is attending the office regularly?

18. Formalities for Hiring on Contract

What formalities need to be completed while an individual is hired on contract?

19. ESI Deductions for Contract Employees

We also deduct ESI for individuals hired on contract in case his/her contract amount is less than Rs.15,000/= p.m.

Regards,
Prakash Tiwari

Please find the answers to the queries raised by you.

- It completely depends on the skill sets of the person. If their skills match your requirements and they are open to contractual employment, you can hire them.

- Surely, you can hire consultants on contracts; however, their fees will be a little higher.

- No consultant or employee on contract is eligible for PF or ESIC.

- Only TDS has to be deducted if the amount is taxable.

Service Agreement Details

In the service agreement, you have to clearly mention the expectations of work, compensation, tenure, and work timings. You have to specify how many days in advance you will inform the employee about the extension of the contract. Since you are giving one leave every month, you can mention that as well. Also, mention that they are not allowed to share any confidential details, and so on.

- Since they are part of your system, they can use your official email ID.

- Yes, they can issue you the invoice, and you can do the needful. TDS has to be deducted in case the amount is taxable.

- Leave encashment: Some companies do, some do not, so it is up to your company to decide.

- Any employee working on a contract has to follow all the rules and regulations of your company, including dress code, working hours, break hours, working days, holidays, and so on.

- You can allow them weekly offs, holidays, and also invite them to get-togethers. Please understand that they are also human beings; what will they do coming to the office on weekly offs or holidays when no one is working?

- Renewal of a contract depends on the employee's skill sets, attitude, and the company's need for the employees.

- You have to have all their documents and contact details.

- As mentioned, contractual employees are not covered under ESIC.

Hope it helps!

Regards

All employments are contracts. To answer your queries, we need to examine the difference between the terms Contract of Service and Contract for Service.

Contract of Service

All employments are contracts of service. Under the contract of service, there are certain tests:

1. The employee is controlled and supervised by a Manager/Supervisor of the organization.
2. The employee is expected to operate at specified hours and at a specified location.
3. The presence of the employee is mandatory, and he or she cannot be substituted by another person on his own accord to perform his/her work.
4. Employees have all statutory rights, including social security coverage, holidays, etc.
5. Employees also enjoy other welfare measures offered by the management.
6. There must be "mutuality of obligation" between the parties. The employer is obliged to provide work, and the employee is obliged to complete the work within the scope of the job description.
7. The employer has a right to take action if the employee fails to fulfill their obligation. If the employer does not fulfill their obligation, then the employee can raise disputes.

Contract for Service

1. Contractors have a contract for services with their client.
2. A contract for service is a strictly business-to-business contract between two firms. The firm could be a proprietorship firm where a single individual is involved.
3. There is no question of employment involved.
4. Obligations of the contractor will include the supply of service as per specifications, completing the requirement of the client according to the schedule and standard, and the requirement to correct errors without any additional remuneration.
5. Rights of the contractor shall include the right to payment as per the contract and payment at the stipulated time. The contractor also has a right to complete the work with any substitute, and the principal has no control over the contractor’s employees.

Let me give one easy example.

A recruiter employed on a contract of service completes the requirement on time. However, if the candidate joined resigns within two or three months, the recruiter's salary is not stopped, and no recovery is made from the recruiter.

However, an organization has a "contract for service" with a placement agency, and if the candidate so selected resigns within two or three months, then it is obligatory on the part of the placement agency to provide another candidate at their cost, and no fee will be levied for this purpose.

For the queries you have raised, it sounds like a contract of service.

A contract of service could be temporary, permanent, or for a fixed term. For example, an employee can be on a contract of service for two years, and at the end of two years, his term expires. But this employee is eligible for all statutory benefits if his remuneration is within the limit specified in the legislation.

If the contract of service exceeds five years, then the person is eligible to receive gratuity. However, the Industrial Disputes Act provides relief for fixed-term employments. A worker engaged for a fixed term is not eligible to receive retrenchment compensation at the end of the fixed term.

I trust this clarifies your doubts to some extent.

Clarification on ESI Coverage for Contractual Employees

There was a mention in one of the responses that contractual employees are not covered under ESI. This is not correct, and I hope all my friends in this forum will agree to this. If an employee is engaged on a contract of service, as I stated earlier, he is a direct employee, and he or she is covered. If there is a contract for service with an agency and the agency's employee performs the work, then it is the responsibility of the Principal Employer to ensure that he or she is covered under ESI. Of course, this is subject to their drawing less than the salary limit fixed under the ESI Act.