Understanding 'Contract for Service' vs. 'Contract of Service': How Do You Determine the Difference?

What determines if a contract is a 'contract for service' or 'contract of service'?

In employment law, the classification of a contract as either a 'contract for service' or a 'contract of service' is crucial in determining the rights and obligations of the parties involved.

A 'contract for service' typically refers to a situation where a person is engaged to provide services to another party as an independent contractor. In contrast, a 'contract of service' usually indicates an employer-employee relationship where the individual works under the control and direction of the employer.

Factors determining the classification

Various factors are considered in determining the classification, including the level of control, degree of independence, provision of equipment, and the intention of the parties involved. Courts often look beyond the written terms of the contract to assess the true nature of the relationship between the parties.

It is essential for organizations and individuals to understand these distinctions to ensure compliance with employment laws and regulations. Consulting legal experts or HR professionals can provide clarity in complex cases and help avoid potential disputes or legal challenges.

Dear Mr. Kumar,

Though both are contracts falling squarely within the definition of a contract under the Indian Contract Act, 1872, a "contract for service" is distinguishable from a "contract of service" in respect of the following aspects:

Status of Parties:

In a contract for service, the relationship between the parties to the contract is limited to that of a mere contractor and contractee only. Whereas in the latter, an additional and more intimate employer-employee relationship is created. In short, a contractor is a distinct and independent entity, and an employee is an integral part of the employer's organization.

Control and Supervision:

In the CfS, the contractor is not subject to the control and supervision of the contractee or principal insofar as the execution of the contract work is concerned, except the power of rejection in case of deviations of quality or quantity of the products or services. In the case of CoS, the employee is always subject to the close control and supervision of the employer in respect of the work assigned, and any failure in this regard would entail the employee to disciplinary action by the employer, which may result in punishments including dismissal from service.

Remuneration:

What the contractor gets in return for his services rendered is service charges or a retainer fee depending on the quantum at the predetermined rates in the contract, subject to escalation charges if any in phases of the work or the completion of the entire work as might have been agreed upon earlier. What the employee gets by way of remuneration for his services is periodically paid wages/salary, bonus, commission, etc., depending on the nature of the job plus the employer's contributions to statutory social security measures.

Termination of the Contract:

A CfS comes to an end on its predetermined date of expiry or the completion of the work. Unilateral foreclosure by either of the parties is also permitted subject to the payment of predetermined damages to the other party. Similarly, though employment is a relatively long-lasting affair till the attainment of the predetermined age of superannuation by the employee, strictly speaking, employment is at will only and not a lifetime affair. Thus, the employer or the employee can foreclose the contract subject to the fulfillment of certain conditions like notice of termination or payment in lieu of notice, settlement of terminal benefits as applicable, etc. But, the employer is more burdened with statutory restrictions when he sends out an employee, like reasonable cause, additional compensation, etc.

Resolution of Disputes:

Disputes between a contractor and his principal are resolved by the judiciary strictly as per the terms and conditions of the contract. But, in the case of a CoS, the judiciary can go beyond the terms of the CoS and decide the issues based on the applicable provisions of labor laws, equity, and social justice as well.

Contract of Service vs. Contract for Service: A Legal Perspective

The controversy over the Contract of Service vs. Contract for Service has been ongoing in the Supreme Court since the Dharangadhara Salt Work case in 1957.

An informative write-up from the Cyril Amarchand Mangaldas group of Advocates on the subject is attached.

In a nutshell, it can be stated that a contract of service is basically a hire for manpower, whereas a contract for service is for executing a defined work.