This article is written by Arnisha Das. This article compares the features of two service agreements viz. Contract of Service (CoS) and Contract for Service (CFS). In any business, these agreements work as the foundation of many compliances in the employment like the scope of work, payment terms, bonuses, confidentiality, termination, IPR, dispute resolution, etc. Non-compliance with any of these can bring about heavy penalties and loss of fame.
Table of Contents
Introduction
Service contracts are the formal contracts that take place at the beginning of any commercial relationship between the employers, employees, business partners or associates in a venture. In this context, there are commonly two types of service contracts that supervise the owner and service-provider relationship. They are known as the ‘contract of service’ and ‘contract for service’ respectively.
A ‘contract of service’ signifies those types of agreements where the employer retains full control over the performance in the execution of the contract and directs a specified procedure to be followed by the employee. ‘Contract for Service’ refers to those types of arrangements where the recruiter or hiring person engages another party with some specific terms & conditions in order to derive their service, but the contractor gets the liberty to work freely and without the direct intervention from the employer. Often, businesses requiring graphic designers, web developers, or photographers opt for hiring an independent worker rather than a full-time employee to accomplish the work.
The contracts demonstrate various factors establishing clear expectations and scope of services for the workers as well as the stakeholders, bringing about a mutually beneficial agreement. While there are a lot of common denominators between the two at first glance, there are many differences subject to the nature of work, degree of control and delegation of the work in the service. In this article, we shall attempt to understand basic characteristics by drawing a parallel between the two concepts, and discussing essentials into making a precise agreement that impacts the service relationships altogether.
What is Contract of Service
A ‘contract of service’ is an agreement between an employer and an employee in an organisation with specific time, place and conditions where the employee is bound by the decisions of the employer and gets all the benefits that arrive from it.
In general, these service contracts are proof that the employees are under control and supervision of the employer and they must abide by all the rules and regulations that integrate the business operations.
Illustration
Let’s say, A is a managing director of a company and B is an assistant technician. Here B works subordinate to A in the company, which clearly shows that B is in a ‘contract of service’ with the employer. By virtue of this, the employer is the person who is authorised to take any decision about the terms, due dates, scope, payments and other services of the employee in the agreement.
What is Contract for Service
A ‘contract for service’ refers to those contracts where the employer hires an independent contractor to acquire any particular service that helps them or any requirement of the company. They are normally not constrained by the companies’ rules and policies, but rather by the terms and conditions set out in the contract.
Independent contractors are free to decide the time, place and deliverables of a deal and are not directly bound by the authority of the employer as opposed to contract of services. For any business, determining the subtle differences between the two is of utmost importance to continue an agreement smoothly.
Illustration
Suppose, X is a visiting lecturer in the department of sociology in a university. Here, X will not be regarded as an employee because his service is only limited to coming and giving lectures until their contract is over. After that, it is less likely that they will be re-hired through a renewal of the contract.
Differences between a contract of service and a contract for service
In a service contract, the main prospects are the kinds of work, the payment of the wages, the severance clause and likewise. Though the definition of contract of service and contract for service can sometimes overlap, there are subtle variations between the two. Having knowledge of the difference between contract of services and contract for services is consequential, as it makes it easier to recognise the potential benefits an employee gets from an organisation as opposed to an independent contractor.
Often, businesses trying to associate individuals as a partner, employee, individual-contractor or others face the dilemma of drafting a contract of service (COF) or contract for service (CFS) to consolidate the relationship. Thus, it is imperative to know the difference between the two to avoid any divergence of the rationale in the business. The following are the parameters to fathom the differences between a contract of service and a contract for service for better understanding of the relationships between both parties:-
Definition
Contracts of services are those kinds of written agreements between an employer and an employee to initiate a working relationship in an organisation by complying with the specific statutory obligations of the organisation. An employer-employee relationship stipulates the roles and responsibilities of an employee under the authority of an employer and working in the integration of a business. In this kind of agreement, the employees are bonded with an organisation or business entity for providing services for a definite period of time under the personal guidance and commands of the employer regarding every business affairs. For example, full-time contract, zero-hour contract, casual contracts, etc.
However, contracts for services define those agreements where the employer and independent contractors decide the rules and guidelines maintained by them for deciding who will deliver the final results and the employer is not in the position to dictate the work to the employee. Unlike a contract of services, it is certainly not a relationship directly involving business affairs but in this way the employee gets more freedom to decide how to complete the assigned tasks. For example, freelance contracts, consultancy agreements, contractor agreements, etc.
Ownership of work
The ownership of work in a contract of service rests in the hands of the employers, whereby they protect the peculiar interests in the business. In the case of a contract of services, the extraordinary rights on all the works that are created by the employee are held by the employer.
On the other hand, subject to particular clauses in the agreement, the independent contractors can hold the rights upon their own creation, unless otherwise specified. The tools and equipment utilised for the purpose of creation remain, typically under the ownership of the employer. The tools and equipment are individual properties in the case of independent contractors and they are solely liable for such maintenance.
Supervision
The supervision and control of the services imply the greater say of one party in the performance of a contract. In contract services, employees work under the guidance and training of the employer.
On the contrary, independent contractors engage in the work through their own capacity and are responsible for any particular consequences or output turning up in the business.
Risks
In contract of services, the risks are usually borne by the employer rather than the employee. If there is any error or omission of the work committed by an employee, the majority of the burden is taken up by the employer.
Generally, in the case of independent contractors, the employers are not alone responsible for any such outcomes. Contractors have to face the repercussions equally, which may even pan out to be the termination of the project.
Duration
Contracts of services can usually stay for longer terms, unless the employee gets terminated or retired after a specific period of time. Any employee can be in a fixed duration of one-year but the same can be extended or renewed up to many more years.
It is not applicable in contracts for services as they are often offered for shorter terms and limited to specific tasks or projects.
Remuneration
The employees are entitled to a specific amount of remuneration every month for the works or services contributed to the employer without failure in contract of services. Regardless of the financial success or failure in business, the employer is obligated to pay their employees wages or salaries every month.
However, the contractors or freelancers are usually paid on the basis of the completion of each turning point or at the end of the whole milestone in a project. Their payments can vary depending on the bulk of work as delivered from time to time and those effect their overall income potential.
Taxes and benefits
In common parlance, employees are authorised to specific taxes and benefits that a company offers to them in a contract of services. Frequently, they are offered benefits like insurance, gratuity, stocks, health premiums or retirement plans.
Unfortunately, independent contractors do not get such benefits as they are not considered as ideal employees.
Dispute resolution
There can be express dispute resolution mechanisms adopted in both contract of services and contract for services in the terms of the contract. In the matter of contracts of services, internal procedures are relied more in a conflict between employer and employee.
The gravity of negotiations or litigation procedures have a greater impact in case of independent contractors.
Termination
The termination period happens after the end of association or expiry of the contract in the contract of services. They can be renewed as per the compatibility of the parties to the extent of a long period. Nevertheless, an employee can be previously terminated because of any discrepancies or negligence found against him in the work of an organisation.
In contract for services, the contract is usually terminated after the end or termination of a specific project. If the client wants to restore the agreement, he can do it if the independent contractor prefers so.
Liability of employer
Employees are generally liable for any negligent duty that is conducted out of the scope of the employer’s jurisdiction. However, employer’s can be also held liable for the actions committed by the employee, though not directly involving in such cases, according to the principle of vicarious liability. The principle holds the employer equally liable for any harmful actions conducted by an employee, if the employee was under the employer’s jurisdiction.
The same is not applicable in case of independent contractors, who are liable of their own for such actions as they are remotely controlled and supervised by the employer.
Table of Differences between a contract of service and a contract for service
| S. No. | Factors of Difference | Contract of Service | Contract for Service |
| Definition | A contract of service is any agreement where the employee is bonded by the employer to work under the authority and supervision of the employer in an organisation. | A contract for service is any agreement where the employer hires an independent contractor to work for a specific project in the organisation without any direct supervision from the employer. | |
| Ownership | The ownership of the work creation typically remains under the name of the employer. | The ownership of the work creation remains under the name of a contractor unless he prefers to sell it to the employer. | |
| Control | In contracts of services, the employer has the supremacy to decide on the work hours and delivery of work by an employee. | In contracts for service, the employer usually does not have much discretion on how the work should be performed by an independent contractor. | |
| Risks | The businesses’ stakes or risks are usually borne by the employer rather than the employee. | The independent contractor has the same liabilities as the employer in undertaking the risks to protect the interests of a business. | |
| Duration | The duration of an employment agreement is at the discretion of the employer. | The duration of a contractor agreement relies on the requirement of the employer and potential of a contractor. | |
| Payment | Employees are entitled to a monthly remuneration, whether the business earns profits or not. | The remuneration depends on the kinds of work and specific charges of an independent contractor. | |
| Benefits | An employee has the right to additional benefits in the organisation. | An independent contractor does not get the additional benefits of an employee. | |
| Dispute Resolution | Disputes are usually resolved under internal procedures or arbitration processes, which have a limited scope of appeal in the courts. | Disputes are resolved through arbitration, mediation, conciliation as well as appeal in the courts though litigation process, if a party is aggrieved by the decision. | |
| Termination | The termination of an employment agreement usually depends on the will of an employer. | The termination can take place after the end of the contract. | |
| Liability of employer | Employer can be held liable for actions of his employees by applying the principle of vicarious liability. | Vicarious liability is normally not applicable for independent contractors unless there is an agreement otherwise. |
Important elements/ clauses to understand in drafting services-agreements
Whether it is for customer-client relations or business-service provider relations, service contracts are indispensable for an organised and smooth-going operation in a business. The following are the salient clauses that are required in drafting service contracts in any industry, irrespective of being a sole proprietorship, contractual partnership or corporation, to enforce owner-labour relationships effortlessly.
Scope of work
The scope of services are the services that are provided in the course of the agreement that need to be described wholly so far as there are no loopholes likely to pose difficulty in the future. All the services need to be outlined, avoiding vague or ambiguous language and revealing the exact nature and extent of the services. It should be ensured that there are no possible misunderstandings or scope creep in the deliverables or deadlines in the business that will violate the clauses previously agreed in the written agreement. The essential factors that need to be considered are:
- In contracts of services, the scope of work of the role of an employee should be defined clearly so that no employee dissatisfaction arises.
- In contracts for services, the expected work needs to be explicitly mentioned so that the independent contract does not outperform the agreement.
Confidentiality
A confidentiality agreement secures the obtained information by any worker during the course of employment in the organisation, which hinders the business movement. The recruiting party, hence, should sign non-disclosure agreements (NDAs) before the starting of the relationship to keep the proprietary information secret, even after leaving their association with the organisation. The things needed to be considered are:
- NDAs are essential agreements to protect the personal information of a business an employee needs to stick by till the end of his agreement and further.
- In case of independent contractors, the employer can sign an NDA or a non-compete clause in the agreement by the contractor to ensure the proprietary information does not get leaked once the term of the agreement is concluded.
Amendments
The clause of amendment should be there to ensure that the existing rules are in tune with the recurring changes in the near future. Both the parties need to put their signatures in such a manner that no discourse arises in future and there is a mutual consent between parties. The parties must:
- Must be flexible with the industrial demands and the specific compliances the business needs to maintain for the changing nature of the business in contract of services.
- Be accustomed with the variability and allow additional costs for revisions.
Intellectual property
Any organisation’s intellectual property is a core element in the business expansion. In case of a contract of service, any work creation, such as design, logo, trademark or patent, becomes the exclusive property of the employer. Thus, the licence to use, exploit or sell the rights is granted only to the employer. On the other hand, in contracts for services, the intellectual properties of the contractors can be sold to the clients through commercial contracts. The ownership must be:
- Specified regarding the sole proprietorship or joint-proprietorship of an organisation clearly stating the rights of the transfer.
- Protected with copyrights, patents and trademarks, which can shield any party from any inadvertent damage. In case of violation, the other party is bound to indemnify the injured party.
Compensation
In general, the most important part of any contract is the payment or compensation terms. The employees get it as per the predetermined terms in the contract, whereas independent workers’ payout can vary depending on the fulfilment of the tasks or responsibilities. There are further prerogatives for employees, such as bonuses, tax reductions, paid leaves and others, which are irrelevant in the matter of independent contractors.
- The employees must be intimated properly of all the rightful benefits along with compensation like insurance, travel allowance, provident fund, holidays, etc.
- The terms must clearly state about the payments, subscription or wages of a contractor to avoid confusion.
Breach of contract
If any binding party infringes the terms and conditions written in the contract, the injured party can claim damages or compensation from the other. In general contract law, there are measures for injured parties to claim exemplary damages, specific performance, or remedy for such delays or harm caused. In a contract of services, the organisation often takes the responsibility for any action of the employee, but in a contract for services, the independent contractor goes through related procedures as available for remedies in case of a breach of contract.
- The employees are generally protected under the authority of the employer, but typically sufficient disciplinary actions can be taken like suspension/termination depending on the severity of the breach of terms.
- Independent contractors are less protected in case of breaches of contract, which can lead to immediate termination or even prosecuting for damages.
Dispute resolution
The dispute resolution clause applies when the conflict between both parties does not get resolved through internal methods or mutual understanding. Therefore, the methods of dispute resolution are sought after, such as arbitration, conciliation, mediation or the use of common law procedures.
- In case of contract of services, internal procedures and redressal committee of the company handles the procedures of retaining the agreement.
- The popular remedies are arbitration, conciliation, mediation or rigorous legal proceedings in case of contract for services.
Termination or expiry
There is a termination clause that states that the termination takes place after the end of the agreement by giving a notice, usually between 30-60 days before the final termination. The employees might get compensation for the unemployment based on the specific procedures in the organisation but the same is not applicable for independent contractors. There is a notice period in organisations where an employee needs to serve the organisation for a few months even after the termination or before shifting to another company. In contractual work, no notice periods exist.
- The period of work in case of employees depends on the discretion of the employer and the ability of performance of the employee. The typical time lapse of a notice period after ensign of association must be delineated.
- In case of contractor agreements, the significant grounds of termination are deadlines, nonperformance, or end of contracts.
Notice Period in service contracts
Notice periods are the amount of period an employee needs to serve an organisation after they have resigned or been terminated from the organisation. It usually depends on the nature, duties, seniority and basic company policies that affect the period of notice of the employees.
According to the Industrial Disputes Act, 1947, the Indian Contract Act, 1872 and the Industrial Employment Standing Orders, 1946, employees need to fulfil such a period as a sign of loyalty and goodwill in the company. It varies from fifteen days to 3 months as per the seniority level and requirement of the company. Employees are also entitled to payments during the notice period.
Force Majure
The force majeure clause is included in an agreement so that whenever any disaster, catastrophe, or unavoidable incident happens and it obstructs the enactment of any clause of the agreement, it gets excused by the law and the contract becomes void. In any such incident, which virtually hampers the performance of the agreement or stops it, the parties are spared from obliging to such agreement.
- In the contracts between an employer and an employee, the parties are relieved from performing any such performance which may obstruct the duty in such a situation.
- In contracts between an employer and an independent contractor, both of the parties get excused from the performance of such a deal.
Indemnification
An indemnification clause usually provides a security to both parties entering into a contract to reimburse the damages or losses incurred from any performance by any of the parties so that the business is safeguarded from unnoticeable damages. Both the contract of service and the contract for service contract lay down the clause for safety.
- The workforce under the superior authority of the employer gets saved under the aegis of vicarious liability holding the employer accountable for the performance of the employees on several occasions.
- The independent contractors are precarious in such events resulting in the suing of one party by the another for compensatory damages.
Why is it necessary to understand contract of service and contract for service
Whether a contract should be deemed as Contract of Service (CoS) or Contract for Service (CFS) is subject to several factors that come into play. Their differences have a great impact on the organisation, especially when concerning taxes. An individual working in the method of CoS is taxed according to the government rules and contributes to social security. However, an individual under a CFS is an independent contractor who is often responsible for the taxes as per the revenue in the business. Such divergence in treatment can have a large bearing on the total tax burden and personal financial strategy of an individual.
In spite of that, the distinction between CoS and CFS relations is very crucial in the application of labour laws. In particular, these laws imply that there are less common attributes applied to employers and independent contractors altogether, such as employees being guaranteed fundamental rights like the minimum wages, fixed hours of work, right to overtime, right to worker’s compensation, etc., which do not apply to the independent contractors. Unlike steady salaries like regular employees, independent contractors can create written agreements with their clients as per the Contract and Labour (Regulation and Abolition) Act, 1970 for long-term fixed remuneration.
By and large, employees are given out various forms of welfare schemes, such as medical insurance, pensions, sick leaves and others. On the other hand, independent contractors do not receive such benefits irrespective of their earning capabilities and other aspects of life.
Thus, from a business point of view, employers are often convinced about relationships classified as a CoS or a CFS. For instance, with regard to legal issues, owners are still legally answerable to some extent for their employees. On the contrary, business entities have very less liability to answer the independent contractors. Setting risk management measures and insurance cover needs are other liabilities of the employer.
The level of control that is exercised over individuals working in an organisation may greatly differ, as this will affect the relationship and the obligations that come along with it. It is frequently found that at times employers tend to employ people with the intent of dispossessing them of the rights and benefits that are attached to it. In reality, they want to yield results from the work of the independent workers, still disowning them from the regular periodical benefits guaranteed to the employees. The system tends to discourage the efforts of the self-employed workers and underestimates the labour. In Indian courts, businesses can get significant punishment if detected to have misidentified between the workforces.
For any individual, the wrong presumption of employees becomes a vicious problem, which can make an entity entering voluntarily or involuntarily into the cycle indulge in the threat of reputational or financial risks in the organisation. Identifying the changes, organisations should adhere to the guidelines and obligations and restructure the whole policy-making mandates to fit into the right category.
Important cases related to the differences between contract of services and contract for services
Whether the company is assigning work as a whole or on piece-rate, the authority of the company in the execution of the work remains vital. The courts have found various measures while giving the pronouncements on the difference between CoF and CFS. In the common law system, there are proposed three ways of experiments to perceive a worker as an employee or a self-employed person, namely, control test, integration test and the economic reality test.
In the case of Yewens vs. Noakes (1880) 6 QBD 530, the decree given by Lord Justice Bramwell implied ‘control test’ while explaining that an employee is someone who is directed by their employer in the whole process of work and not just in what tasks to be performed or when to complete the tasks.
Further, in Stevenson, Jordan & Harrison Ltd vs. Macdonald & Evans Ltd (1952) 1 TLR 101, it was determined that the evaluation of the performance of an individual hired if deemed to be extremely necessary to the operation of the overall organisation, then they are more likely to be regarded as an employee.
Next, in a landmark case of Ready Mixed Concrete (South East) Ltd. vs. Minister of Pensions and National Insurance (1968), the court established the standard criteria for demarcating CoS and CFS, which are:
(1) the worker giving their own efforts for labour;
(2) either explicitly or implicitly they are under control of the employer;
(3) terms & conditions in the agreement denoting the employment control (degree of control, mode of remuneration, right to delegate, etc.).
Sushilaben Indravadan Gandhi vs. The New India Assurance Company Ltd. (2020)
In India, Sushilaben Indravadan Gandhi vs. The New India Assurance Company Ltd. (2020) is a landmark judgement where the Supreme Court established the decision about the status of an employee working in an organisation on a contractual basis.
Facts of the case
Dr. Alpesh I. Gandhi, an ‘Honorary Ophthalmic Surgeon’ was working under the Rotary Eye Institute, Navsari on contractual basis since May 4, 1996. One day while being in the services of the institute, Gandhi had met with an accident by a minibus of the hospital while travelling, when the driver lost control of it. Unfortunately, due to severe injuries, he ultimately succumbed to death. Now, prior to the accident, the institute came into an agreement with New India Assurance Company, an insurance company for the insurance of the vehicle. After a few months, the wife of the deceased claimed damages and filed proceedings under Section 166 of the Motor Vehicles Act, 1988, against the driver, the institute and the company in the Motor Accident Claims Tribunal.
However, it was now claimed by the insurance company, New India Assurance Company Limited, that by the limited liability clause, the vehicle excluded an insurance for any ‘employee’, who was working under the institution during the time when such an incident occurred. The tribunal adjudged that since the deceased was working on an honorarium and was not a permanent employee working as a part of the institution, the wife of the deceased would definitely be entitled to receive the compensation and held an amount of 37,63,100 rupees to be paid jointly and severally by the driver, institute and insurance company. After an appeal in the Gujarat High Court, the court found the agreement to be a Contract of Service (CoS) and mitigated the liability of the insurance company. Although, when the matter was heard by the Supreme Court, it was determined that the deceased was not identified as a worker under the Workmen Compensation Act, 1923.
Issues
(i) Whether a person working in an honorarium can be regarded as an ideal employee of an institution?
(ii) Whether the insurance company is liable to insure damages to a worker who was working under ‘contract for services’ in the hospital?
Provisions of Workmen’s Compensation Act, 1923
According to Section 2(n) of the Workmen’s Compensation Act, 1923, a ‘workman’ is any person who is working under a conservative setting of a master-servant relationship excluding any relationship where the person is not directly related to the ‘trade or business relationship’ of the employer. A railway servant is a ‘worker’ as defined under Section 3 of the Indian Railways Act, 1890 and not permanently employed in any administrative, district or sub-divisional office of a railway or employed in such capacity as detailed under Schedule II of the Act. Also any person working in the ‘Armed Forces Union’ is not eligible for compensation under the Act.
Provisions of Industrial Disputes Act, 1947
Industrial Disputes Act, 1947 defines ‘workman’ under Section 2(s) as any individual working as an apprentice or employed person doing any manual, technical, skilled, unskilled, clerical, operational, or supervisory work for hire or in consideration of payment and also applies to legal proceedings of industrial disputes, including workers who have been dismissed, , discharged or laid off due to such disputes. However, it does not apply to those working under specific military laws, or police services, administrative roles of supervisors earning more than a specified wage (more than ten thousand rupees per month) mainly related to duties of managerial nature.
Judgement and analysis
The Supreme Court set out many guidelines while giving the judgement of the case. The principal observations were that as society advanced from agrarian to modern society, there have been several changes in the level of control exercised by an employer on his own employees, thus only a singular test would be insufficient towards landing in a proper judgement as to whether a worker should be contemplated as an employee or independent contractor. There are many factors that affect the agreement, which makes it difficult to determine a case with a universal rule rather than analyse it through different ingredients. Thus, the three-tier test, the asset and ownership test, and the economic reality tests are equally recommended to justify a conclusion.
The Apex Court also took resort to many legal precedents while adjudging the case. One of them is Dharangadhara Chemical Works Ltd. vs. State of Saurashtra (1956), where it was held that there should be a prima facie test to determine if an individual is actually working as an employee or not. The main purpose of the test is to prove that the employer has extensive control over the work of the employee in carrying out the service. Thus, if it could be realised that the worker is under the control or supervision of the employer, he shall be recognised as a regular employee and eligible to receive all benefits affiliated with it. Notwithstanding this, the court held that the method of checking the economic reality of the workers in each case can vary because of the changing scenarios of businesses.
The other matter was the Silver Jubilee Tailoring House vs. Chief Inspector of Shops & Establishments (1973) case, in which the Supreme Court held that in many jobs regardless of factors like income, working time, and place, the sole condition that the worker worked under the supervision or control of the employer was sufficient to prove the status of the worker as a regular or temporary worker. Here the tailor, who could supervise the work of the employer and had the right to reject any work presented by the employee and for which penalty could be levied upon him, would naturally be deemed to be an employee under this act.
Further, in the case of Hussainbhai, Calicut vs. Alath Factory Thozhilali (1978), a three-judge panel of the Supreme Court established an important principle regarding employment and control of employers. The court emphasised that any employer has significant control over the workers’ livelihood, skills, and job security and the power to effectively lay off any employee from the occupation. So, it is cardinal to assess the influence over the employee in the job by the employer and figure out those economical conditions in categorising the employment status. The Court arrived at the conclusion that if one can derive the regular employer-employee relationship that subsists irrespective of any payments or legal relationships, the purpose of ‘contract of service’ and ‘contract for service’ is established. However, in contract of services, the sanctity of employer-employee relationship is not maintained, thus it does not manifest such true relationship, especially in the labour laws.
Indian Medical Association vs. V.P. Shantha & Ors. (1995)
In Indian Medical Association Association vs. V.P. Shantha & Ors (1995) case, the question intrigued as to whether the service of medical practitioners could be regarded as service under Section 2(1) (o) of the Consumer Protection Act, 1986. The Supreme Court pronounced that if the services rendered in terms of payments collected from the ‘consumers’ by private medical practitioners, it can be designated a ‘service’ under the Act. However, if the service is provided out of free will or government financed service, it cannot be referred to as a ‘service’ under the definition of the Act. Also, it was determined that in ‘contract of services’ usually the patients cannot be considered as ‘consumers’ as the medical practitioners are under the employment of the government. If they are taking money in some cases, it can be regarded as ‘service’ in the meaning of the Act. Alternatively, in non-governmental medical practices or ‘contract for services’, despite giving free services, it can come under the definition of service similar to that of consumers who were charged fees.
Conclusion
Contracts of Service (CoS) usually create a master-servant relationship, which implies that the employer has a lot of say in the affairs of the business. The concurrent factors that are included, such as the working hours, techniques and equipment employed, are subject to the scrutiny of the employer. It affords more control to the independent contractor in terms of decision-making or work performance in the organisation. Although in a contract of services (CFS), employees are directly answerable to the employer, in contract for services it is not. Also, the integration of work into the business creates the difference between CoS and CFS.
In the recent past, the growth of the gig economy has triggered new challenges in the legal framework modifying statutory laws for which there can be a blurring line of differences between the two kinds. Also with the advent of artificial intelligence, there are many factors that will affect the categorisation and the nature of service relationships in a contract. Overall, it is important for organisations to have a sensitive outlook towards these changes and adopt suitable alternative measures to tackle the problem.
Frequently Asked Questions (FAQs)
How can organisations opt for Contract of Service (CoS) or Contract for Service (CFS)?
The decision between opting for a Contract of Service (CoS) and a Contract for Service (CFS) hinges upon various criteria that are related to the particular way of interaction and the situations that are taken into account. There are major factors such as the level of power vested on an entity, the integration of an individual’s duties, the operations, and the use of tools and equipment in the business.
What are the legal implications of misclassifying the relationship between CoS and CFS?
As aforesaid, there are several instances of misclassifying employer-employee relationships in both the contract of service and contract for service. Any business or entity misclassifying between the employee or independent worker of an organisation can be held liable for violating employment terms & conditions, which can lead to fines and/or even damage to the company’s reputation.
What are the potential consequences of the absence of any resolution of a dispute?
The penalties for not being capable of either handling conflicts or addressing them in a CoS or a CFS model are harsh. When a conflict is not settled, it might result in various consequences including legal proceedings that will result in more loss. In addition, unresolved disputes may injure relations and tarnish the image of the organisations; besides, trust between both the parties will be diminished.
Are medical professionals covered under the Consumer Protection Act, 1986?
According to the decision of the Supreme Court in Indian Medical Association vs. V.P. Shantha (1995), medical practitioners are covered under Section 2(1) (o) of the Consumer Protection Act, 1986 when the services are profitable or related to the medical trade or business. However, if the services are rendered free, they cannot suffice the meaning provided under the Consumer Protection Act, 1986.
Can the services of the law professionals be regarded as the services under the Consumer Protection Law?
The services from a law professional are not covered under the consumer protection law. Recently, the Supreme Court in the judgement of Bar of Indian Lawyers vs. D.K. Gandhi (2024) case adjudicated that services of the legal profession were of ‘sui generis’ in nature. The provisions of the Consumer Protection Act (Section 2(42) of the Consumer Protection Act, 2019) views the services of an advocate as that of a ‘contract of personal service’ rather than ‘contract of service’.
How will the gig economy impact the classification of service relationships?
The disastrous shift that has been brought by the advent of the gig economy has had a huge influence on the working environment and it is undeniable. The rise of the employment of independent contractors and freelancers in the labour market has prompted competition in the constituents of the long-established conventions in the job market. Because of this, certain individuals get the advantage of misclassification of employees in a contract as independent contractors to avoid legal compliances under labour laws.
How can technology affect the classification of service-contracts in a business?
The affects of technological advancements in the classification of service-contracts in a business are changing the face of work with consequences on the service relationships. Some of the matters which the court takes into cognisance include, the extent of the control that the employer has over the worker, the importance of the worker’s integration into the business, and where the work is being done. Remote work also presents difficulties that hinder the implementation of employment laws and the promotion of worker’s rights. Also, online platforms (like Upwork or Fiverr) have given rise to new forms of services dispensing gig workers a fairly independent environment to work, but they still may experience the control of these platforms.
What is a Personal Service Agreement (PSA)?
Personal Service Agreements (PSA) are non-employment contracts which the employer executes without the collective bargaining of an organisation. It is rather purchased for a specific or non-routine service to be delivered at the end of an estimated period. There can be different uses of personal services agreements ranging from industries like health, finance, technology, consultancy, etc.
What are the emerging trends and challenges in the area of service contracts?
Among other trends, the most important trend is connected with the fact that the role of the global workforce in service relationships has grown remarkably due to globalisation. The cross border service delivery and arrangements highlight maintenance of international labour laws, tax laws to stabilise emerging trends. Other than that, the importance of data is increasing significantly in the business environment of today, so service contracts should also address concerns to do with the ownership of data as well as data privacy and security.
References
- https://www.india.gov.in/website-ministry-labour-and-employment
- https://clc.gov.in/clc/acts-rules/contract-labour-act
- https://blog.ipleaders.in/most-important-agreements-clauses-service-provider/
- https://www.youtube.com/watch?v=awtxP2Y-fBQ
