Contract of service
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This article is written by Anuradha Goel, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.

Introduction

In today’s world, organizations tend to enter into a number of contracts with a large number of people/organizations for meeting their business and day-to-day requirements.

Organizations hire employees or engage the services of a third party to meet their needs. However, for all purposes, they enter into a number of contracts.

All such contracts entered into by the company can be broadly divided into two categories-

  • Contract for services/work for hire agreement

Parties: A contract for service is an agreement that is entered into by the company with a third-party for availing its services.

The third-party is an independent service provider, not an employee of the company.

The third party is not entitled to the benefits that the employees of the company receive or are entitled to from time to time during the course of their employment.

Control: The company does not exercise control over the third-party.

Purpose and ownership of intellectual property: The company enters into such contracts where they want the service provider to assign the ownership of the intellectual property rights in the created work to it and in return pay for the work done by the service provider.

Examples where a contract for services is entered into-

  1. A company taking the assistance of a third party to develop a website for them, development of certain artwork, etc.
  2. A company hiring the services of a photographer for their new jewellery. collection.
  3. A film producer hiring the services of an animation artist for his movie.
  • Contract of services/employment contracts

Parties: A contract of service is an agreement that is entered into by the company with an individual for availing his/her services.

The individual here is the employee of the company and is entitled to the benefits that the employees of the company receive or are entitled to from time to time during the course of their employment.

Control: The company enjoys control over the work created by the employee and the employee is bound to obey the orders of his employer.

Ownership of intellectual property: The ownership of the intellectual property created by the employee rests with the company. 

Exception-However, in cases where an invention is created by the employee during the course of his employment, such ownership rests solely with the employee.

In order to claim ownership over such intellectual property, a separate inventions assignment agreement can be entered into or a clause regarding the same can be incorporated in the terms and conditions of the employment.

Description

Contract for Service

Contract of Service

Parties

Company and third party

Company and employee

Relationship of the parties

Independent contract/ consultancy

Employer-Employee

Control over the work

The third party is not bound to obey the instructions of the company

The employee is bound to obey the instructions of the employer

Ownership of all the rights arising from the  work created out of contract

The company gets ownership after paying for the services to the third party

The company is by default the owner of the work done by the employee, except in cases of inventions

How to decide which kind of agreement needs to be entered into

The most important factor to be kept in mind is to understand the commercial intent of the parties who are entering into such contracts. As a lawyer, ask yourself these two basic questions-

  • What is the relationship between the parties? Are the services of the third-party required only once or will it be required for the day-to-day activities?

If the service is required only once, say for example to design a jewellery collection, a work for hire agreement is more suitable rather than a contract of service.

However, if you require the services of a third-party every other day, for example, to manage your books of account, a contract of services is the way to go.

  • Who wants to retain the ownership of the work created out of the contract between the parties? Is it the company? Is it the third-party? Does the company want only a license of the work created/wants ownership?

Pointers to be kept in mind while drafting clauses for a work for hire agreement

  • Retention of the service provider- This clause describes that the service provider has been engaged by the company as an independent contractor and is not an employee of the company.
  • Scope of work- This clause describes the purpose of engagement and the responsibilities of the service provider. This clause should also mention whether the service provider can be assigned new work arising out of his existing work without any extra charges/not.
  • Renewal of the contract- Whether the company alone has the right to renew the contract or the service provider can also do the same. The clause should also mention the procedure for the renewal of the agreement.
  • Consideration- The amount to be paid by the company in exchange for the services provided by the service provider.

Answer questions such as how the payment shall be made? Will it be performance wise or monthly? (specify the exact date in case of monthly payments). How much percentage of the total amount shall be paid on each milestone? The mode of payment, the bank details, etc needs to be mentioned in this clause.

This clause can also answer questions such as the number of modifications that shall be provided free of cost to the company. What shall be the cost of an extra modification.

Will the service provider receive any commission if the work is commercially exploited by the company?

  • Ownership- This clause shall mention that the service provider understands that all ownership rights arising out of the work created by him shall rest with the company. The service provider shall cooperate, execute documents, and transfer all such rights to the company.

The company is the sole and exclusive owner and has the right to use, modify, edit the work as per its requirement.

  • Assignability- This clause mentions that the service provider cannot assign the contract to any other party without prior written permission of the company. 

This is because the company has retained the service provider owing to his personal skills, for example, a film producer hires a video editor due to his well-known skills of editing videos. If he assigns the contract to another person, the quality of editing may get compromised and the film producer may not get the desired result.

  • Representation and warranty-The service provider needs to represent and warrant that the work created by him is original and does not infringe any third party rights.

This helps the company to invoke indemnity and claim damages from the service provider if a suit is filed against the company for infringement of any third-party rights.

  • Confidentiality- The service provider shall keep all information obtained by the company confidential and shall not disclose the contents of the agreement/work created by him except without prior written consent of the company.
  • Indemnification- The service provider shall indemnify the company in case of any third party claims/ breach of any of the terms and conditions of the agreement.

This becomes imperative because as a company one does not want to land in trouble and end up paying costs due to third-party infringements.

As a service provider’s lawyer, one can try to negotiate and cap the indemnity amount which shall be given in case indemnity is invoked.

  • Infringements- Since the company is the owner of the work created out of the agreement, the company shall have the right to proceed against any third parties for infringement of any of its rights under the created work. 

In such an event, the service provider shall cooperate with the company and the company shall pay the service provider the expenses incurred due to such cooperation.

This is important to mention because the company never reimburses an employee for the cooperation rendered by him/her. This characteristic also differentiates a work for hire agreement from an employee agreement.

  • Termination- This clause can cover the grounds of termination and the consequences thereof, such as what happens to work created until the date of termination by the service provider?

The Company shall have the right to terminate the agreement if the service provider fails to deliver the work as per the timelines mentioned in the agreement. 

This is important as certain intellectual property rights, such as patents require registration and if the service provider does not adhere to the timeline, there are chances that some other party might get a patent of a similar feature and the entire purpose of engaging the service provider shall become futile.

  • Dispute resolution- This clause can mention the mechanism for resolution of any disputes that might arise between the parties in connection with or relating to any terms of the agreement.

A mediation clause followed by an arbitration clause can be the way to resolve disputes. However, do keep in mind that a time frame has to be mentioned within which if the dispute is not resolved through mediation, it can be referred for arbitration. 

A list of mediators and arbitrators can be annexed at the end of the agreement in order to save precious time which might be lost if the parties do not mutually agree to the appointment of a mediator/arbitrator.

Additionally, means to facilitate the resolution of disputes through e-arbitration can also be incorporated.

Pointers to be kept in mind while drafting a contract of services[1]

  • Employment- This clause should mention that the company has appointed the individual as an employee of the company and the designation at which he is appointed.
  • Place of work- This clause should mention the designated place and address of the company from where the employee is supposed to report and carry out his assigned activities. Whether the employee may be relocated/transferred to any other department/office/location within the organization. 

This clause can also include the working hours of the employee. Alongwith, in case of shifts, an express clause with respect to the same can be mentioned, as to whether it will be subject to change/not.

  • Duties and obligations- This clause shall mention the duties and obligations of the employee such as- he shall perform the assigned tasks to the best of his ability, he shall not disclose the confidential information of the company, he shall adhere to the discipline, he shall follow the policies of the company, etc.
  • Representation and warranties- This clause shall mention that the employee is competent to enter into an agreement with the company, the documents submitted by him are true and accurate, etc.
  • Remuneration and benefits- This clause shall mention the monthly remuneration and the additional benefits that the employee is entitled to during the course of his employment like medical insurance, life insurance, statutory allowances, paid leaves, etc. 

It can include whether such remuneration is fixed/variable which shall be increased subject to performance of the employee and satisfaction of the employer over a period of time. The period of time can be defined as well.

  • Probation period- This clause should talk about whether the employee shall be subject to a probation period and duration of the same is to be mentioned. Post the probation period, the employee shall be given a confirmation letter.
  • Intellectual property rights- This clause can mention that all rights, including the intellectual property rights arising out of or in connection to the work done by the employee during the course of his employment shall vest with the company. 

In cases where a separate assignment agreement is required to be entered into by the employee, the employee shall fully cooperate and execute all documents necessary to transfer and assign all such rights to the company without any additional remuneration.

  • Non-compete and Non-solicit- This clause shall mention that the employee shall not carry on/attempt to carry on any activities/render services similar to that of the business of the company with any third party including but not limited to the competitors of the company.

The employee shall also not solicit the clients/customer of the company to itself or any third party.

  • Confidentiality- The employee shall treat all information provided by the company as confidential information and shall not disclose it to any third party without prior written consent of the company.
  • Dispute resolution- The clause shall mention the mechanism for resolution of any disputes arising between the employee and the employer arising out of/ in connection with or in relation to the employment.
  • Termination- This clause can mention whether the company can terminate the employee without cause/not. If yes, what is the process for the same and the consequences thereof.

This is important because if the company terminates the employee without sufficient cause and the same is not mentioned in the employment agreement, it can be challenged in the court by the employee.

Conclusion

A contract is an integral aspect of any transaction. However, more important than that is to choose the correct kind of agreement that needs to be drafted in order to fulfill the purpose and intent of the parties. A wrong contract can pave the way for disputes.

A contract for service is required when one wants to engage the services of a third-party as an independent contractor for a specific project or short-lived purpose.

A contract of service is that of employment and is entered with employees who engage and perform services with the company on a day-to-day basis. The content of an employment agreement shall vary from industry to industry and shall be descriptive of the nature of work to be carried out by the employee. In addition, it shall talk about working hours, salary structure, etc.

References

[1] https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/Tools_templates/internal_templates/Lets_Venture/EMPLOYMENT_AGREEMENT%20(3).pdf


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