Friday, January 30, 2009

Contract of Service Vs Contract for Service

I’ve decided to write about this (with some reference from Industrial Relations practitioner as an advisor) as many HR practitioners that I’ve personally known could not differentiate the above while some might even suggest it’s just terminology differentiation.

Contract of Service

A contract of service is any agreement whether in writing or verbal, expressed or implied, whereby:

- One person agrees to employ another as an employee, and
- The other person agrees to serve the employer as an employee

Note: An apprenticeship contract or agreement is also considered a contract of service.

A contract of service can be in the form of a letter of appointment/employment. The employer cannot change the terms and conditions of employment unless the employee agrees to it. Any terms and conditions of employment, in a contract of service, that is less favourable than the relevant provision under the Employment Act is illegal, null and void. The provision in the Act will take precedence over a particular contractual term that is less favourable.

Contract for Service

In a contract for service, there is no employer and employee relationship. The person is usually self-employed or may provide his/her services on a freelance basis at a fee. He/she is not an employee within the definition in the Employment Act.

Difference Between a Contract of Service and a Contract for Service

A contract of service is an agreement whereby one person agrees to employ another as an employee and the other agrees to serve his/her employer as an employee. The employer would need to contribute EPF and comply with relevant statutory benefits such as annual leave, sick leave and et cetera for its employees engaged under a contract of service.

On the other hand, a contract for service is an agreement whereby a person is engaged as an independent contractor, such as a self-employed person or vendor engaged for a fee to carry out an assignment or a project for the company. Under such a work arrangement, there is no employer-employee relationship, and the employee is not covered by the Employment Act.

There is no single conclusive test to distinguish a contract of service from a contract for service. Some of the factors to be considered in identifying a contract of service include (non-exhaustive):

• Control Test
• Independence Test
• Integration Test
• Economic Reality Test

The Tests

Control Test

The traditional test, how much control is being exercised over the worker by the employer. The more control that is being exercised, the more likely it is that the worker is an employee regardless of what the contract says.

Traditionally ‘masters’ exercised actual control over their ‘servants.’ However, in more recent days, because people are becoming more specialized, employees will often know more about the subject area they are working in than their employers. The control test does not therefore look at whether the employer is operating actual control, but rather asks whether the employer could exercise control.

Independence Test

It’s pretty much the flip side of the control test, does the worker have independence in deciding how his/her work is to be done, can he/she decide his/her own work hours, subcontract out work, and et cetera.

Integration Test

Is the work being performed under the contract integral to the operation of the business structure as a whole, or is it only works on the side of the main business? One feature which seems to run through the instances is that under a contract of service, a person is employed as part of the business and his/her work is done as an integral part of the business whereas under a contract for service, his/her work, although done for the business, is not integrated into it but is only an accessory to it.

Economic Reality Test

Is the worker dependent upon the job for economic survival (can other employment be undertaken, for example).

6 comments:

  1. Mmmm... i thought it was the same thing too.

    But isn't contract of service just called normal employment?

    BTW check out my blog

    http://fitnessmalaysiablog.blogspot.com

    ReplyDelete
  2. thank you for information!
    i got this topic for my presentation. and you save me :D

    ReplyDelete
  3. Hi Thomas,

    could you share what are the implications of engaging a freelancer on the below condition:

    i) long term contract for services (i.e. > 1 year)
    ii) continuous renewal of contract (i.e. weekly, quarterly, yearly etc) and without a break in between.

    would the above give rise to the misclassification risk i.e. freelancer successfully making a claim for a similar benefits enjoyed by permanent staff.

    would really appreciate your help.

    ReplyDelete
  4. Good differentiation and information to me...
    Thank You.

    ReplyDelete
  5. guy can help me solve this question....
    the facts like this...
    #the name of that company is caterpillar.sdn.bhd. they specialised on oil rig belonging to the multinational oil company but the company denied having any employment relationship. and also the company paid the workers like other company for every month. and also pay for EPF and rest days and overtime paid stated on their contract. so question is ask about weather the workers is under contracts of services or contracts for services....

    ReplyDelete
    Replies
    1. the company had paid for the EPF and so on,workers of the company is under the Contract of service.. contract for service can be explained, like this. one day, u want to cut the grass in your house area. then u had called a contractor or a self-employed person to cut the grass and u pay them with money. that was called as the contact for service because u only call them for that particular job and when that job is done, u and that contractor had nothing more to deal with because u only hire them for that particular job.

      Delete