CONTRACT OF SERVICE VS CONTRACT FOR SERVICE

CONTRACT OF SERVICE  VS  CONTRACT FOR SERVICE

A contract of service (CoS) is where an employer employs a person in a job whereas a contract for service (CfS) is when an employer engages an independent contractor to do a job.

In today scenario, most company engage independent contractors to do certain job for them (outsource) - mainly to avoid the hassle of employing a large workforce and because of its advantages e.g.:

•       Payment is based on the result achieved -motivation to increase production and less absenteeism.

•       Reduction in overhead  and supervision cost

Also the existence of atypical workers under atypical employment that leads to blurring of the line between contract of service and contract for service

•       Part time worker

•       Casual worker

•       Home worker

•       Fixed contract

•       Agency worker

Thus in order to determine the status of a worker, certain tests have been used by the courts to determine the status:

•       Control Test

•       Integration Test

•       Multiple Test

•       Economic Reality/Entrepreneur Test

•       Mutual Obligation Test

1. Control Test

In the first instance, the courts investigate if the user of labour has the 'right to control' the worker. They will look at the work relationship for indicators of control.

In Employees Provident Fund Board v Bata Shoe Company (Malaya) Ltd [1968] 1 MLJ 236, the Court of Appeal upheld the decision of the High Court that shop managers were employees of Bata due to the considerable control which the company had over the shop managers. However there was no relationship of employer and employee between the Bata Shoe Co. (M) Ltd and the salesmen employed by the shop managers of the company. Under the agreement between the company and the managers, the managers were given power to employ persons to assist them and it was stated that the managers would be responsible for payments under the Employment Provident Fund Ordinance.

2. Integration Test

If the 'control test' is not conclusive, which may frequently be the case (eg. Cassidy v Ministry of Health [1951] 2 KB 343 , the courts may resort to what they call the 'integration test'.

The ‘integration test’ seeks to test if the worker is 'part and parcel' of the business organization, and also involves study of each and every specific situation.

It is often easy to recognise a contract of service when you see it, but difficult to say wherein the distinction lies... One feature which seems to run through the instances is that, under a contract of service, a man is employed as part of the business, and his work is done as an integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it"’

3. Multiple Test

McKenna J in Ready Mixed Concrete (South East) Ltd. v Minister of Pensions and National Insurance [1968] 2 QB 497, had derived another test known as ‘multiple test’.

Facts :

Ready Mixed Concrete (South East) Ltd (“RMC”) was in the business of making and selling ready mixed concrete. The company had engaged an independent haulage contractor to deliver the concrete to customers but that contract was terminated and RMC decided to introduce a scheme whereby concrete was delivered by owner-drivers working under written contracts.

The owner-drivers entered into a hire purchase agreement with Ready Mix Finance Ltd to purchase a lorry but the mixing equipment on the lorry was the company’s property. In 1965 the company asked the Minister of Social Security for a determination of the employment status of one of the owner- drivers, Mr Latimer.

Decision :

The Minister decided that Mr Latimer was employed under a contract of service but, on appeal to the High Court, MacKenna J held that he was running a business of his own. In summing up MacKenna J said that Mr Latimer was a “small business man” and not a servant. He concluded that the contract was not one of service but of carriage.

It is perhaps the most widely applied of the tests. It essentially conflates the control test into a more general survey of the circumstances of the relationship.

The test was applied in our local case in Casio (Malaysia) Sdn. Bhd. v. Wahab Tuan Idris [2001] 2 ILR 117.

The central elements of the multiple test are:

—  Did the worker undertake to provide his/her own work and skill in return for remuneration?

—  Was there a sufficient degree of control to enable the worker fairly to be called a servant? The first of the tests to evolve was called the control test. The basic question was whether the employer told the worker what job to do, when it was to be done and how it was to be done. (cf. Whittaker v. Ministry of Pensions [1967] 1 QB 156)

—  Were there any factors inconsistent with the existence of a contract of service?

—  Which would definitely negate the existence of a master/servant relationship. If there are not, then there is a presumption that, because the worker could be a servant, he should be so considered.

4. Economic Reality/ Entrepreneur Test

The ‘economic reality test’ focuses on the inconsistency of seeking a profit from doing the work with doing the work as an employee.

The idea underpinning the development of this "test" was that it was not enough to establish the degree of control exercised by the employer over the worker.

What really distinguishes employees from independent contractors, it was said in a number of cases, is that the independent contractor is working in the hope of making a profit rather than merely for a wage or salary.

In Market Investigations Ltd. v Minister of Social Security [1969] 2WLR 1 Cooke LJ came close to assigning primacy to the economic reality test. But he did recognise that other tests might be more relevant or decisive in particular circumstances.

This test offers real advantages where the employer and worker have dressed up a master/servant relationship in the garb of a contract for services (usually to secure the tax advantages which accrue to self-employed persons).

5. Mutual Obligation Test

It is said that the relationship of employer and employee cannot exist unless the employer perceives and acts on an obligation to supply work; and the worker feels obliged to undertake any work offered.

Mutuality of obligation – whether the employer feels obliged to offer work and the worker feels obliged to take it when offered - can be an important question where casual working is involved.