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.
CONTRACT OF SERVICE VS CONTRACT FOR SERVICE
Reviewed by Kamaruddin Mahmood
on
9:05:00 PTG
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