Difference between Contract of Service and Contract for Service

SUSHILABEN INDRAVADAN GANDHI V NEW INDIA INSURANCE COMPANY LIMITED SUPREME COURT OF INDIA(AIR 2020 SC 1977)

THE SUPREME COURT OF INDIA IN APRIL 2020, Since there are many ambiguity in definition of various social welfare laws in India. They have not clearly defined the " Workmen" and each laws define " Workmen" differently. The Apex Court of India in above case define ( what constitutes as a workman and as to what differentiates contract of service from contract for service). The case brings into light the ingredients as well as the factors of the test of what constitutes a workman while also bringing into light that sometimes such tests often restrict the definition of workman.

BRIEF FACTS

• The petitioner, SushilabenIndravadan Gandhi had moved to court for claiming the insurance that she was to be given due to the demise of her husband, Dr. Alpesh Gandhi who worked as an honorary Ophthalmic Surgeon in the Rotary Eye Institute, Navsari.
• The deceased was on duty and was travelling on the bus which was owned by the hospital along with other medical staff who were on board.
• Unfortunately, due to the rash driving the minibus met with an accident and the deceased was severely injured and later succumbed to his injuries.
• The hospital had their insurance covered by the New Insurance Company Limited who are the defendants in the present case.
• A few months prior to the incident the hospital had availed a policy from the defendants in which it was stated that the policy shall not cover those who are employed by the hospital.
• The hospital also had an agreement with the company through IMT-5 endorsement which required the company to pay compensation for unnamed passengers other than those who are covered under Workmen Compensation Act of 1923.
• Gandhi approached the Motor Accident Claims Tribunal demanding compensation of Rupees 1 crore.
• The tribunal observed that the deceased had a Contract For Servicewith the hospital and thus was not an employee of the hospital therefore holding the defendants liable to pay compensation.

GUJARAT HIGH COURT DECISION

• This was appealed by the defendants before Gujarat High Court who observed the opposite and stated that the contract between Dr. Gandhi and the hospital was that of Contract of service and thus the respondent could claim a compensation of Rs. 50,000 and the rest expenses shall be borne by the Hospital.
• The case was further appealed by the respondent in the Supreme Court demanding for the compensation to be enhanced.

ISSUES OF THE CASE

The issue of the case that was noted by the Supreme Court are as follows:

1) Whether the deceased had a "contract of service" or "contract for service" with the said hospital, i.e., whether he could be considered as an employee of the hospital

2) Whether the policy between the company and the hospital will cover the deceased on the basis of the contractual agreement shared by the deceased and the hospital.

LEGISLATION APPLIED IN THE PRESENT CASE

Section 2(n) of the Workmen Compensation Act of 1923

Section 2 (n) " workman" means any person (other than a person whose employment is of a casual nature and who is employed otherwise than for the purposes of the employer' s trade or business) who is--

(i) a railway servant as defined in section 3 of the Indian Railways Act, 1890 (9 of 1890 ), not permanently employed in any administrative, district or sub- divisional office of a railway and not employed in any such capacity as is specified in Schedule II, or

(ii) employed 1 2 in any such capacity as is specified in Schedule II. whether the contract of employment was made before or after the passing of this Act and whether such contract is expressed or implied, oral or in writing; but does not include any person working in the capacity of a member of 3 the Armed Forces of the Union] 4 ; and any reference to a workman who has been injured shall, where the workman is dead, include a reference to his dependants or any of them.

Section 2 (i) of Factories Act of 1948

(l) "worker" means a person employed, directly or by or through any agency (including a contractor) with or without the knowledge of the principal employer, whether for remuneration or not], in any manufacturing process, or in cleaning any part of the machinery or premises used for a manufacturing process, or in any other kind of work incidental to, or connected with, the manufacturing process, or the subject of the manufacturing process but does not include any member of the armed forces of the Union.

Section 2 (s) of Industrial Disputes Act of 1947 and previous judgements to compare the definition of "workman"

workman means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with, or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute, but does not include any such person--

(i) who is subject to the Air Force Act, 1950 (45 of 1950), or the Army Act, 1950 (46 of 1950), or the Navy Act, 1957 (62 of 1957); or

(ii) who is employed in the police service or as an officer or other employee of a prison; or

(iii) who is employed mainly in a managerial or administrative capacity; or

(iv) who, being employed in a supervisory capacity, draws wages exceeding ten thousand rupees] per mensem or exercises, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature.

ARGUMENTS PRODUCED BEFORE THE COURT

1. The counsel for the appellant emphasized through the case of Dharangadhara Chemical Works Ltd. v. State of Saurashtra that the contract between the deceased and the hospital was that of " contract for service" and thus the deceased was not an employee of the hospital. The deceased was given an honorarium of Rs. 4000 for his services by the hospital and also that he was not a regular employee and the contract did not allow him to avail any financial benefits which was given to other employees as far as the leave policy of the hospital was concerned.
2. The counsel for the respondent supported the decision of the High Court and thus stated that the contract was that of contract of service making the deceased an employee of the hospital and further stated that the deceased shall not come under IMT-5 either but IMT-16. However, the hospital has not paid for the endorsement of IMT-16 thus the deceased will not be insured by the defendant company.

DECISION OF THE APEX COURT

The Supreme Court came to its decision on the basis of comparing the test for defining the term "workman" under various legislations and previous judgements. The Court noted that there cannot be a universal test which can help define what "workman" constitutes as. It further emphasized that it also depends upon the amount of control that an employer has over the work of the employee and thus as society and technology progresses the control and definition of who can be considered as an employee also changes.

• In the present case, it is disputed whether the deceased came under the hospital or not, as per the contract that the deceased had with the hospital, he was not a regular employee and was given an honorarium of Rupees four thousand a month for his services and thus it is necessary to establish the test where a person employed is integrated into the employer's business or merely functions as an accessory.
• The court also noted that the tests that were laid down in many English judgments which depend upon the matter of economic reality, "the degrees of control, opportunities of profit or loss, investment in facilities, permanency of relations and skill required in the claimed independent operation. As mentioned before the technology and the control over employee's work has changed in time and therefore the test of control does not always help in determining whether the employee comes under the control of the employer. There are often tests which determine whether the person who has engaged himself to perform service performs them as a person in business on his own account.
• Thus the Supreme Court observed that the determination of "contract of service" and "contract for service" depends upon different factors and scenarios and the application of all the mentioned tests.
• Finally, to come to its conclusion the Supreme Court observed through previous case laws that when the if the context of the case is depended upon one of a beneficial legislation being applied to weaker sections of society, the balance tilts in favor of declaring the contract to be 'Contract of Service' and the opposite if it is 'Contract for Service.
• Upon these factors Court finally came to the conclusion that in the present case, the contractual agreement between the deceased and the hospital was that of 'Contract for Service' and also that as per the terms of the contract that it was evident that the doctor was in control of his own work and was practicing individually and not as an employee of the hospital.
• The Supreme Court overruled the High Court's decision and restored the decision of the Tribunal and asked the defendant company to pay the compensation to Mrs. Gandhi.

THE APEX COURT IN THIS CASE

THE CONTRACT IS A 'CONTRACT FOR SERVICE'

On perusing the Contract to gather the intention of the parties, the Supreme Court applied the economic reality test and concluded that the terms of the Contract made it clear that it is one for service and that the Deceased was an independent professional and not an employee of the Hospital.

Some of the factors considered by the Court while arriving at the above findings are as follows:

1. The Contract clearly provided that the Deceased shall no longer remain as a regular employee of the Hospital , making it clear that his services were no longer seen as that of a regular employee but as an independent professional.
2. The remuneration under the Contract was described as an honorarium, which was consistent with the position that the Deceased was an independent professional working with the Hospital.
3. The Deceased was given a share of the spoils insofar as the Contract entitled him to receive a percentage of the earnings of the Hospital for certain activities.
4. The Contract was on equal terms as the duration was for three years, extendable only by mutual consent.
5. The Contract could not be terminated in the usual manner, as with other regular employees of the Hospital, but only upon notice by either side.
6. Even though the leave rules of the Institute were applicable to the Deceased, since he was not a regular employee, the Contract provided that he was not entitled to any financial benefit as might be applicable to other regular employees of the Hospital.
7. The fact that the Contract provided for arbitration of disputes between the Deceased and the Hospital by the Managing Committee of the Institute showed that their pact was not that of master and servant but of employer and independent professional.

The Court found that certain provisions did point in the direction of a contract of service viz. that the employment was full-time and the Deceased could do no other work, the Deceased was to work on all days except weekly offs and holidays given by the Institute, he was governed by the conduct rules of the Hospital and the Contract could be terminated by the Hospital at any time without compensation in the event of a proven case of indiscipline or breach of trust. However, the Court found that the factors which made the contract one for service outweighed these factors.

CONCLUSION

The following case is an important judgement for determining the difference between 'Contract of Service' and 'Contract for Service'. The Court helped determine that there are often times that legislations overlap each other which leads to exclusion of an individual from the compensation that they deserve to get. The Court helped determine that there can never be a universal test to determine a workman. Also, that it takes other factors to determine whether the person in fact is an employee and thus one should not always depend upon the 'Test of Control'. The case emphasized on the socio- economic factors and states that often when faced with ambiguity in law, socio- benefit legislations should be applied to ensure compensation to those who require them the most. The Supreme Court in this case encourages in broadening the factors for determination of the test and the definition itself which can be seen as a welcoming move with respect to social welfare and benefit of the society and indeed sets a good precedent for future cases in the same matter.

DISCLAIMER: The case law presented here is only for sharing information and knowledge with the readers. The views expressed are personal and shall not be taken as professional advice. In case of necessity do consult with professionals for more clarity and understanding of subject matter.

Footnotes

LET'S CONSIDER SOME DEFINITIONS OF "CONTRACT FOR SERVICE"

1. 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.

2. A contract for services is a formal, legally binding agreement before a business and a self-employment individual. It differs between an employment contract – known as a contract of service – which is between an employer and an individual who then becomes employed by the company.

3. A contract for services is an agreement between a business and an individual who is self-employed wherein the business agrees to pay the individual for a limited amount of service without that individual formally becoming an employee.Such agreements are usually made for specific acts, such as painting a house or tuning a car, although long-term work may also occur. The contract will specify the nature of the contracted work, its compensation, and any other details deemed prudent to express for the clarification of the contract.

4. Contract for service refers to a person who provides his services to his clients.

5. People who work for contract for service are generally not entitled to any rights that are there for people who work under contract of service.These are people who are independent contractors having their own business and a fixed address. They have control over their business and they know what is to be done at what time, and how the job is to be carried out either personally os through others. These people can provide their service to more than one client at a time and such people usually provide for their own insurance cover.

LET'S CONSIDER SOME DEFINITIONS OF "CONTRACT OF SERVICE"

6. 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.

7. While the contract of service refers to a person who is in employment.

8. A contract of service means an agreement, whether verbal or in writing, where a person binds him/herself to render service to, or to do work for, an employer in return of wages. Thus even a verbal agreement between an employee and an employer is valid and is enforceable by law.

The table below illustrates the principal ingredients clearly to help decide the nature of contract.

CONTRACT OF SERVICE

1. Supply of Labour.
2. The end product or service is not specified.
3. There is control & supervision over such labour.
4. Bound to obey the orders & instructions.
5. There are no discretionary powers.
6. Right to reject the product / Service & or to refuse to give work.
7. The invoice by the contractor is based on the number of persons supplied by him.

CONTRACT FOR SERVICE

1. The end product or service is specified.
2. No mention of supply of labour.
3. They are not subjected to control and supervision.
4. They are bound by the instructions of the contractor.
5. The contractor has discretionary powers.
6. The contractor is accountable for deficiencies in service.
7. The invoice by the contractor is based on the quantum of work or service.

SOME JUDICIAL DECISIONS

• In Dharangadhara Chemical Works Ltd. v. State of Saurashtra, a four-judge bench of the Supreme Court held that the prima facie test for the determination of the relationship between a master and servant is the existence of the master's right to supervise and control the work not only by directing what work the servant is to do, but also the manner in which the servant shall do his work. However, the nature or extent of control which is requisite to establish the relationship between an employer and his employee must necessarily vary from business to business and is by its very nature incapable of a precise definition.
• In Silver Jubilee Tailoring House v. Chief Inspector of Shops & Establishments,a three-judge bench of the Supreme Court held that an employer-employee relationship existed between a tailoring shop and persons employed by the owner of the shop for stitching. The fact that machines on which sewing took place were supplied by the proprietor, as well as his right to reject sub-standard work, were found to outweigh the fact that such persons did not have to work exclusively for the owner of the shop and that they were not obliged to work for the full day.

The Supreme Court also held, in Silver Jubilee (supra), that in many skilled employments, applying the test of control over the manner of work, to establish a master-servant relationship, would be unrealistic.

There can be no single or magic formula to decide whether a contract is one for service or of service. The court can only perform a balancing operation weighing up the factors which point in one direction and balance them against those pointing in the opposite direction.

• The economic reality of control test was recognised by a three-judge bench of the Supreme Court in Hussainbhai v. Alath Factory Thezhilali Unionwherein it was held that the true test is where a worker or a group of workers labours to produce goods or services which are for the business of another person, then he is the employer of such worker/ group of workers. The Supreme Court found that such an employer has economic control over the workers' subsistence, skill and continued employment and they would be virtually laid-off if the employer ceased to use their goods or services for any reason. The presence of intermediate contractors with whom alone the workers have an immediate or direct relationship ex contractu was held to be of no consequence, when it could be discerned upon lifting the veil that the contractor was not the real employer.