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Contract of Service and Contract for Service
by Shantimal Jain*
Cite as : (2003) 8 SCC (Jour) 2
In both the contract of service and contract for service there is transfer of property in goods but the difference is of degrees i.e. “dominant” or “incident”. A job contract would not entail incidental liabilities because in such a situation the entrepreneur only hires labour and skill. The material and inputs are supplied by the contractor and the labour after applying his labour and skilled hands over the end products to the contractor. If the terms of contract are appropriately spelled out and dominant element is identified, the distinction would manifest itself. In a market economy with competitive players it would be a mistake in such contracts to empower labour that need be emasculated and disciplined.
A contract of service is different from a contract for service. In a contract of service the employer normally enjoys the power of control over the work of the servant and the servant is bound to obey the orders/instructions of the master. An independent contractor, on the other hand, undertakes to produce the required result, but in the actual execution of the job to produce the result, he is not under the order or control of the person for whom he executes that work. He is free to use his discretion. The line of demarcation between an independent contractor and an employee is very thin and the two concepts sometimes overlap. In such a situation, the question about the relationship of employer and employee needs to be determined with reference to the facts and circumstances of each case as to who are the parties to the contract, who pays the wages, who has the power to dismiss, what is the nature of the job, and the place of executing the job, all have to be kept in mind. Out of so many tests, the vastly important test which till now held ground was the element of control and supervision of work.
There is a well-understood difference between a contractor and workman and between contract for service and contract of service. A “contractor” is a person, who in the pursuit of an independent business, undertakes to do specific jobs of work for other persons without submitting himself to their control in respect of the details of the work1.
A contractor has also been defined as a person who, in the pursuit of an independent business, undertakes to do specific jobs of work for other persons without submitting himself to their control in respect of the details of the works and jobs2.
For distinguishing between an independent contractor and a servant, the test would be whether or not the employer retains the power not only of directing what work is to be done but also of controlling the manner of doing the work. If a person can be overlooked, beholden and directed in regard to the manner of doing his work, that person is not a contractor and it makes no difference that his work is piece work.
However, with regard to labour matter, legal position changes very frequently and purpose-oriented interpretations are placed thereon.
The Supreme Court in the case of Shining Tailors v. Industrial Tribunal II, U.P.3, departing from hiherto obtaining legal position, held that tailors working on piece-rate basis in a big tailoring establishment are workmen of the owner of the establishment. Every piece-rated workman is not an independent contractor, piece-rate payment meant, payment correlated to production. It is a well-known mode of payment to industrial workmen.
The employer’s right to reject the end product, if it does not conform to the instructions of the employer, speaks for the element of control and supervision. So also the right of removal of the workmen or not to give the work has the element of control and supervision. The right of rejection coupled with the right to refuse work would certainly establish “master-servant relationship”. But in a case, where goldsmiths were engaged by a gold merchant for manufacturing jewels for him, where such goldsmiths were asked to finish jewels within a given time or earlier and engage themselves in other works, it has been held that it was a contract for service and the goldsmiths were independent contractors4. For evolution appreciating this law in India the case of Shivnandan Sharma v. Punjab National Bank Ltd.5 could be taken as the convenient point wherein the test for determining the question whether the person is an “employee” or an “independent contractor” was taken into account by the Supreme Court for the first time and “Supervision and Control” was held to be the crucial point for determining the relationship. Then in Dhrangadhra Chemical Works Ltd. v. State of Saurashtra6, the Supreme Court held that the test of supervision and control may be taken as prima facie test for determining the relationship of employment. Since the nature or extent of control varied from business to business it became impossible to precisely define the extent of control and supervision. The judicial dicta therefore suggested that correct method of approach, would be to consider whether having regard to the nature of work, there was due control and supervision by the employer. It means the greater the amount of direct control exercised over the persons rendering services by the persons contracting for them, the stronger would be the logic for holding it to be a contract of service.
In Silver Jubilee Tailoring House v. Chief Inspector of Shops and Establishments7, the Supreme Court observed that the control idea was more suited to the agricultural society, prior to industrial revolution and during the last two decades the emphasis in the fields has shifted and no longer rests exclusively or strongly upon the question of control. Control is obviously an important factor and in many cases it may still be decisive, but it is wrong to say that in every case, it is decisive. It was further observed that search for a single formula in the nature of a single test will not serve the purpose and all factors that have been referred to should be considered. In Chintaman Rao v. State of M.P.2, the Supreme Court gave restricted meaning to the words “directly or through an agency” in the Factories Act and held that worker was a person employed by the management and that there must be a contract of service and a relationship of master and servant between them. This case is perpetuation of the ratio dicidendi in Dhrangadhra case6 and that it has since been followed by the Supreme Court and the High Courts subsequently.
The developments in England also were on similar lines.
In Whittaker v. Minister of Pensions and National Insurance8 Mocatta, J. observed:
“The test of control is, therefore, not as determinative as used to be thought to be the case, though no doubt it is still of value in that the greater the degree of control exerciseable by the employer, the more likely it is that the contract is one of service.”9
Similar were the views of Roskill, J. in Argent v. Minister of Social Security10 when he said:
“Control is obviously an important factor. In some cases it may still be the decisive factor, but it is wrong to say that in every case it is the decisive factor. It is now, as I venture to think, no more than a factor, albeit a very important one.” (All ER p. 215 F-G)
The emphasis shifted to organisational test, namely, whether the person concerned was a part and parcel of the organisation. One feature, which ran common through the instances is that under a contract of service, a man is employed as part of the business, whereas under a contract for service, his work, though done for the business, is not integrated into it, but only accessory to it.
Between “complete control” and “complete independence”, a variety of circumstances may exist, and the law recognises that many types of services involve a wide field of initiative and discretion being left to the servant. Specially, in case of professional man, there can be no question for an employer telling him how to do the work. Therefore, absence of control and direction in that sense can be of little help, what in fact matters is lawful authority to command. The question, therefore, is not whether the control is exercised, it is as to where is the right of control. And the distinction between the physical control and the right of control is subtle, but very important.
It will be useful to pause for a moment and to look how the problem has been dealt with in U.S.A. Although the courts in U.S.A. have not completely given go-by to the common law conceptions, especially the application of supervision and control test, a new doctrine of “economic reality” has been evolved. In U.S. v. Silk11 it is observed that the test was whether “men were employees as a matter of economic reality”.12
The Supreme Court of India considered, generally speaking, this aspect in Silver Jubilee Tailoring House v. Chief Inspector of Shops and Establishment7 wherein it observed as under:
“The fact that generally the workers attend the shop, which belongs to the employer and work there, on the machines, also belonging to him, is a relevant factor. When the services are performed generally in the employer’s premises, this is same indication that the contract is a contract for service. It is possible that this is another facet of the incidental feature of employment. This is a sort of situation, when organisational test could find some application.13
From the decisions it appears that the law in India too is not static. The master’s power of selection of his servant, the payment of wages and other remuneration, the right to control, the method of doing the work and master’s right of suspension or dismissal are other recognised factors in this regard. In the case of Integrated Rural Development Agency v. Ram Pyare Pandey14 the Supreme Court held that where the relationship between the employer and the employee is purely contractual, the same cannot be enforced by the civil court.
All the factors, namely, the employer’s power of selection and dismissal, right of control and supervising the method of doing the work, the nature and place of work, the economic control, organisational test and all other relevant facts and circumstances have to be taken into account for deciding the question either way.
These factors, though indefinable, play not an insignificant part in judicial decisions; there are boundaries within which they can exert their influence but the boundaries are not sharply drawn and fixed for all time and although they are assuming specific forms, they are not wholly contained within them. Courts are sometimes quixotic in their rulings. They resort to taking an overly narrow interpretation of the letter of law resulting in an unintended and bizarre consequence whereas at other times they backtrack this course and the result is the brazenness for the employer who is a usual victim of the vagaries.
These are days when social security measures receive utmost attention of the Government. Social security suggests and requires, status rather than contract and consequently the right of the workman becomes a matter not of contract but of status.
In spite the aforesaid, the next phase of reforms shall embrace the labour market where flexibility is badly needed and the hitherto rhetoric shall have to undergo complete metamorphosis and the Government may not afford to be all cosy and socialistically inclined because it is only by getting sensitised to lowering of cost of production that we could survive in the global competitiveness and for this contract labour system is a must.
The concepts of contract for service and of service shall therefore have to yield to each other. Later or sooner the judicial verdicts too shall attune to the times and synchronise accordingly. Lacklustre performance of workers shall have no place in economy whose caravan shall push on traversing all these terrain of employment styles. Ostensibly being distinct — there is definitely a partnership, kinship and affinity interwoven into the two concepts and only a calm, calculated and scholarly detached approach could delineate a thin divide and any predetermined exercise would create crisis of comprehending the intricacies of the propositions.
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