Contract of Service Vs Contract for Service

INTRODUCTION

Businesses exist with the primary view of making a profit and thus returning value to its shareholders. It is therefore not surprising that once the profit base of the business is undermined or threatened that steps will be introduced to stem the loss in profits by the business. If an analysis is conducted and the findings indicate that the proportionately high cost of conducting business can be attributed to the local environment or to the cost of staffing levels, then a decision may be taken to outsource some of the company’s business. This decision will undoubtedly cause displacement for some company employees as their positions become redundant due to the act of outsourcing.

With this in mind it becomes prudent to define some key terms in order to bring greater clarity to this topic. According to roseindia.net, outsourcing is the process by which a company contracts another company to provide particular services. The company that does the outsourcing is called the firm or client. The company that receives the outsourced work is called the vendor.

Two additional key terms are:

1. Contract of service- which simply stated relates to a person in employment

2. Contract for service- which relates to a person who is self-employed and who provides services to clients or the company.

It is instructive to note that a person who works under the term contract of service is referred to in employment and tax legislation and is therefore a person who is:

• An employee on the payroll of the company

• An employee for employment rights purposes, and

• a worker for other employment rights purposes

A contrast can therefore be made with the person who works under a contract for services, who may also be referred to as a self-employed person, since this person is neither an employee nor a worker. There is therefore no requirement for the company to include such a person on its payroll as payments are usually made on invoice submitted by the individual. Under this arrangement there is no entitlement to any of the employment rights as are available to employees and workers.

The challenge has long been to clearly differentiate these two terms; two tests have been used to identify an employee, who as aforementioned is a person who works under a “contract of service”. These are:

a. “mutuality of obligation”, i.e. both parties to the contract have obligations to each other, the employee to perform work as directed, the employer to pay for the work performed.

b. The “degree of control” exercised by the employer over the