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Tips
Employee or not an employee?
When do you determine whether the person that you "employ" is an
employee or a contractor?
This is one of the most common problems that are faced by
employers and employees alike. Read on to know where you stand.
Contract of Service Vs Contract for
Service
Posted by Thomas Lee at 5:41 AM (extract from
http://humanresourcemalaysia.blogspot.com)
I’ve decided to write about this (with some reference from
Industrial Relations practitioner as an advisor) as many HR
practitioners that I’ve personally known could not differentiate the
above while some might even suggest it’s just terminology
differentiation.
Contract of Service
A contract of service is any agreement whether in writing or verbal,
expressed or implied, whereby:
- One person agrees to employ another as an employee, and
- The other person agrees to serve the employer as an employee
Note: An apprenticeship contract or agreement is also considered a
contract of service.
A contract of service can be in the form of a letter of
appointment/employment. The employer cannot change the terms and
conditions of employment unless the employee agrees to it. Any terms
and conditions of employment, in a contract of service, that is less
favorable than the relevant provision under the Employment Act is
illegal, null and void. The provision in the Act will take
precedence over a particular contractual term that is less
favorable.
Contract for Service
In a contract for service, there is no employer and employee
relationship. The person is usually self-employed or may provide
his/her services on a freelance basis at a fee. He/she is not an
employee within the definition in the Employment Act.
Difference Between a Contract of Service and a Contract for
Service
A contract of service is an agreement whereby one person agrees to
employ another as an employee and the other agrees to serve his/her
employer as an employee. The employer would need to contribute EPF
and comply with relevant statutory benefits such as annual leave,
sick leave and et cetera for its employees engaged under a contract
of service.
On the other hand, a contract for service is an agreement whereby a
person is engaged as an independent contractor, such as a
self-employed person or vendor engaged for a fee to carry out an
assignment or a project for the company. Under such a work
arrangement, there is no employer-employee relationship, and the
employee is not covered by the Employment Act.
There is no single conclusive test to distinguish a contract of
service from a contract for service. Some of the factors to be
considered in identifying a contract of service include
(non-exhaustive):
• Control Test
• Independence Test
• Integration Test
• Economic Reality Test
The Tests
Control Test
The traditional test, how much control is being exercised over the
worker by the employer. The more control that is being exercised,
the more likely it is that the worker is an employee regardless of
what the contract says.
Traditionally ‘masters’ exercised actual control over their
‘servants.’ However, in more recent days, because people are
becoming more specialized, employees will often know more about the
subject area they are working in than their employers. The control
test does not therefore look at whether the employer is operating
actual control, but rather asks whether the employer could exercise
control.
Independence Test
It’s pretty much the flip side of the control test, does the worker
have independence in deciding how his/her work is to be done, can
he/she decide his/her own work hours, subcontract out work, and et
cetera.
Integration Test
Is the work being performed under the contract integral to the
operation of the business structure as a whole, or is it only works
on the side of the main business? One feature which seems to run
through the instances is that under a contract of service, a person
is employed as part of the business and his/her work is done as an
integral part of the business whereas under a contract for service,
his/her work, although done for the business, is not integrated into
it but is only an accessory to it.
Economic Reality Test
Is the worker dependent upon the job for economic survival (can
other employment be undertaken, for example).
Additional Note from ZYA:
- Most employer presumed that if the contract (or agreement)
between the employer and the employee is on a fixed and/or short
duration (example: for 3 months), the relationship between the
employer and the employee is thus between a company and a
contractor. On the contrary, as long as the relationship are
based on the above tests and if it meets the criteria of an
employer and employee relationship; the person would therefore
be considered to be an employee (but on a Fixed Term Contract
Of Service).
- Irrespective whether the contract or agreement is
termed as "Contract For Service" or of similar connotation, and
whether the person signs it knowingly or unknowingly; as long as
the tests determine that the person is on a Contract Of Service,
the person is therefore considered to be an employee.
- Employers should be absolutely sure when they hire people on
Contract For Service, because later on they can be summoned by
the relevant authorities and/or claims can be made by the
employees.
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