Importance of Business Law

Analyze the SC Test to clarify the difference between a Contract of Service and a Contract for Service

In present times, companies prefer to enter into a different contracts with a lot of individuals or company for their business and routine requirements.

Companies hire permanent employees or engage the services of a third party to meet their routine requirements. So, for all different reasons the businesses enter into different contracts.

Every contract can be broadly divided into two categories-

  1. Contract for Services
  2. Contract of Services

Contract for Services:

A contract for service is an agreement that is between the company and third-party for availing its services. The third-party is an independent service provider and not a permanent employee of the company. As third party is not an employee so they are not entitled to the benefits that the employees of the company receive from time to time during their employment. The company does not have overall control over the third-party as they are their service provider and not employee.

Examples where a contract for services is used-

  • A business taking the support of a third party to develop a website for them, development of certain artwork, and others
  • A film producer hiring the services of an animation artist for his movie or hiring an editor for his editorial experience.

Contract of Services:

A contract of service is an agreement between the company and individual (employee) for availing his/her services. The individual represents the employee of the company. So, he is entitled to the benefits that the employees of the company are entitled to from time to time during the course of their employment. The company has control over the work produced by the employee (the rule has its exceptions) and the employee has to obey the instructions of his employer.

In Sushilaben Indravadan Gandhi v. The New India Assurance Company Limited, [ Judgement dated 15th April 2020 in Civil Appeal No. 2235 of 2020] The Supreme Court clarified the tests to differentiate between a contract of service and a contract for service.

The Supreme Court continued to set aside the decision of the Gujarat High Court. Although the contract, in this case, had been specified, there were also factors that identified it in the understanding of being a working contract. Therefore, this judgment serves as a practical and current example in the courts while performing the equitable act required in such cases. The broad reason accepted by the Supreme Court in the present case is an acceptable example, as many previous decisions were based on the concept of a service contract in terms of a contract of employment in the context of labour laws. This case provides much-needed modern ideas to be used by the courts when considering only contract matters and confirms the tests that will be used when deciding whether a contract is one of service or for service.


Some past landmark judgements has analysed by the Supreme Court of India

The Supreme Court reviewed previous tests framed by the Court (in 1957) to determine whether the people who supplied the various types of goods or services could be said to be employed by the employer. Many of these judgments were based on labour laws, such as the Industrial Disputes Act, 1947. Some of the trials, which were recognized by the Supreme Court, are listed below.

  1. In Dharangadhara Chemical Works Ltd. v. State of Saurashtra, a four-judge panel of the Supreme Court held that the prima facie test of determining the relationship between a master and a servant was the employer’s right to administer and control the work not only by directing what the work was doing but also by how the servant would do his job. However, the type or extent of control required to establish a relationship between an employer and his or her employee must vary from business to business and in nature cannot be precise.
  2. In Silver Jubilee Tailoring House v. Chief Inspector of Shops & Establishments, the three-judge Supreme Court bench held that a relationship between the employer and the employee between the sewing shop and the people employed by the shop owner to sew. The fact that the shipping equipment was given by the owner, as well as his right to refuse substandard work, was found to outweigh the fact that such individuals were not required to work for the shop owner alone and were not obliged to work all day.
  3. The economic reality of the regulatory test was recognized by the three-judge bench of the Supreme Court in Hussainbhai v. Alath Factory Technical Union where the real test is that an employee or group of workers is working to produce goods or services for someone else’s business, and he is the employer of those employee. The Supreme Court has found that such an employer has the power to control the economy over the livelihoods of employees, their ability, and to continue working and will be subject to dismissal if the employer ceases to use their goods or services for any reason. The presence of middle-class contractors with only immediate or direct relationships was irrelevant where it can be found when the veil is raised that the contractor was not a real employer.

Test to determine the difference between a contract of service and a contract for service

The Supreme Court of India stated some test to determine the difference between a contract of service and a contract for service contains the following:

  1. The simple test of ‘control of the employer’ that the employer controls not only the work but also the way it is done, is just one of a series of things that need to be tested to see if the contract works or not, in today’s complex society.
  2. Whether the employee is connected to the employer’s business or just an accessory thereof is an important means of assessing which side of the line the contract falls on.
  3. The various criteria set by the courts of England are also strong enough to apply to many different types including whether the employer pays the said person or another salary and whether there is a sufficient level of control over the employer.
  4. An assessment of who owns the assets through which the work to be done, and/or who ultimately makes a profit or loss, so that a person can see if the business is run by the employer or through his or her account, and a useful test.
  5. True economic assessment i.e. whether the employer has the economic power over the livelihood, ability, and continuity of the work can be used to determine whether an employee is self-employed or employed by his or her employer.
  6. The fact that a person engages in a particular activity on his or her own initiative is also an important test from an employee’s point of view.
  7. No single general application test can produce relevant results. “A combination of all practical tests taken as a whole for the real situation” will need to be determined whether a given contract is one of service or for service.
  8. All of the above will not always work. The court may make an action by measuring some of the points pointing in one direction to those pointing in the other. The context in which the discovery is to take place is very important. If the context is one of the beneficial rules applied to the weaker sections of society, the balance tends to declare the contract as one of the services. Where the situation is other than of a beneficial legislation or only in the realm of contract that would point towards a contract for service then, other things being equal, the court may tilt the balance in favour of construing the contract as being one for service.


An agreement is an essential element of any transaction. However, the most important thing is to choose the kind of agreement that needs to be done to achieve the goals and objectives of the parties. The wrong agreement may cover the way for disputes. A contract for service is required when a person wants to include third-party services as an independent contractor for a specific project or temporary purpose. A contract of service is that of employment and is entered into with employees who participate and perform duties with the company on a daily basis. The content of the contract of employment will vary from industry to industry and will define the type of work to be done by the employee. In addition, it will talk about working hours, salary structure, etc.

UN Legal Group
UN Legal Group