There are often confusions between “contract of service” and “contract for service”. A mere difference in the words, “of” and “for” will by itself change the entire context of the aforementioned phrases and indeed transform the impact in law of the said phrases.
Contract of service is an agreement in which one person agrees to employ another as an employee and the other person agrees to serve as an employee. This is generally known as an employment contract where the employer-employee relationship is defined, including the terms and conditions of employment. The agreement can exist in different forms either in written, verbal, expressed or implied. The contract of service also includes letter of appointments and apprenticeship agreements.
In contrast, contract for contract for service works strictly on a business-to-business basis. It is commonly used to engage an independent contractor to carry out a particular project or assignment for a definite period at a defined fee. Such independent contractors could be self-employed persons, a vendor or a freelancer. An immediate example would be that of a freelance computer technician who helps to maintain and repair computer systems.
The legal impact
The difference between a “contract of service” and a “contract for service” is crucial in determining an individual’s legal position.
An employee under a contract of service may invoke the jurisdiction of Industrial Court when his rights are violated by the employer, for example forced resignation and unfair dismissal. Under s. 20(3) of the Industrial Relations Act (IRA) 1967, an employee can make a claim to be reinstated to former employment and back- wages with a maximum pay of 24-month’s salary for dismissal without just cause or excuse.
On the other hand, the independent contractor has no such rights under the IRA 1967. The independent contractor can only rely on contractual rights and seek remedy for a breach of contract in a civil court (if any).
How does this mechanism work?
Converting a contract of service to a contract of service (“conversion”) would require termination of an existing employment. A separate contract for service with new agreed terms will be entered and signed by such parties. Essentially, there will be changes to the parties’ relationship, consideration from both parties and parties’ intention to be contractually bound by the contract for service.
What are the circumstances I should be aware of before carrying out such a conversion?
Engaging independent contractors may seem attractive for employers. However, cases have suggested that when there are disputes over the worker’s status, the Court will take on a proactive role to determine whether the contract is one of service or for service. Independent contractors may work well for short term or ad-hoc arrangements but not for all circumstances.
In Henry Eliathamby v. Tootpay 2018] 4 ILR 22, the Court rejected the Company’s case where the Claimant was an independent contractor. The Court held that the facts that (1) the Claimant had been working with the Company for 5 years and (2) the Claimant had to report directly to the Managing Director implies a contract of service between such parties, even though there was no such letter of appointment provided by the Company.
In Hoh Kiang Ngan v Mahkamah Perusahaan Malaysi [1996] 4 CLJ 687, the Federal Court adopted the Control Test to determine the worker’s status. It was held that the more control the Company exercised over a worker, the more likely the worker is an employee of the Company regardless of what the contract says.
Therefore, employers are advised to examine their commercial needs to ascertain whether such conversions or the use of independent contractors are appropriate based on the required job function.
In light of the ongoing pandemic, certain measures have to be taken to ensure business sustainability which may include the conversion of employment contracts. Be mindful to comply with the existing laws and regulations, and to seek for expert consultation to better safeguard the Company’s initiatives.
