THE CONCEPT
OF EMPLOYMENT AND INDEPENDENT CONTRACTOR
By:
Barrister:
Khurram Saleem Baig
B.A (
LL.B(Hons)
LL.M(Hons)
LL.B(
Advocate High Court
Email: Ksbaig@hotmail.com
Introduction
The employment emanates from a
contract which is known as employment contract which creates relationship
between an employer and employee. The contract of employment creates different
rights and obligations on the parties. The employment is given statutory
production commonly known as labour laws the violation of which is enforced by
the employees if aggrieved by any violation of the terms thereof. Employer is
also put under the obligation under the relevant statutory laws commonly known
as labour laws to follow the rules of law.
In
The Confusion arises when the
labour is hired through some labour contractor or employment agencies and when
the job for ends product is entrusted to a third party contractors which is
known as independent contractor. Over the past few years there has been growing
practice in the National and Multinational Organizations to entrust their
organizational or business activities to a third party independent contractors
commonly known as service providers. This is done to keep minimum number of
subordinate staff on thgier payroll. The motive behind the same is ti avoid
rigours of legal obligations under different statutory laws commonly known as
Labour and Employment Laws. In the instant paper the effort has been made to
discuss the concept of employment in the eventuality when a person is hired by
an employer directly or through some labour contractor or employment agency.
The confusion also arises when job or business activity is entrusted to
independent contractor or service provider. The confusion is to the extent that
the person hired by the independent contractor or service provider. The
confusion is to the extent that the person hired by the independent contractor
known as service providers be treated as employees of the independent
contractor or employees of the organizations. The efforts would be made to
compare the laws in vogue in
In the instant paper the effort
has been made to discuss the concept of employment in the situation when a
person is hired by an employer directly or through some labour contractor or
employment agency. The confusion also arises when job or business activity is
entrusted to an independent contractor or a service provider. The confusion is
as to whether the persons hired by the independent contractor can be treated as
employees of the independent contractor or employees of the organization, which
has entrusted the job to an independent service provider. The effort would be
made to compare the laws presently in vogue in
1) THE PROTECTION OF EMPLOYMENT
UNDER STATUTORY LAWS IN
In Pakistan over a period of
time, various labour law were enacted to cater for the rights of the
subordinate employees, out of which two enactments are relevant for the present
discussion i.e Industrial Relations Ordinance, 2002, formally Industrial
Relations Ordinance 1969, and W.P Industrial and Commercial Employment
(Standing Orders) Ordinance 1968. These Labour enactments create rights and
obligations of both the parties i.e employer and employee. The subordinate are
termed as workers. Under the IRO, 2002, the workers are given a right to join
or form a trade union. In addition procedure to form a trade union and to act
as a collective bargaining agent is prescribed. The Standing Orders Ordinance
1968, elaborates the rights of the workers pertaining to terms and conditions
of service. An employee if intends to invoke the provisions of the labour laws
to enforce his rights given hereunder has to be a “workman” as defined under
the above laws. The terms workmen as used therein are reproduced hereunder for
ready reference.
“Section 2(i) of the
“Workman” means any person
employed in any individual or commercial establishment to do any skilled or
unskilled, manual or clerical work for hire or reward.”[1]
Section 2 (xxx) of IRO, 2002
“Worker” and “Workman” means
any and all persons not falling within the definition of employer who is
employed in an establishment or industry for remuneration or reward either
directly or through a contractor, whether the terms of employment be express or
implied, and for the purpose of any proceeding under this ordinance in relations
to an industrial dispute includes a person who has been dismissed, discharged,
retrenched, laid off or otherwise removed from employment in connection with or
as a consequence of that dispute or whose dismissal, discharged retrenchment,
lay off or removal has led to that dispute but does not include any person who
is employed mainly in a managerial or administrative capacity”.[2]
Section 2 (x) of the IRO, 2002,
Definition of Employer”
“Employer” in relation to an
establishment means any person or body of persons, whether incorporated or not,
who or which employs workmen in an establishment under a contract of
employment.”[3]
2) The Concept of Independent
Contractor or Service Provider
The concept of independent contractor or
service provider is not new. This concept is related to the term “contract for service”. However unfortunately this concept has not
been that well perceived in
The relationship of an employer
and employee involves the process of employer’s power of selection of his
employee’s payment of salaries or other remuneration, employer’s right of
suspension and dismissal and the employer’s right to control the method of
doing the work. The relationship of employer and employee can be categorized as
under:
1) Contract of Service
2) Contract for Services
3) The Process of Hiring
The process of hiring a person may be undertaken directly by the employer
or through the involvement of Employment Agency. Prima facie the test for
determination of the relationship between the employer and the employee is the
existence of the right in the employer to supervise and control the work done
by the employee not only in the matter of directing what work the employee is
to do but also the manner in which he shall do his work. The employer
therefore, has the power to direct what work his employee has to do with a
further right to direct how work is to be done.
The concept of employment has to be understood by the following terms
which came under discussion before the foreign as well as Superior Judiciary in
In Stevenson & Others v
MacDonald and Evans (1952) 1
TLR 101 Lord Denning Said:
“Under a contract of service man is
employed as part of the business and his work is done as an integral part of
the business, whereas under a contract for services his work, although done for
the business, is not integrated into it but is only accessory to it”.[4]
The term “contract of service” is construed by the Superior Judiciary as
a contract of employment entered into directly by the employer or through some
employment agency, meaning thereby that the employee is hired “directly” or
“indirectly”. Whereas the term “contract for services” is defined and construed
as a “work contract” whereby an independent contractor is assigned a job on agreed
rates which is executed by the said independent contractor through his staff
and the “Principal “ is concerned only with the end result of the required job.
Para, 872 of Halsbury’s Law of England, Fourth Edition, Vol. 25 at page 448 and
para, 3 of the definition of the term “contract of service” given in Stroud’s Judicial Dictionary, Fourth
Edition, at page 587 reads as follows:-
“A contract to render services is not the same thing
as “contract of service”, semble, the latter implies some relationship of
master and servant and involves an obligation to obey orders in the work to be
performed and as to its mode and manner of performance”.[5]
The relationship of master and servant is characterized by a contract of
service, express or implied, between the master and the servant. A contract of
service is one in which a person undertakes to serve another and to obey his
reasonable order within the scope of the duty undertaken. Whether or not a
particular contract is a contract of service is a question of fact, depending
upon the terms of the engagement, the method of remuneration, and the power of
controlling and dismissing the employees, although none of these factors is by
itself conclusive. A “contract of service” must be distinguished from “contract
for services”.
Paras 501 and 502 from the Halsbury’s Law of England, Fourth
Edition, Vol. 16 reads as under:-
“One test which emerges from the recent authorities is
whether on one hand the employee is employed as part of the business and his
work is an integral part of the business, or whether on the other hand his work
is not integrated into the business but is only accessory to it or it is done
by him on his own account”.
A person may be the employer of another even if a third party has the
power of appointing or dismissing him or of requiring his dismissal or has
powers of direction and control in regard to his work, pays him his wages.
However, a contract to render services to a third person is not a contract of
service. A person may be an employee even if he is remunerated otherwise than
by wages.
Further whether the workman was carrying on his own business, or was he
carrying on that of his employers? In United States of America v Silk
(1946) 331 US 704 case decided by the Supreme Court of United States, loaders
of trucks of independent contractor were held to be the employees of the Silk
Coal for the reason that the that the company had the powers to control the
said persons.[6]
Similarly in Mrs. Arving case decided by the
The history of British Law reflects that a contract of employment is
generally referred to a “contract of service” and is governed by the general contractual
principles. Traditionally the “control test” was applied in Yewens
v Noakes (1880) 6 QBD 530 where Bramwell
LJ defined an employee as a person who is “subject to the command of his
master/servant relationship[7].
But gradually other determining factors were established which include privity
of contract, payment of wages and power to terminate. In Nethermere Ltd v Gardiner (1984)
IRLR the Court of Appeal considered the minimum requirement of an employee for
the existence of an employment contract and determined that an employee should
be obliged personally to accept and perform some work for an employer in return
for payment.[8]
Another key factor in determining the employment relationship is that of
mutuality of obligations, in other words a contractual undertaking by an
employer to provide work and a contractual undertaking by a worker not to
refuse any work offered. This is a particularly important factor when
considering casual workers. In O’Kelly v Trusthouse Forte (1983)
ICR 728 the court held that the employer had no contractual obligation to
provide them with work and the causal staff were under no obligation to accept
the work offered. The court in this case laid down the following factors to
determine whether the employees were being employed under a “contract of
service” as opposed to a “contract for services”:[9]
1)
The
employees provided their services in return for remuneration for the work
actually performed.
2)
They
performed their work under the direction and control of the respondents
3)
When
working they were carrying on the business of the respondents
4)
Clothing
and equipments were provided by the respondents
5)
The
employees were paid weekly in arrear and were paid under deduction of income
tax and social security contribution
6)
There
was a disciplinary and grievance procedure.
A) Multiple Test
This test includes different
factors including the concept whether the terms of the contract are consistent
with “contract of service” or “contract for services”. According to McKenna J in determining whether
contract of service exist the following three conditions must be present:
1)
The
servant agrees that in consideration of a wage or other remuneration he will
provide his own work and skill in the performance of some service for his
master.
2)
He
agrees, expressly or impliedly, that in the performance of that service he will
be subject to the other’s control in a sufficient degree to make that other
master.
3)
The
other provisions of the contract are consistent with its being a contract of
service.
In Market Investigations Ltd v
Minister of Social Security (1969) Cooke
J Considered, that the test to be applied was “is the person who has
engaged himself to perform some services, performing them as a person in
business on his own account”? If the answer is “Yes” the contract is a
“contract for services”. If the answer is “No”, then the contract is a
“contract of service”. In, this case the company engaged interviewers to carry
out market research. The employees could choose the hours they worked and work
for other companies if they so wished, it was held that because the
interviewers were not in business on their own account, they bore no financial
risk, they were employees and the employer was obliged to pay their national
insurance contributions.[10]
In
The Court of Appeal further
explained two different concepts, “contract of service” and “contract for
services” in Young and Massey. In Young & Woods Ltd v West (1980)
IRLR 201, Mr. West was employed as a sheet-metal worker. It was agreed with the
employers that he should be treated as self-employed and no deductions were
made from his pay for tax and national insurance, nor did he receive holiday
pay or sickness benefit from the company. He was also treated by the Inland
Revenue as self-employed for tax purposes. Mr West was dismissed from his
employment and claimed unfair dismissal. The respondents claimed that he was
self-employed under a contract for services, but this was rejected by the
employment tribunal. The respondents appealed to the Court of Appeal which
stated that Mr West was an employee and not in business of his own. The Court
of Appeal further stated that Mr West was paid an hourly rate and worked normal
working hours and that the company provided him with the necessary equipment
for his work. However, the control test “control test” still remains an
important criterion in order to determine whether the employment contract is “contract of service” or contract for services.[11]
4) The Concept of Employment in
the Sub-Continent
The above issues have also been
dealt with by the Superior Courts in this subcontinent. The Indian Supreme
Court observed that relationship of employer and workman are similar to the
relationship between master and servant and that the prima facie test for the
determination of relationship between master and servant is the existence of
the right in the master to supervise and control the work done by the servant,
not only in the matter of directing what the servant is to do but also the
manner in which he shall do his work. The above observation therefore
emphasized that test of power to supervise and control the work done by another
person is important.
The Supreme Court of Pakistan
in two different cases considered the ground reality whereby an establishment
employees its own workmen who are on payroll of the factory/establishment but
in respect of certain other work, the work is entrusted to independent
contractor who employs his own labor to carry out the assigned job on lump sum
basis. The Supreme Court considered the definition of the term worker as
defined in Section 2 (xxviii) of the
IRO, 1969 reproduced here above and observed as under:-
“The Learned counsel has over
looked that this question already stands decided by this Court vide its judgement
in Main
Munir Ahmed v The State 1985 SCMR 257[12],
wherein it has been held that a company is not responsible for the acts of the
employees of the independent contractor to carry out any particular work for
the company. The misconception on which the learned counsel has based his
contention has arisen because of the use of work “person employed either
directly or through a contractor”, in definition of the word in Section 2
(xxviii) of the Industrial Relations Ordinance.
“What was intended by the legislature by
this provision was to include amongst workmen or employees nit only persons who
had been directly employed by the owner or employer but also who were employed
by them through such persons who undertake contracts to supply labour”. [13]
As observed in D.C
Works Limited v State of Saurashtra AIR 1957 SC 264,
“Relationship of employer and
workman are similar to the relationship of employer and workman which are
similar to the relationship between master and servant and that prima facie
test for the determination of relationship between master and servant was the
existence of the right in the master to supervise and control the work done by
the servant, not only in the matter of directing what the servant is to do but
also the manner in which he shall do his work”.
Further the
relationship of employer and employee will be between the contractor and the
workmen. Workers or workmen defined in the Ordinance and the Standing Ordinance
and would be entitled to all the rights and benefits available to him under the
labour laws, but such rights and benefits would be provided to the
workers/workmen by the contractor and not by the original industrial
establishment.
In Farid
Ahmed v
“Contractor, according to terms of
contract, being independent person responsible for carrying out manufacturing
work after employing workers, engaged by him, could only be treated as his
employees and mill owners who had nothing to do with payment of wages to said
workers, no relationship of employer and employees existed between mill owners
and such workers”.
Keeping in view
the judgements of the Superior Courts, the determining factors are reproduced
as under:-
i)
The
power to hire a person by giving employment creating relationship of master and
servant.
ii)
Power
to supervise and control the work of the person employed by the master
iii)
The
obligation to make the wages to such a person
iv)
The
power to terminate the services
v)
The
obligation to perform the contract with the establishment by hiring its own
staff
vi)
Powers
to substitute the staff as per requirement of the contractor.
The above facts
would exclude the persons hired by independent contractor to do the required
job from being treated as employees of the establishment. It is therefore,
clear that the term “contract of service”
creates relationship of master and servant whereas “contract for services” creates relationship between an
establishment and independent contractor to provide required work or job by
hiring his own staff according to the terms of the contract.
5) The
Distinction between an Employee and an Independent Contractor in the context of
Vicarious Liability
The distinction between an
employee and an independent contractor becomes extremely important in the event
of a worker committing a tort during the course of his employment. The litigant
who has suffered harm may pursue a claim for compensation against the
tortfeasor. However under the doctrine of vicarious liability if he can
establish that a tort was committed during the course of employment he may also
bring a claim against the employer of the tortfeasor. The House of Lords in Mersey
Docks and Harbour Board v Coggins and Griffith (Liverpool) Ltd (1947)
AC 1, the court laid down the proper test whether the hirer did or did not have
the authority to the control the manner in which the employee did his work and
that the stipulations of the parties as to who was to be regarded as the
employer as the employer. The court held that the “burden of proof was on the
general employer i.e the one who hired out the employee”. In this case the hirers directed the
employees as to what parcel they should lift with the crane, they has no
authority to tell the employee how to use the crane. Other factors which may be
of importance is include who pay the wages, who can dismiss the employee, how
long the employee is hired out and whether the machinery is also provided by
the employer.[15]
In Morris v Breaveglen Ltd
(1993) ICR 766, the plaintiff was employed by the defendants and was sent by
them to work at Dartmoor Prison farm pursuant to a labour only sub-contract
which the defendants had entered into with the main contractors at the site.
Under the terms of the sub-contract, the defendants accepted that they were
liable to observe and perform all safety obligations imposed by statute or
common law and to maintain employer’s liability insurance in respect of their
employees.[16]
The trial judge found that,
while the plaintiff was working on the site, it was the main contractor who had
the right to control what he did and how he did it. The court of Appeal
rejected this argument and stated that the vital distinction had to be drawn
between two types of claim. The first arises where the subcontracted employee
causes damage to a third party, in which case the employer responsible for the
damage is the one who has the right of control over the employee. The second
type of claim arises when it is the subcontracted employee himself who is
injured. In such a case it is the general employer who remains liable because
he is personally liable for the performance of his duty to the employee and
cannot avoid the liability by delegating it to a main contractor.
In
The important factor in this
regard which is to be noted is, “the plaintiff who is an employee if get
injured during the course of his employment cannot recover damages from the
employer if he was ceased to be under the duty of the main employer”. For
example an employee who was hired by the first employer was further hired by
the second employer. In this scenario the first employer would cease to have
control over the employee if he is under the full control of the second
employee.
The other factors apart from
the control test are: payment of wages, power of hire and fire and the schedule
of workers. So the control test including other factors as explained above are
determinative factors to establish a relationship between an employer and an
employee. It should be borne in mind that the control is not the sole criteria but
one of the factors to establish the same.
A) The common law test
In Express and Echo Publication Ltd v Tanton[18],
the Court of Appeal was called upon to decide a case involving Tanton, who was
first engaged as an employee driver for his employer. After rendering his
services for the company he was made redundant. He was reassigned as a driver
on the term that he will be self-employed. In January 1996 he received a copy
of a document titled “An agreement for services”. According to this term he was
allowed to arrange at this own expense another suitable person to perform the
services if due to some reasons he is not able to perform the services. Tanton
refused to sign the agreement. The employment tribunal decided that:
1)
It
was the employers intention that Tanton should be self-employed, and at one
point both the sides agreed on the same fact.
2)
The
Inland Revenue department considered Tanton as an employee.
3)
The
proposed January 1996 contract which Tanton refused to sign clearly placed
Tanton outside of the employment relationship.
4)
Tanton’s
duties included picking up newspapers and delivering them to the pursuant route
fixed by the appellant.
5)
The
employer provided Tanton with both vehicle and a uniform.
6)
The
remuneration was a fixed fee per journey determined by the employer.
7)
Tanton
received no sick holiday pay.
8)
Tanton
had and utilized the right to employ the substitute driver, whom he
compensated.
The paramount importance in this regard was the degree of control that
the employer appeared to exercise over Tanton. The tribunal decided that he was
an employee under the ‘contract of service’. This decision was sustained by the
Employment Appeals Tribunal. In the Court of Appeal the employer contended that
the Employment Tribunal has committed a legal error in its approach. It was
asserted by the applicants that the tribunal should have considered the terms
of the agreement between the parties (a question of fact) and consider whether
any of the contract terms were inconsistent with the existence of a contract of
employment (question of law), and if no inconsistent terms were apparent,
determine whether the contract was a “contract of service” or a “contract for
service”, an entire agreement should be based on mixed question of law and
fact.
The Court of Appeal
found that an agreement allowing the hiring of substitutes is inconsistent with
an employment relationship (contract of service). According to the court of
Appeal the contract of service exists if the following three conditions are
fulfilled:-
1)
The servant agrees that, in consideration of a wage or other
remuneration, he will provide his own work and skill in the performance of some
service for his master.
2)
He agrees, expressly or impliedly that in performance of that
service he will be subject to the other’s control in a sufficient degree to
make that other master.
3)
The provisions of the contract are consistent with its being
a contract of service.
This decision represent little more than a repetition of the test of
“personal control”. In addition it can be argued that the “third stage adds
nothing, since it neither indicates what the core features of the “contract of
service” are, nor which features are necessarily inconsistent with the
employment contract. The court assertion was based upon the fact that the freedom
to complete a job either by one’s own hands or by another’s is inconsistent
with the contract of employment. Further the court stated that there must be an
irreducible minimum of obligation on each side to create a “contract of
service”. As Tanton was required to work personally for the putative employer
the mutuality of obligation is missing which is essential to establish a
“contract of service”.
The Privy Council in Cheng Yeun v.
Hong Kong Golf Club[19] relied upon “mutual obligation” test
and also stated that “control” an American inspired conception of “economic
reality” the “burden of financial risks” and the parties choice of their
“actual intention” are paramount in order to determine the employment contract
between the tow parties.
6) Analysis
The question to be asked
is? “Is the person who has engaged himself to perform the service for his
employer, is he performing them as a business on his own account? If the answer
to that question is yes then the contract is a “contract for services”. If the
answer is no then the contract is “contract of service”. In Ready Mixed
Contract and O’Kelly there was a clear evidence of both personal and economic
dependence between the employer and was required to obey certain reasonable
orders and was dependent on that employer for continuing work and income.
The contract was based neither
on negotiations between Cheng and the Royal Hong Kong nor an agreement between
individual golfers and Cheng who he worked for. As he was free to work when he
pleased and did not receive any sick holiday pay his “economic livelihood” was
tied to the club. In other words he was economically dependent on the Royal
Hong King Golf Club. Lord Hoffman in his dissenting judgments stated that lack
of mutuality of obligation cannot be the sole factor to justify “contract for
service”. According to his Lordship Cheng Yuen only had to prove that he was
under a continuous “contract of employment” like other casual employees,
whereas the majority of the court disallowed cheng yeun employment protection
regardless of the his undeniable economic and social subordination. Further as
discussed earlier in Express and Echo Publications Ltd. Tanton’s economic
dependence and subordination to the controls of the company it is difficult to
agree with the decision of the Court of Appeal that Tanton was an independent
contractor regardless of the fact that according to the contract he was allowed
to hire a substitute. This clause does not oust him from the category of an
employee. In Massey v Crown Life Insurance[20],
an accountant agreed to enter into an independent contractor status after being
informed of the cost and benefits of doing so. He then sought the benefits of
employee status in response.
Lord Denning stated: “Having
made his bed as being self employed, he must lie on it.” However this cannot be
the case most of the times, the other factors which can go contrary to what
Lord Denning stated may include an arbitrary power exercised by a person
dominant economic position against individuals whose mobility is said to be
limited by the structure of labour market. On the other hand a fully informed
university educated professionals who posses employment alternatives and
options does not fall under economic subordination category.
Unfortunately the courts have
to adopt a rational approach in order to determine whether a particular
employee falls under the category of “contract of service” or “contract for
service”. The tests laid down by courts to categories the status of employment
in different cases as mentioned above are elusive and require consistent
principles regarding the same. However the most vital factor which should be
taken into account in order to determine whether a particular contract is a
“contract for service” or “contract for service” are as follows
1)
The
terms of the agreement between the parties which is a mixed question of facts
and law.
2)
Whether
these terms are consistent with the employment contract.
3)
What
was the intention of the parties when they entered into the employment
agreement?
4)
The
control test.
5)
The
consistency of mutual obligation between the parties.
6)
The
mode of payment and its deduction made by an employer for tax purposes
7)
Whether
the employee was in a better position to understand the terms of the agreement.
The implied conduct of the parties apart from the terms of the agreement should
also be taken into account.
8)
The
interpretation of the employment contract should not be done in a stringent
manner by the courts.
9)
The
factor of economic and personal dependence between worker and an employer.
It is pertinent to mention that
most of the organizations hire independent contractors to undertake certain
commercial activities. These independent contractors are responsible to hire
their own labour. In this scenario the employment contract between independent
contractor and the organization is “contract for services”. However the
relationship between an independent contractor and the labour which he hires is
“contract of service”. In case of any dispute regarding the same the courts
should look into the above mentioned factors to determine the status of the
employment contract which is a mixed question of “law and fact”.
Conclusion
The primary goal of this article was to
analyze in detail the concept of employment including the distinction between
“contract of service” and “contract for service”. It should be borne in mind
that the distinction between these two concepts is not easy to grasp. In order
to ascertain a clear logical solution regarding the same it has been explained
in detail in this article certain tests which will help courts in
[1] Section 2 (xxx) of IRO, 2002
[2] Section 2 (xxx) of IRO, 2002
[3] Section 2 (xxx) of IRO, 2002
[4] Stevenson
& Others v MacDonald and Evans (1952) 1 TLR 101
[5] Halsbury’s Law of England, Fourth
Edition, Vol. 16
[6]
[7] Yewens
v Noakes (1880) 6 QBD 530
[8] Nethermere
Ltd v Gardiner (1984) IRLR
[9] O’Kelly
v Trusthouse Forte (1983) ICR 728
[10] Market
Investigations Ltd v Minister of Social Security (1969)
[11]
[12] Main
Munir Ahmed v The State 1985 SCMR 257
[13] Section 2 (xxviii) of the Industrial
Relations Ordinance.
[14] Farid
Ahmed v Pakistan Burma Shell Limited (1987 SCMR 1463)
[15]
[16] Morris
v Breaveglen Ltd (1993) ICR 766
[17] Watts
v Lowcur Ltd (Queen’s Bench (Commercial Division) 11 February 1988)
[18] Express
and Echo Publication Ltd v Tanton, 1999
[19] Cheng
Yeun v.
[20] Massey
v Crown Life Insurance(1978) ICR 590