If you have ever worked for a company or organisation in Singapore, or undertaken a project for a client, you may have signed a contract before starting work.
However, do you know if you had signed a contract of service, or a contract for service? What is the difference between the two types of contracts? Does it even matter?
This article aims to explain some of the key differences between contracts of service and contracts for service, and help you understand why it is important for you to be aware of these differences.
This will ensure that your legal rights are adequately protected when signing such contracts in future.
What is the Difference between a Contract of Service and a Contract for Service?
What is a contract of service?
A contract of service (also known as an employment agreement) is an agreement where one person (Party A) agrees to employ another (Party B) as an employee with a company or organisation. A contract of service establishes an employer-employee relationship between Party A and Party B.
A contract of service is usually in the form of a letter of appointment or employment, which sets out key employment terms that Party B, as the employee, should be aware of. Some of these key terms include:
- The full names of the employer and employee;
- The job title, main duties and responsibilities;
- The start date and duration of employment;
- Working hours and leave benefits; and
- Salary and allowances.
Employees under a contract of service may also be covered by the Employment Act, which provides for the basic terms and conditions at work for employees covered by the Act.
What is a contract for service?
A contract for service is an agreement whereby an independent contractor (such as a self-employed person or vendor), is engaged to carry out a particular assignment or project for a defined fee. A contract for service is also known as a freelance service contract.
A contract for service establishes a client-contractor relationship between the contracting parties. The independent contractor carries out business on his or her own account, unlike in a contract of service where the employee does business for the employer.
Independent contractors are not covered by the Employment Act, and statutory benefits such as working hours and leave benefits do not apply to them. Contracts for service are also sometimes referred to as freelance service agreements.
How Can You Tell What Kind of Contract You are Under?
There is no determinative or conclusive test to distinguish a contract of service from a contract for service.
As a guide, Singapore’s Ministry of Manpower has compiled a non-exhaustive list of some of the factors that can be considered in identifying which type of contract applies to you:
- Who decides on the recruitment and dismissal of employees?
- Who pays for employees’ wages and how are they paid?
- Who determines the production process, timing, and method of production?
- Who is responsible for the provision of work?
- Ownership of factors of production
- Who provides the required tools and equipment?
- Who provides the working place and materials?
- Economic considerations
- Is the business carried out on the person’s own account, or is it for the employer?
- Can the person share in profit or be liable to any risk of loss?
- How are earnings calculated and profits derived?
For example, if it is the employer who is responsible for the provision of work and determines how much and when you should be paid, then you are more likely to be under a contract of service.
On the other hand, if you are responsible for the provision of work and determine how much to charge for your services, then you are more likely to be under a contract for service instead.
Why is it Important to Know the Differences between These Two Types of Contracts?
It is important to know what type of contract is applicable to you, because they carry differences in rights, duties, and obligations between you and the contracting counterparty.
Contracts of service
A contract of service establishes a legal relationship between the parties i.e. the employer and employee. This legal relationship means that an employer is obliged to provide work for an employee, and the employee is obliged to complete the work.
A contract of service is also usually in the form of a written agreement that clearly sets out the obligations owed by the employer and employee in this legal relationship.
Do note that a contract of service only comes into effect when the employee turns up for work on the appointed starting date, as stipulated in the agreed terms of the contract. If the employee fails to turn up, the Employment Act ceases to apply as the employer-employee relationship did not start.
Contracts for service
On the other hand, a contract for service can either be in the form of a formal, written agreement, or an informal arrangement between the contracting parties. It is not always expressed in writing. Some contracts for service can even take the form of an oral agreement between the parties.
In addition, as mentioned earlier, clients do not owe independent contractors the same obligations that the employers owe employees under the statute (i.e. Employment Act).
Knowing the differences between the two types of contracts is also important when it comes to legal liability for harm or injury to a third party.
A contract of service will usually include an indemnity insurance clause, where the employer is required to insure the employee against legal responsibility for their actions if the employee is sued for an act that causes harm to a third party.
However, this applies to the employee’s act while in the course of his or employment. In other words, the liability of an employee against a third party is limited.
In the case of a contract for service, in the absence of an indemnity clause, independent contractors or freelancers may sometimes find themselves facing unlimited liability for an act that causes harm or injury to a third party, if it occurs in the course of a project or service.
For example, if an independent contractor is sued and does not have enough money, the court can order him or her to sell personal assets like houses and cars to settle the lawsuit.
Independent contractors or freelancers need to ensure that they include an indemnity clause in their contracts for service, to avoid incurring such unlimited liability.
What Should I Do in the Event of a Dispute?
Under a contract of service
A contract of service will typically include a dispute resolution clause that would indicate whether you have to go to court or mediation first, in the event of a dispute between the contracting parties. Such clauses may also provide for the dispute to be resolved by way of arbitration.
Do read the terms of a dispute resolution clause carefully and abide by the procedures stipulated in it (E.g. parties are to undergo mediation first before going to court as a last resort), in the event of a dispute.
Under a contract for service
Similarly, it is important for an independent contractor or freelancer to include a dispute resolution clause in his or her contract for service.
As independent contractors do not have recourse to dispute resolution mechanisms provided for in the Employment Act, they should negotiate the inclusion of a dispute resolution clause in their contracts or agreements with a client.
Both parties may decide and reach an agreement on what they deem to be the most appropriate form of legal redress should a dispute arise.
How are Both Types of Contracts Terminated?
For contracts of service
In a contract of service, there will be typically a clause that provides for situations where either the employer or employee can terminate the contract, and the applicable procedures for the termination of the contract.
A contract of service may be terminated if the employee decides to resign, the employer dismisses the employee, or the contract terms have expired.
If an employee has been unfairly dismissed from his or her employment, they may submit a written appeal to the Ministry of Manpower.
For contracts for service
A contract for service may be terminated if the performance of the project or service is disrupted due to unforeseen circumstances, or it becomes impossible to continue on a project that is already in progress.
It is important for the independent contractor or freelancer to negotiate the terms of the contract for service carefully. This is so that the contracting counterparty or client is aware of the alternatives that might be available in the event of an unforeseen or sudden termination of a project or service.
It is also important for the independent contractor or freelancer to ensure that his or her interests are safeguarded in the event that the client chooses to prematurely terminate the freelancer’s services.
For example, the freelancer may negotiate for a clause that ensures that he or she is remunerated for the time and effort that has already been spent working on the project, as well as to prevent the client from using the freelancer’s work and/or ideas, in whole or in part, without adequate compensation.
Where Can I Find a Sample Template for Both Types of Contracts?
The templates can be downloaded at the following links:
Whether you are an employee or independent contractor, it is important for you to be aware of your rights and responsibilities under the applicable type of contract.
Do be sure to carefully read the terms and conditions of your contract, and always clarify and/or negotiate terms that you are unsure of.
You may also wish to obtain legal advice if you are unsure about the terms and conditions of your contract or wish to clarify the extent of your rights and responsibilities before you commence work.
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