INDIAN SUPREME COURT ON THE DISTINCTION BETWEEN EMPLOYMENT v. INDEPENDENT CONTRACTORSHIP
source: troutcpa.com

INDIAN SUPREME COURT ON THE DISTINCTION BETWEEN EMPLOYMENT v. INDEPENDENT CONTRACTORSHIP

Test of Control and Supervision

In order to distinguish whether a working relationship is in the nature of a ‘contract of service’ (i.e, an employer-employee relationship) or a ‘contract for service’ (i.e., an independent contractor-ship), the Indian Supreme Court in its earlier decisions given in the 1950s relied upon the traditional test of ‘control and supervision’. This traditional test was developed under the British jurisprudence. See our Supreme Court’s decisions in Dharangadhara Chemical Works Ltd. v State of Saurashtra (1957 AIR 264) and Shivanandan Sharma v The Punjab National Bank Ltd (1955 AIR 404) wherein it has cited and concurred with decisions of the Court of Appeal in England. Broadly, the parameter for the ‘test of control and supervision’ was to evaluate whether there was an existence of power in the employer not only to direct what work the servant is to do, but also the manner in which the work is to be done. If this was so, a relationship of ‘contract for service’ or employer-employee existed. In contrast, the working relationship between an establishment and an individual was considered to be that of ‘contract for service’ (i.e, independent contractor-ship) where the organisation can only order or require what is to be done (not how the work shall be done). This evaluation was to be made considering the facts surrounding the relationship between the organisation and individual.

Changes in Working Styles and Insufficiency of the Test of Control and Supervision felt by the Supreme Court

Subsequently, the Supreme Court concurring with the observations in the British judgements adopted the view that the traditional ‘test of control and supervision’ had become insufficient to accurately and positively determine whether a certain working relationship was in the nature of a ‘contract of service’ (employment) or ‘contract for service’ (independent contractor-ship). The Supreme Court acknowledged that the ‘test of control and supervision’ was developed in the nineteenth century wherein the employment was typically of domestic, agricultural and manual workers. However, since then world has witnessed modernization. There has been an increase in sophistication of industrial processes and a greater number of professional and skilled people are now working in salaried employment type of working structure (for example in the case of a doctor, architect, skilled engineer, pilot, etc.) and in many of such ‘contracts of service’ the employer/master cannot control the manner in which the work is done (for eg: in case of doctor, surgeon, sailor, pilot). In such a changed world, the test of ‘control and supervision’ in itself can no longer be relied upon as the sole test. Having said that, the Supreme Court did agree that although this ‘test of control and supervision’ cannot be relied upon as the only test now, it still does remain an important factor to consider and perhaps in some cases, a decisive one. Read Supreme Court’s decisions in Workmen of Nilgiri Co-operative Marketing Society Limited v State of Tamil Nadu and Ors. (AIR 2004 SC 1639), Silver Jubilee Tailoring House v. Chief Inspector of Shops and Establishments (1974 AIR 37) and even Dharangadhara Chemical Works Ltd. v State of Saurashtra (1957 AIR 264).

Search for Substitute Tests: Test of Integration/Organisation

Eventually, for some time search for substitute tests were also made. Another test named the ‘integration/organisation test’ was also developed under the British jurisprudence. The ‘integration test’ has also been discussed by the Indian Supreme Court in many of its judgements. Read Supreme Court’s observations in Workmen of Nilgiri Co-operative Marketing Society Limited v State of Tamil Nadu and Ors. (AIR 2004 SC 1639) for more information. The parameter of this ‘integration/organisation test’ was to evaluate whether the person (worker) was fully integrated into the employer’s concern, or remained apart from and independent of it. As per this ‘integration/ organisation test’,  the working relationship was of the nature of a ‘contract of service’ (employer-employee relationship) if the worker was employed as part of the business, and his work was done as an integral part of the business; whereas the working relationship was of the nature of a ‘contract for service’ (independent contractor-ship) wherein the worker’s work, although done for the business, was not integrated into it but was only accessory to it.

Supreme Court Says That No Single Test Is Accurate or Determinative

However, none of the above-mentioned tests (including ‘test of control and supervision’ or ‘test of integration/organisation’) are now considered by the Supreme Court of India or the British courts as a sufficient test to accurately determine the nature of the working engagement. The Supreme Court has reiterated in many of its judgements, that to determine whether a working relationship is in the nature of a ‘contract for service’ or ‘contract of service’, each case has to be answered having regard to the surrounding facts involved in that particular working relationship. No single test – be it ‘test of control and supervision’, be it ‘integration/organisation test’ – can be held a determinative factor for determining the legal relationship of organisation and a worker.

Having said that there can be no magic formula for determining nature of work engagements, the Supreme Court through its judgement over the years appears to have continually made certain observations as to the characteristics of ‘contract of services’ (employment type of relationship) and the ‘contract for services’ (independent contractor-ship). We will discuss the most significant ones below.

Common Characteristics Observed Indicating a ‘Contract of Services’/Employer-Employee Relationship

Some of the common observations regarding characteristics of ‘contract of services’ (employment type of relationship) are as follows:

  • The worker performs services in the employer’s premises. (However, in one case Supreme Court has also stated that it may not be possible to infer that a relationship of employer and employee has come into being only because persons had been more or less continuously working in a particular premises)
  • The worker works on machines supplied by the employer.
  • The manner in which a worker is paid is irrelevant. A worker can be an employee even though he is paid piece-meal (per job) and not per day/month.
  • A worker would be an ‘employee’ if he has agreed to work personally. While promising to work personally, it is irrelevant if he takes assistance from other persons who work under him.
  • The employer has power of control in respect of the: work that is to be done; as well as the manner/method in which the work is required to be done by the worker.
  • The employer has the power to reject the end-product of the worker if it does not conform to the instruction of the employer and the worker can be directed to re-work on the assignment. This power of the employer indicates to an element of control and supervision.
  • The employer has the power to refuse work to a worker (eg: in case the worker has not performed his work in the manner as instructed by the employer; or if the worker has absented himself for a long time). This indicates to the element of control and supervision of the employer over the worker.
  • The employer has the power to suspend or dismiss/terminate the engagement of the worker. In other words, the employer has the liberty to remove the worker.
  • The employer has the right to select the worker.
  • The employer has the direct obligation to provide payment/remuneration of some form to the worker.
  • The degree of control and supervision by the employer on the worker would be different in different types of businesses. However, if an ultimate authority over the worker in the performance of his work resided in the employer so that he was subject to the latter’s direction, that would be sufficient for the working relationship to be considered as a ‘contract of service’. Furthermore, the factor of ‘control’ is an important one but not a decisive factor in determining that the working relationship is that of ‘employer-employee’ (i.e., contract of service).

You may read Workmen of Nilgiri Co-operative Marketing Society Limited v State of Tamil Nadu and Ors. (AIR 2004 SC 1639), Silver Jubilee Tailoring House v. Chief Inspector of Shops and Establishments (1974 AIR 37), Shining Tailors v. Industrial Tribunal II, U.P., Lucknow and Ors (AIR 1984 SC 23), Dharangadhara Chemical Works Ltd. v State of Saurashtra (1957 AIR 264) and Shivanandan Sharma v The Punjab National Bank Ltd (1955 AIR 404).

Common Characteristics Observed Indicating a ‘Contract for Services’/Independent Contractor Relationship

From the Supreme Court’s judgements, we can also identify some of the common observations made by the Supreme Court on the characteristics of the ‘contract for services’ (independent contractor-ship) which are as follows:

  • The organisation hiring out work can only order or require what is to be done (and not the manner in which the work is to be carried out).
  • A worker (independent contractor) could be under a ‘contract for services’ if he has promised to get the work done (there is no requirement for him to work personally on the organisation’s work).
  • A worker (independent contractor) to whom work is hired out in a ‘contract for service’ working type engagement is expected to use his own tools and equipment for carrying out the work.
  • Whether a worker (independent contractor) has a right to work or decide not to work when an offer is made by the establishment to the worker (independent contractor) is also a significant factor.
  • The degree of independence from the control of the organisation is a significant factor. Greater the degree of independence from control of the organisation, greater the probability that the services rendered are of the nature of professional services and that the contract is for service.

You may read Workmen of Nilgiri Co-operative Marketing Society Limited v State of Tamil Nadu and Ors. (AIR 2004 SC 1639), Silver Jubilee Tailoring House v. Chief Inspector of Shops and Establishments (1974 AIR 37), Dharangadhara Chemical Works Ltd. v State of Saurashtra (1957 AIR 264).

Concluding Remarks

The current stand taken by the courts in India (including the Supreme Court) is that (i) there can be no magic formula/single test which can be propounded to indicate which factors of the working relationship should be treated as determining ones; and instead; (ii) one should take a pragmatic approach, while weighing all the factors for and against a contract of employment and determining the nature of the work relationship (i.e., whether it is a ‘contract of service’ (employment) or ‘contract for service’ (independent contractor-ship).

 

Written by Ishita Bisht

 

The author is a legal counsel with Cornellia Chambers, a boutique law practice. We will be happy to provide legal assistance on any human relation and employment law issues that you may be facing. We would love to hear your thoughts on this reading. You may also reach out to us on our ‘contact us’ page on our website www.cornelliachambers.com.  This reading has been prepared for general information purposes only. The information presented should not be substituted with specific legal advice.

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