Contract of Service and Contract for Service

Every day, all over the world, business transactions are being carried out. There is an endless interaction between organizations/ individuals engaging the services of employees/ third parties. Thousands of documents are being appended signatures and filed away as an agreement between parties involved. These agreements are called contracts and they make up the core of all business relationships. They have been divided into two main groups expressly discussed in this article!

Employees/ Employers often wonder what type of agreement they are entering into or what kind of contract are they to draw up that would correspond to the agreement between two or more parties.

Well, understanding the basics as to which type of contracts there are and what they entail will provide basic knowledge when drafting up agreements. There are two major types you need to know about. Contract of service and contract for service.

Contract of Service

Contract of service has to do with the relationship between an employer and employee. It comprises the terms and conditions surrounding the employment of an individual or potential employee. This contract type describes an agreement between two parties, in this case, an employer of labour and an individual employed by a company, specifically as an employee, for their service to the company. The individual is hired as an employee and enjoys compensations and benefits that other employees are entitled to throughout their work term.

The key characteristic feature of a contract of service include the employer-employee relationship where one party agrees to take on an individual as an employee and the other party agrees to work for and render their services to another individual or a company (in most instances) as an employee.

The contract of service agreement can be verbal or non-verbal. May be a spoken agreement between two parties or a drafted document (contract letters) containing the terms of the agreement and signed by both parties. The latter is more legally binding than the former and is the most preferred method seeing as it negates the possibility of dispute and disagreement on the agreed terms and conditions. This form of contract usually includes key employment terms such as:

• Contact details of both employer and employee
• Business description
• Clear details of the scope of work, job role, work hours, workdays, or any particular work schedule individuals are to follow
• Salary compensation and benefits employees are entitled to
• Detailed information on company policies
• Term and termination of employment
• Any specific requirements of the company as well as any other additional information.

Contract for Service

When a self-employed person or individual is hired by a company or organization for the services they provide, this is termed a contract for service.

A contract for service can also be termed a service agreement, a contractor form, an independent contractor agreement, a contractor agreement, or a freelance agreement.

This type of agreement is legally binding, where an independent worker is contracted to execute a task or work on a project for an agreed amount.

The core difference between a contract of service and a contract for service is in the service rendered. An employee is hired to serve the company with their skills and is expected to fully apply themselves to the job for the entire length of their employment while in a contract for service, the self-employed individual is hired only for the services they offer and provide a finite amount of work spanning a specific period agreed upon by the parties involved.

In addition, the clear disparity between the two makes it easy to tell who is entitled to certain benefits and who isn’t. An employee would enjoy certain benefits (like insurance plans, pension schemes, company shares, leave allowances) that a self-employed individual or a contracted worker wouldn’t receive. However, while the contract of service binds an employee to the company they work for, the contract for service does not restrict a self-employed individual to work exclusively for the company hiring their services which leaves them open to other business opportunities.

Usually, a contract for service includes;

• Terms of agreement
• Detailed outline of service
• Fee and compensation details
• Confidentiality agreement
• Ownership rights of materials, products, or information provided to or shared during course of work
• Assignability of work; and
• Other additional clauses.

Differences between a Contract of Service and a Contract for Service

Based on the information provided above, the differences between both are quite evident.

In a contract of service, an employer-employee relationship is the order of the day. The employer claims rights over work done by the employee in the company under the legally binding employment agreement while the employee is entitled to compensations and benefits as staff of the company. The agreement usually spans a longer period than a contract for service.

On the other hand, the contract for service agreement is between an employer of labour and a self-employed person or an individual worker. The individual is hired to provide certain services that they are known to offer either as a one-time deal or for a short duration. In either case, the employee has no exclusive right or claim to the individual or their work asides from the agreed-upon business.

How to Know Which Contract to Use for an Agreement

When drafting a contract agreement, it is best to take into consideration the intent of the parties involved and the type and necessity of service needed. Asking questions like; what is the relationship between the parties involved? Are the services rendered a one-off type of job or is it a continuous type? The answer determines which form of agreement suits the occasion.

For example, considering that many companies and businesses are going digital, many tech-related job roles are in high demand. Still, some companies can do without them as permanent staff and would rather employ said person as a freelance or contract staff. Also, the type of company would also help determine what kind of agreement is necessary. In instances where there is a constant/ frequent demand for these services, an employment agreement can be used but in the case where the demand is occasional or infrequent, a contract for service would suffice.

In conclusion, knowing the types of service agreements that exist would help you, as an employer, make wise and informed decisions on what is best for your company as regards employment of labour and help you choose the right type to use.