Whether someone is in a contract of service vs contract for service for your company has important consequences. For instance, you must pay workers in a contract of service CPF, and they are entitled to a whole host of other labour rights. For instance, contracts of service workers must have sick leave, maternity/paternity leave, non-working days, overtime and more. However, workers in a contract for service are not entitled to such rights.
We’ll explain:
- What is a summary of contracts of service vs contracts for service?
- What is a contract of service?
- What is a contract for service?
- What are the 11 legal differences between contracts of service vs contracts for service?
- What’s a legal case demonstrating the difference between contracts of service vs contracts for service?
- Why is it important to differentiate contacts of service from contracts for service?
- How to protect your company from liability for workers under contracts of service?
What is a summary of Contracts of Service vs Contracts for Service?
Contracts of Service vs Contracts for Service in Singapore | ||
| Differentiating Factor | Contracts of Service | Contracts for Service |
| Independent Contractor Clause | Not stated | Most freelancer contracts will contain a clause titled “independent contractor” (or something to that effect) clearly stated in the contract. |
| Control | Company has control over what, and how, the work is to be done | Company has control over what work is to be done, but limited to no control over how the work is to be done |
| Importance of Work to Company | Integral part of company’s business/work | Not integral part of company’s business/work |
| Method of Payment | Generally salary
May either be fixed salary + variable component, or completely variable (e.g. paid per number of products produced, paid per number of customers won, etc.) | Generally tips, commissions and/or ad-hoc payments (payments that are not fixed)
Usually paid according to amount of work completed |
| Restriction on External Employment | Obligation to work for only employer | No obligation to work for only one employer. Can work for multiple companies |
| Working Hours | Generally have fixed working hours. May have overtime or shifts as part of their regular work, but ultimately the hours are usually planned and fixed. | Generally do not have fixed working hours. Work hours can vary significantly from one period to the next period, e.g. depending on number of contracts taken up. Work hours are generally also self-determined (“Own Time, Own Target”). |
| Overtime Pay | Employees are entitled by law to overtime pay | Freelancers are not entitled by law to overtime pay. Any overtime pay, if granted, is on a goodwill basis |
| Annual Leave, Sick Leave, Maternity/Paternity leave | Employees are entitled by law to minimum amounts of paid annual leave, paid sick leave, and paid maternity/paternity leave | Freelancers are not entitled by law to paid leave, in whatever form. Any paid leave, if granted, is on a goodwill basis |
| Right to Terminate, Dismiss or Suspend | Employment contracts will state the right to terminate, dismiss, or suspend worker | Freelancer contracts will usually state terms of completion of contract, terms of breach of contract, and other clauses for ending the contract; usually the contract will make it apparent the person it is not an employee |
| Delegation authority | Less likely to be able to delegate duties to a third-party outside the company | More likely to be able to delegate duties to a third-party |
| Provision of Accommodation, Uniforms, Name Cards, Other Material with Company Logos, Access to Company Events, etc. | Employees are more likely to be issued company accommodation, uniforms (e.g. for service industries), name cards, and other material with company branding/logos | Freelancers are less likely to be issued these benefits since they are external contractors |
What is a contract of service?
A contract of service is an agreement where one party agrees to hire another party as an employee. Contracts of service are the standard form of contracts for hiring employees. Contracts of service apply to both full-time and part-time employees.
A contract of service is usually provided in the form of an Employment Agreement. Such an agreement will list out the Key Employment Terms for the employee.
Employers must provide certain entitlements, and are responsible for certain liabilities, for workers under a contract of service. We cover these responsibilities towards the end of our guide, under the section titled “Why is it important to differentiate contacts of service from contracts for service?”.
What is a contract for service?
A contract for service is an agreement between where one party agrees to hire another party as a freelancer/ independent contractor. A freelancer is typically paid to carry out a particular job or project, with a set fee. Examples of freelancers/independent contractors include:
- Individuals providing services like graphic design, house renovation, odd-job labourers, etc.
- Vendors providing services like IT consulting, strategy consulting, printing services, shipping services, etc.
- Vendors providing products like vending machine rentals, industrial machine wholesale, food wholesale, etc.
Sometimes, independent contractors are engaged on a long-term basis via retainer payments. Common examples include external lawyers kept on monthly retainers, or Public Relations firms paid a regular retainer to advise on marketing needs.
Freelancers are not allowed to claim various entitlements that are provided to employees, such as overtime, leave, and compensation for work-related injuries. We cover these differences under the section titled “Why is it important to differentiate contacts of service from contracts for service?”
What are the 11 legal differences between Contracts of Service vs Contracts for Service?
You have to look at the totality of the 11 criteria to decide. There is no single, one-size fits-all criteria. This is the same process that the Courts will apply, if a lawsuit is filed to decide whether a person is under a contract of service (or contract for service). Such lawsuits are typically filed because the person feels they have been mistakenly classified under a contract for service, and therefore been deprived of the various rights that workers under contracts of service enjoy.
Differentiating factor 1: Independent contractor clause
Most freelancer agreements will contain an “independent contractor” clause. This is a clause that clearly marks that person as a freelancer.
Here’s a sample independent contractor clause:
- The Service Provider is an independent contractor, and not an employee
- The Service Provider shall have control over the manner and form in which work is to be performed, in the best interests of the Hiring Company
- The Service Provider will supply their own equipment and manpower and resources to complete the Project”
If such a clause is absent, then the Courts will look at the other 10 factors to decide whether the person is under a contact for service or contract of service. In some rare cases, some employers may try to insert this independent contractor clause into their hiring agreement, but the degree of control they exercise over the person may actually tilt the person towards being an employee. In such scenarios, the Courts will also look at the other 10 factors to decide whether the worker is an employee or freelancer.
Differentiating factor 2: Control
The Courts will examine the level of control that the company exerts over its workers. For employees, the employer will have control over what work is to be done, and how it is to be done. For instance, an IT company can dictate to its employees what software to build, what programming language to use, what lines to code to insert, what functions to perform – the list goes on.
For freelancers, the level of control that the hiring company can exert will vary, depending on the nature of the project. Some freelancer arrangements may involve a high level of control by the hirer. For instance, a company hiring an IT vendor can specify what software it needs to build, what programming language/tech stack to use, what functions to perform, and more. However, other situations may see the hirer having significantly less control over freelancers. For instance, a company hiring a freelance graphic designer to design a corporate logo is unlikely to be able to tell the freelancer exactly how to draw the logo (if it could, then the hirer would just draw the logo themselves!). The hirer may provide generic ideas about the kinds of emotions they want to convey, the kinds of corporate colours that should apply, etc., but it’s unlikely to be able to control the freelance designer’s work with too much force.
Because of the level of variation in control, this is not a hugely important factor in differentiating contracts of service vs contracts for service. This will form merely one part of the overall analysis.
Differentiating factor 3: Importance of work to company
The Courts will consider the level of importance of the work completed by the worker. For instance, does the worker perform menial or peripheral tasks for the company? Business owners frequently outsource non-core functions like HR, accounting, and IT support to vendors or freelancers, via contracts for service. If the function is core to the business, then it usually only makes sense for companies to keep such workers as employees. Companies are unlikely to outsource their competitive advantages.
Differentiating factor 4: Method of payment
Generally, employees are paid a fixed salary each month. This salary may include other additional incentives like bonuses, annual wage supplements (AWS), allowances, overtime pay, etc. Whatever the case may be, the focus is on whether a salary is paid.
Freelancers, on the other hand, are more likely to not be paid a salary. The nature of hiring a freelancer is to avoid such fixed overhead costs. Therefore, freelancers are more likely to be paid via tips, commissions, or general ad-hoc payments. Examples would be a freelance graphic designer, who is paid $100 per icon that they design. This payment is not a regular monthly salary, but an ad-hoc payment done for a single job.
Differentiating factor 5: Restriction on external employment
Employees are almost always contractually bound to work for only one employer. They cannot have outside employment (i.e. moonlighting). If a contract states that there is an obligation to work for only one employer, it is likely that the Courts will find that the person is an employee.
Freelancers do not generally have this restriction, as they can work for multiple companies.
Differentiating factor 6: Working hours
Employees generally have fixed working hours. This can be your standard Monday to Friday, 9AM to 5PM hours. It could be delegated in shifts, or three-days-on-two-days-off schedules.
Freelancers tend to not have fixed working hours. Generally speaking, they have more control over their own schedules. For instance, an outsourced IT company will respond whenever the client contacts them to fix an IT bug or start a new project, but otherwise, the IT vendor won’t be working for the client from 9AM to 5PM every day, unlike an employee would.
In terms of importance in determining whether a contract is of service or for service, the Courts usually will not place a great importance on evaluating working hours. There is a great deal of variation in working hours, so this will just be one aspect of consideration.
Differentiating factor 7: Overtime pay
Only employees have a legal entitlement to overtime pay.
Freelance workers do not have a legal right to overtime pay. If a hiring company does pay freelancers for overtime, that is done purely out of goodwill.
If a worker receives overtime pay from their company regularly, that can be good evidence that an employer-employee relationship (i.e. a contract of service) exists. Otherwise, why would the company bother paying for overtime?
Differentiating factor 8: Annual Leave, Sick Leave, Maternity/Paternity leave
Only employees have a legal entitlement to annual leave, sick leave, and maternity/paternity leave.
Freelance workers do not have a legal right to these types of leave. If a hiring company does provide freelancers with leave, that is also done purely out of goodwill.
If a worker is able to apply for and claim leave from their company (especially if that leave was approved multiple times), that can point strongly to a contract of service, rather than a contract for service. Most hiring companies will not give their freelancers paid leave since it’s an extra expense.
Differentiating factor 9: Right to terminate, dismiss, or suspend
The majority of employment contracts will contain a clause stating that the employer has the right to terminate, dismiss, or suspend the employee. This is a key factor in contracts of service. Most contracts for service will not contain this clause.
Differentiating factor 10: Delegation authority
Generally, employees don’t have the ability to delegate tasks to a third-party. For instance, if a boss of a strategy consulting company tasks their subordinate to complete a consulting project, the subordinate is unlikely to be able to hire a sub-contractor to finish the project for them. Even if the subordinate were able to hire a sub-contractor, it’s likely that it would only be for specific parts of the project that required specialist knowledge which the subordinate doesn’t possess. It’s unlikely that the subordinate would have the authority to outsource all their work without seeking their boss’ approval.
On the other hand, independent contractors tend to have greater ability to delegate their work to a third-party. For instance, let’s take the same example of the corporate strategy consulting company mentioned above. In this case, let’s say the boss of the company was hired as an independent contractor to advise on an M&A deal. In this case, let’s say the boss needs to delegate his work to some external parties, like accountants and financial valuation experts to assist on the project. The boss is likely to be seen as an independent contractor because he has the power to delegate his work to other third-parties.
Differentiating factor 11: Provision of Accommodation, Uniforms, Name Cards, Other Material with Company Logos, Access to Company Events, etc.
Usually, only employees have access to these benefits. Company housing, company uniforms, company name cards with their position stated, etc. It is uncommon that independent contractors will receive such items.
What’s an example of a contact of service vs contract for service lawsuit?
A great example to illustrate the factors above is the 2019 case of Public Prosecutor v Jurong Country Club (JCC). In this case, JCC was facing potential legal penalties for not making CPF contributions to an alleged employee, known as Mr. Yusoff, from 2003 to 2016. Mr. Yusoff was hired by JCC as a fitness instructor for its gym. The Court of Appeal ruled that Jurong Country Club was not liable for CPF contributions to Mr. Yusoff, because Mr. Yusoff was not in fact an employee at all.
The Court of Appeal found that the following factors rendered Mr. Yusoff an independent contractor/freelancer, rather than an employee of JCC:
Factor 1: Control
The club’s level of control over Mr. Yusoff only extended to requiring him to be at the JCC gym daily. It exercised little control over the specific way Mr. Yusoff conducted his training sessions.
Factor 2: Delegation authority
Mr. Yusoff did not have delegation authority, as he was not allowed to find a replacement gym instructor if he could not be present to train members. However, the lone fact that Mr. Yusoff did not have delegation authority does not prove that he was an employee, rather than a freelancer. Since Mr. Yusoff was JCC’s sole gym trainer, it was reasonable for JCC to expect Mr. Yusoff to provide the training services himself. Also, Mr. Yusoff had decades of training experience. A replacement trainer may not have the same depth of skill and fitness knowledge that Mr. Yusoff would have had, providing for a poorer experience for JCC’s gym clients. It was therefore logical that JCC would not want a replacement of potentially inferior quality, and would instead insist on such a highly experienced trainer providing the services himself.
Factor 3: Method of payment
Mr. Yusoff’s compensation was weighted more heavily towards a commission. He also had a monthly retainer.
While a compensation scheme that has a larger commission component is not itself indicative of being a freelancer, it is part of a broader pattern of facts that points towards Mr. Yusoff being on a contract for service.
Factor 4: Work arrangements
Factor 4 proved to be critical in demonstrating that Mr. Yusoff was on a contract for service. Mr. Yusoff was not counted as an employee, and was therefore excluded from JCC’s internal manpower roster for budgeting purposes. Mr. Yusoff was not invited to staff-only events, such as JCC’s “Dinner and “Dance”. This Dinner and Dance was compulsory for all employees, with penalties for those who did not show up.
Furthermore, Mr. Yusoff:
- Did not report to the HR department
- Was not issued an HR manual for study
- Was exempted from employee performance reviews
- Did not have KPIs to meet
This was not the case for employees, who had to comply with the criteria set out above.
Mr. Yusoff was also not provided with an access card that would allow him to enter all areas of JCC. This was unlike employees, whose access cards permitted them to go to every (or almost every) part of JCC. His access card only permitted him access to the gym.
Mr. Yusoff’s JCC identification number was also different compared to all other employees.
Mr. Yusoff was also allowed to conduct training sessions for non-members for his own additional income. This was unlike employees, who were barred from engaging in activities at the club to earn extra income. JCC’s HR manual stated that employees who engaged in such activities were to be fired.
Factor 5: Benefits
Mr. Yusoff did not have Work Injury Compensation Insurance from 2003 onwards. This is because Work Injury Compensation Insurance only applies to employees, and does not cover independent contractors.
Mr. Yusoff was not provided with annual leave, sick leave, and hospitalisation benefits. This is unlike employees, who received these entitlements/benefits.
After evaluating this series of factors, the Court of Appeal ruled that Mr. Yusoff was actually an independent contractor, hired by JCC under a contract for service. This case illustrates are taken into consideration when evaluating whether a worker is under a contract of service, or a contract for service.
What should employers do if there is a legal dispute over Contracts of Service vs Contracts for Service?
Employee has dispute with employer (contract of service dispute)
Most contracts of service (i.e. employment agreements) will usually include a “dispute resolution” clause. This clause will usually specify that disputes must first be settled in mediation or arbitration, before lawsuits can be filed. Alternatively, such clauses may have the employee waive their right to take legal action against their employer, and compel employees to resolve matters strictly in arbitration.
It’s important for business owners draft your contract of service/employment agreement well, to limit the extent of your liability against disgruntled employees.
Freelancer/vendor has dispute with hiring company (contract for service dispute)
Most hiring contracts will include a “dispute resolution” clause also. This clause will state the methods of resolution available if there is a dispute or breach of contract. For instance, the clause may have the freelancer/vendor waive their right to pursue civil litigation, and instead only settle disputes via arbitration.
It is vital that business owners include a dispute resolution clause in their contracts with external vendors. This protects their company in case the freelancer/vendor makes allegations (e.g. breach of contract) and decides to sue you.
Another not-uncommon scenario is when workers who are under a contract for service (i.e. freelancers) argue that they are actually under a contract of service (i.e. employees). This is most commonly done when workers feel they have been deprived of certain benefits that employees are entitled to.
In such scenarios, speak with a lawyer who can advise you on the best course of action. Don’t engage the disgruntled worker in negotiations before you get advice from a lawyer. It’s also best to have a legal professional present during any negotiations you hold with the person in question.
How are Contracts of Service, and Contracts for Service, terminated?
Ending a Contract of Service
An employer can simply rely on their contractual right to the end the contract of service. This will be spelled out in the Employment Agreement. No other reason, other than this right to terminate the contract, needs to be given.
Employees can end their contracts of service by quitting. For employees on time-limited contracts, the Employment Agreement will end upon expiry of the contract.
Ending a Contract 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 counter-party 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.
Why is it important to differentiate Contracts of Service from Contracts for Service?
Business owners must provide for many labour rights for employees, since they under contracts of service. However, businesses do not have to provide these rights for freelancers, since they are under contracts for serivce. Knowing who is an employee and who is a freelancer will help ensure that businesses do not become liable for mistakenly classifying someone as a freelancer, and then incurring serious legal liability because they did not provide these various rights to them.
Rights that apply only to contracts of service (i.e. employees) include:
#1. CPF contributions:
Only employees are entitled to CPF contributions made by their employers. CPF contributions vary by age, and can make up a substantial amount of additional earnings over time. For instance, workers under 55 are entitled to 17% of their salary as CPF contributions, to be made by their employer.
Both part-time and full-time employees are entitled to CPF contributions by their employers. Freelancers are not entitled to CPF contributions by the companies who hire them.
#2. Rights under Employment Act:
Only employees are entitled to the various employment rights granted under the Employment Act. The Employment Act provides many protections for workers. This includes rules on maximum working hours, mandatory overtime pay, mandatory rest days, extra mandatory compensation if for being made to work on rest days or public holidays, and more.
Freelancers are not covered by the Employment Act, and therefore do not have these rights.
#3. Rights under Work Injury Compensation Act (WICA):
Only employees are entitled to the rights granted by the Work Injury Compensation Act. This Act makes it legally compulsory for companies to compensate workers for their work-related injuries/diseases, including Covid-19. Companies must pay for up to $45,000 in medical expenses for treatment of work-related injuries (e.g. fracture after falling at work), or work-related sickness (e.g. lung disease from breathing in sawdust at work).
The Work Injury Compensation Act also makes it compulsory for lump-sum compensation to be paid in case the worker dies or becomes temporarily/permanently disabled due to work. Compensation for work-related death can go up to $225,000 (can be higher in some cases). Compensation for work-related disability can be up to $289,000 (can also be higher in some cases).
Freelancers are not covered by the Work Injury Compensation Act, and therefore cannot claim compensation if they happen to suffer work-related injuries/sickness.
#4. Employer’s vicarious liability for employee’s mistakes/misdeeds:
Vicarious liability only applies to actions committed by employees, not independent contractors.
Vicarious liability means being legally liable for the actions of someone else. In the case of employers, this means that companies can be held legally liable (i.e. sued) for mistakes or misdeeds committed by their employees. For instance, a driver employed by a shipping company may get into a road accident, damaging someone else’s car and hurting them in the process. The driver of the damaged car can sue the company, holding them vicariously liable for the damage and injuries he’s suffered.
Vicarious liability can also apply to cases where employees use their company positions to cheat other people. For instance, a worker may send fake invoices to defraud customers of the company. Defrauded customers can then sue the company, claiming they are vicariously liable.
How to protect your company from liability for workers under contracts of service?
For employees (i.e. those under a contract of service), you should carry Work Injury Compensation Insurance to protect them. Employers in Singapore are legally liable for any work-related injury/disease contracted by employees, including Covid-19! Employers must pay the following costs:
- Employer must pay up to $45,000 medical expenses for employee’s work-related injury/disease
- Employer must pay up to $225,000 in case of employee’s work-related death
- Employer must pay up to $289,000 in case of employee’s work-related temporary/permanent disability
Work Injury Compensation Insurance will cover all the costs above. Get Work Injury Compensation Insurance from $5/month now!
You should also strongly consider the following protections for your business:
Get Public Liability Insurance from $9/month
Get Commercial Property Insurance from $12/month
Get Professional Indemnity Insurance from $42/month
Get Directors & Officers Liability Insurance from $42/month
