Employees vs Independent Contractors India
Updated as of 2017
The practice of engaging contractors by employers is prevalent throughout India, similar to various other jurisdictions, for improving their overall competitiveness in the globalised market economy. Increasing labour cost and the need for flexibility in managing manpower to respond to market conditions and customers’ demands have caused employers to prefer contractors in a number of circumstances. However, the employment of contractors is subject to certain risks wherein such contractors may be reclassified and deemed to be direct employees of the employer in specific situations. This article provides an overview of the distinction between Independent Contractors and employees, the law governing the employment of contractors in India and the allied risks of reclassification of such contractors as direct employees.
In India, there is a distinction between a ‘contract of service’ and a ‘contract for service’. It is on the basis of the nature of the engagement that one can be classified as an employee or independent contractor. A contract of service implies relationship of master and servant, involving an obligation to obey orders in the work to be performed, its mode and manner of performance.1 In a case of contract of service, there may be a distinction with respect to workmen and managers. Section 2(s) of the Industrial Disputes Act, 1947 (the "ID Act") defines workman as a person employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work, for hire or reward, terms of employment be express or implied. It specifically excludes those employed in mainly managerial or administrative and supervisory capacity.
A contract for services implies an agreement wherein one party undertakes to provide services, to or for another in the performance of which he is not subject to detailed direction and control but exercises professional or technical skill and uses his own knowledge and discretion. A reference to independent contractor may include consultants, freelancers and also contract labourers. In case of independent contractors, the relationship will be governed by the terms and conditions of an agreement, whereas, in case of a relationship with a contract labourer, it will be governed by the provisions of the Contract Labour (Regulation and Abolition) Act, 1970 (the “Act”). Under the Act, the employer is termed as a ‘Principal Employer’, the employees of the contractor-employer are termed as ‘Contract Labour’ and the agency/company that supplies such contractor employees to the employer is termed as the ‘Contractor’.