What is the difference between a Contract of Service and a Contract for Services?
Although the terms sound very similar, they differentiate between employees -- who typically work under a contract of service, and self-employed individuals -- who typically work under a contract for services, writes Mark Primrose, associate at law firm Harbottle and Lewis LLP.
What is a contract of service?
A contract of service reflects the status of the individual as an employee of the other party to the contract.
There are limits on the freedom to agree contract terms for employees, since they have statutory rights to specific protections and also have a right to be provided with information about key terms (e.g. pay, workplace, hours of work, minimum notice periods, sickness pay and disciplinary and grievance procedures). A contract of service with therefore typically reflect all of these rights.
In addition to the statutory and agreed terms, the courts imply some additional terms into the employment relationship. These include a duty of both parties to act in good faith and a duty on each party to maintain a relationship of mutual trust and confidence between the parties. Breach of this term allows employees to claim constructive dismissal.
What is a contract for services?
By contrast, the contract for services is usually limited to the terms essential to the commercial provision of services by the self-employed individual to the client, who is the other party to the contract.
Such terms will be those agreed between the parties and the courts will not seek to imply additional protections, such as the mutual trust and confidence term implied into employment contracts.
Statutory Employment Rights
Employees benefit from a range of additional rights including:
- protection from unfair dismissal after two years’ service,
- the right to a redundancy payment after two years’ service,
- minimum wage,
- paid holiday,
- disciplinary and grievance processes,
- rights to reflect flexible working
- time off work
- protection from discrimination
When individuals with ‘for services’ contracts become ‘workers’
Interestingly, self-employed individuals who are required to provide their services personally may qualify to be treated as “workers”, in which case they would be entitled to some, but not all of the statutory rights enjoyed by employees.
And workers, as the recent Uber Supreme Court judgment has demonstrated, are entitled to minimum wage, holiday pay and protection from unlawful discrimination. They also have the right to be accompanied in hearings of a disciplinary nature and to the protection given to whistle‑blowers.
And finally, a label won’t cut it
In practice, there is a significant grey area in the distinction between those working under contracts of service and those under contract for services. It follows that simply labelling a contract as a contract for services will not prevent the courts -- or HMRC -- from considering that the reality is an employment relationship to which all employment rights apply.