The Difference Between a Contract of Service and a Contract For Services

The Difference Between a Contract of Service and a Contract For Services

Written By
Joy Cunanan
Updated on
June 23, 2022
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minutes

Oftentimes, before you begin to work on any type of project, you may have had to sign some type of contract. Whether you are an employee working for an employer in an organisation, or self-employed and working with a contractor, you are likely to come across service contracts at any point in your career.

There are two types of service contracts for different reasons, the first is a Contract of Service, and the second is a Contract For Services. Although there is only one word that differentiates their names, these two contracts share many differences and are used for significantly different reasons.

This article will help explain the key differences between the two types of contracts and why it is important for you to understand these differences before you decide to enter into an agreement. 

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What is a Contract of Service?

A Contract of Service is defined by the Ministry of Manpower (MOM) as an agreement between an employer and an employee. It is vital for both parties as it gives security and protection to each party involved. 

For the employee, this contract gives them security as they can ensure they are working in a professional business where their obligations are clearly defined, which helps them understand the expectations they need to meet. As for the employer, they will have security as they can ensure these obligations are met. They will also have protection in case an employee, for any reason, breaches their contract as they can take legal steps to make sure that the business is compensated for example.

A Contract of Service defines the different terms and conditions of employment and must include things like Key Employment Terms (KETs) and essential clauses such as working hours and the scope of the job. 

In Singapore and most countries, most working adults are employees, and thus, working under a Contract of Service. In addition to this, they are also covered under the Employment Act and provided with statutory benefits. Let’s take a quick look at what the employment act covers.

The Employment Act covers the following types of employees:

  1. Full-time - Employees who typically work an average of 40 hours a week and are eligible for benefits from the company such as healthcare, dental care, vacation days, and paid time off.
  2. Part-time - Employees who work less than 40 hours a week generally and are not eligible for benefits a full-time employee would have.
  3. Temporary - Employees who are individuals who are hired for a short period of time, based on a company’s needs.
  4. Contract - Employees who are individuals retained by a company for a predetermined time, for a predetermined price, also known as freelance workers.

These employees can be paid in a broad range of ways, such as hourly, daily, monthly, or piece-rated. However, if an individual is employed as a seafarer, domestic worker, or a statutory board employee or civil servant, they will not be covered under the Employment Act.

The Employment Act may include the following benefits:

  1. Sick Leave
  2. Annual Leave
  3. Maternity Leave
  4. Incentives 
  5. Bonuses
  6. Relocation Assistance
  7. Healthcare Benefits
  8. Retirement Fund Contributions
  9. Childcare Benefits
  10. Transportation Reimbursements 

The Employee Act recognizes that it is important that employees are given a supportive environment to work in and that these benefits can help raise productivity, increase employee retention rates, as well as have a positive impact on the bottom line of the company.

Now that we have taken a look at what a Contract of Service is, let’s go through what exactly a Contract For Service is, and the differences between the two.

What is a Contract For Service?

As previously mentioned, a Contract of Service is an agreement between an employer and an employee. Whereas a Contract For Service is a contract where instead of an employer-employee relationship, there is a client-contractor type of relationship. 

A self-employed or independent worker or freelancer can agree to complete a task for a certain fee with this type of contract. Interestingly, in the past few years, more alternative working arrangements such as freelancing and self-employment have been on the rise in both Europe and Asia. The Labour Force in Singapore 2020 report highlighted that the number of self-employed persons in Singapore grew in 2020 to 14.7% of the overall employed residents. Many reasons could explain this rise in self-employment, but the two main reasons why people may switch to these more alternative solutions are flexibility and being their own boss.

However, unlike a Contract of Service contract though, these Contract For Service contracts are not protected under the Employment Act. What this means is that individuals do not get statutory benefits such as annual leaves, maternity/paternity leaves, public holidays and medical leaves, and so on.

The Ministry of Manpower (MOM) has broken down the main differences between the two types of contracts:

Contract of service

  • Has an employer-employee relationship
  • Employee does business for the employer
  • May be covered by the Employment Act 
  • Includes terms of employment such as working hours, leave benefits, etc.

Contract for service

  • Has a client-contractor type of relationship
  • Contractor carries out business on their own account
  • Not covered by the Employment Act
  • Statutory benefits do not apply

Now that you understand the similarities and differences between the two types of service contracts, here are the different factors to help determine whether you should enter into a Contract of Service or Contract for Service.

Contract of Service VS Contract For Service

When entering into any contract, it is important for both businesses and employees, or contractors and those self-employed, to understand the different aspects of the type of contract they are entering into.

Here are a set of factors, along with different questions, by the Ministry of Manpower (MOM) to consider when determining which type of service contract you may be entering into.

  1. Control 
  • Who decides on the recruitment and dismissal of employees?
  • Who pays for the employee’s wages and in what ways?
  • Who determines the production process, timing, and method of production?
  • Who is responsible for the provision of work?
  1. Ownership 
  • Who provides the tools and equipment?
  • Who provides the working place and materials?
  1. Economics  
  • Is the business carried out on the person’s account or is it for the employer?
  • Can the person share the profit or be liable for any risk of loss?
  • How are earnings calculated and profits derived?

If another party is responsible for determining most factors of the relationship and working arrangements, such as when you should be paid, how you should be paid, and so on, you are most likely entering into a Contract of Service. This is because there is more of an employee-employer relationship dynamic going on. 

Whereas, if you are the one responsible for determining how much to charge for your services, how exactly you get paid, and so on, then it would be a Contract For Service.

Why is it important to understand these differences?

When entering into any contract it is important to understand exactly what you are getting into. Each contract carries differences in rights, duties, and obligations between you and the contracting counter-party so your understanding is crucial in protecting yourself. 

As mentioned before, although Contracts For Services for more alternative working solutions offer more flexibility and power to you as an individual it does not have the same level of security and safety as you are not protected under the Employment Act. 

For example, suppose you are working on a project with a Contract For Service agreement in place, and unfortunately you accidentally harm someone during it. With this type of contract, you may face liability for causing harm or injury to a third party during the course of the project. Whereas if you were working under a Contract of Service, as an employee of an organisation you would be protected - at least for the course of your employment.

Clauses to keep in mind when drafting each contract

  1. Contract of Service

Employment - States that the company has appointed an individual as an employee of the company, and details what position they will be taking on.

Place of work - States the designated place and address of the company from where the employee is supposed to report and carry out his assigned activities. Also whether the employee may be relocated to any other department/office/location within the organisation. 

Duties and obligations - As the name suggests, this mentions the duties and obligations of the employee and how they should perform the tasks they’ve been assigned to the best of their ability.

Representation and warranties - State that the documents necessary to submit are true and accurate, and that the employee is competent to enter into an agreement with the company.

Remuneration and benefits - Remuneration is the total compensation received by an employee. It includes the base salary, any bonuses, commission payments, overtime pay, or other financial benefits that an employee will receive from an employer.

Probation period - States if an employee will be subjected to a probation period and how long it will last will also be mentioned.

Intellectual property rights - This clause makes it clear that each party retains the ownership over their intellectual property; that is unless the agreement says otherwise.

Non-compete and Non-solicit - This clause mentions that the employee shall not continue or attempt to carry on any services similar to that of the business of the company with any third party including but not limited to the competitors of the company.

  1. Contract For Service

Retention of the service provider - Unlike the employment clause, this describes that the service provider or self-employed party or freelancer is not an employee of the other party.

Scope of work - States the responsibility of the service provider which includes both qualitative and quantitative performance requirements.

Consideration - Mentions the amount to be paid by the company in exchange for the services provided by the service provider.

Ownership - This clause will mention that the service provider understands that all ownership rights arising out of the work created shall rest with the company. This means that the company will be the exclusive owner of that work and has the right to use, modify and edit it.

Assignability - This clause mentions that the service provider cannot assign the contract to any other party without prior written permission from the company. 

Confidentiality - The service provider shall keep information obtained during the course of their work confidential and shall not disclose anything without prior written consent from the company.

Indemnification - This mentions that the service provider shall compensate the company in any cases of third-party breach claims. 

Termination - The company shall have the right to terminate the agreement if the service provider fails to deliver the work as per the timelines mentioned in the agreement. 

Understand Your Rights and Responsibilities With Lexagle Today

Entering into any type of contract is an integral part of a transaction. Whether you are an employee or an independent contractor, you need to be aware of your rights and responsibilities under the applicable type of contract.

Understanding the ins and outs of these service agreements can help you develop an effective agreement that will benefit your own business. At Lexagle, we are here to help you clarify the extent of your rights and responsibilities for you to make better-informed choices for your future. Contact us today to discuss how Lexagle can best fit your unique needs.

The Difference Between a Contract of Service and a Contract For Services
Author
Joy Cunanan
Joy is the Digital Transformation Manager at Lexagle. As a marketing professional in the Tech and B2B industry for over seven years, she is always on the lookout for the next best solution in the ever-changing online world. With a passion for helping businesses thrive and optimize operations, she shares her expertise in the power of contract lifecycle management and its capacity of easing the contracting process for busy organizations worldwide.

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