Contract of Service versus Contract for Services

Introduction

A contract for services is a formal, legally binding agreement before a business and a self-employment individual. It differs between an employment contract – known as a contract of service – which is between an employer and an individual who then becomes employed by the company.

The difference is between service and services – self-employed people provide a finite amount of work while an employed person is in effect providing themselves permanently.

An employee-employer contract is a contract OF service (also known as a Contract of Employment); and
A contractor-client contract is a contract FOR services.

The division between the two also distinguishes between those who gain rights via employment and those that do not. Self-employed people do not typically gain employment rights/benefits, such as pension schemes, because they are expected to pay for these provisions themselves.

UK law currently recognises three main types of employment status:

Employees working under a contract of employment, who have full employment rights;
The genuinely self-employed, who are independent contractors; and
Workers, who have a status in between employment and self-employment (refer to ‘I Think I Might be a Worker’ below).

Working out which one you are in ‘reality’ than ‘on paper’ is important due to the difference in employments rights associated with each type.

You read an example contract here.

What is a Contract of Employment?

Simply put, a contract of service reflects the status of the individual as an employee of the other party to the contract.

Also known as a Contract of Service.
- Contrast with Contract for Services below.
A contract of service or apprenticeship, whether express or implied and, if express, whether oral or in writing (section 230(2), Employment Rights Act 1996).
Whether or not an individual is working under a contract of employment will determine whether they are entitled to certain statutory rights, such as statutory redundancy payments and statutory maternity pay and the right not to be unfairly dismissed.
This can be contrasted with a contract for services or a worker relationship, where the relationship between the parties is not that of employer and employee.
For a contract of employment to arise there must at least exist an obligation to personally perform the work, mutuality of obligations between employer and employee, and a sufficient element of control over the employee’s work.
- Refer to Irreducible Minimum below.
- Refer to Ready-Mixed Concrete (South East) Limited v the Minister of Pensions and National Insurance [1968] 2 QB 497.
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 will 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?

A contract for services is a contract that is used for appointing a genuinely self-employed individual such as a consultant (or a profession or business run by that individual) to carry out services for another party where the relationship between the parties is not that of employer and employee or worker.

Also known as a Service Agreement.
A contract for services can be undertaken by directors of a limited company, those on the books of an umbrella company, or freelancers, for example.
A 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 contracts of employment.

There has been much public debate on the gig economy and zero-hours contracts. ‘Zero-hours contract’ is not a legal term, but means a contract involving an employee or a worker in which there is no set minimum number of hours.

What Happens 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 judgement 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.

What Label?

Labels do not determine employment status – that depends on the terms of the contract and how the arrangements operate in practice.
In practice, there is a significant grey area in the distinction between those working under contracts of service and those under a 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.

What is Irreducible Minimum?

Various tests are used to decide whether a person is an employee including:

Element	Outline
Mutuality of Obligation	Does the employer have to provide work, and does the worker have to take the work that is offered?
Control	Does the employer control how the worker does the work, and do the employer’s disciplinary procedures apply to the worker?
Integration	How far is the employee integrated into the employer’s organisation?
Multiple	Looks at a number of factors including ‘substitution’ (that is, can the worker send another person to do work for the employer on their behalf?).

Relevant factors to consider when determining if there is a contract of service in existence – and the other factors consistent with employment status – includes the ‘irreducible minimum’ of:

Personal service;
Mutuality of obligation (MOO, see below); and
Control.

Courts will also look at whether the nature, length, and pay (such as being paid on PAYE basis) and benefits of the engagement, are consistent with other employees in the organisation. Courts will also look at being entitled to holiday pay and the alleged employer providing the individual with the tools for performance of their duties (mobile phone or laptop, for example).

What is Personal Service?

In simple terms, the individual cannot allow someone to substitute for them, they must carry out the work themselves.

What is Mutuality of Obligation?

There is also a relationship between an employee and employer called ‘mutuality of obligation’, often referred to in shorthand as ‘MOO’.
MOO is one of the key tests of employment status.
MOO means that an employer is obliged to provide work for an employee, and the employee is obliged to complete the work.
Within the scope of their job description, employees have to complete the work that ‘comes down the pipe’, which is one of their fundamental distinctions from a contractor.
If the employee fails to fulfil their obligations, the employer can take action that may ultimately result in the employee’s dismissal.
Similarly, if the employer does not fulfil their obligation to the employee, the employee can take action that might result in an industrial tribunal.
However, it is important to note that although MOO ordinarily means that the alleged employer is obliged to provide work and the alleged employee is obliged to perform it, this will not necessarily always be so.
- For example the Court of Appeal in Clark held, albeit obiter, that the alleged employer not providing work but remunerating the worker on a retainer basis when work is not available could satisfy the requirement of mutual obligation.
- What matters is that there is some mutuality.
- The nature of the mutuality required will depend on the circumstances of the case.

What is Control?

In broad terms ‘control’ refers to the power to determine what duties are to be performed and when and how they are to be performed.

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; and
Protection from discrimination.

What are the Core Differences between a ‘Contract of Services’ and a ‘Contract for Services’?

In each of these types of contract both parties have specific rights and responsibilities which differ according to the type of contract in place.

Permanent employees have a contract of service with their employer, and the key rights and responsibilities of employee status under a contract of service are:

The worker is controlled by their employer: They must perform the tasks they are instructed to by a line manager according to their job description.
The worker is expected to work at a specific place during specific hours on specific days (even flexi-time has core hours).
The worker must present themselves for work and cannot send someone else as a substitute.
Employees have statutory rights to holiday pay, sick pay, maternity and paternity rights and redundancy payments.
Employees have statutory rights regarding how they can be asked to leave their employment.
Employees enjoy a range of additional benefits, which can vary according to the employer, but might include company cars, private health insurance, staff canteens, health clubs and gyms and so on.
Employees are not personally liable for any errors they make when completing work for their employer, nor are they expected to make good in their own time.

Employment Rights By Status

Employment Status	Employment Rights
Employees have a right to:	1. Protection against unfair dismissal. 2. A statutory redundancy payment after two years’ service. 3. Minimum statutory notice. 4. Statutory maternity, paternity, adoption, and shared parental leave and pay, and statutory sick pay. 5. TUPE protection (provided TUPE applies to the transfer of undertakings concerned). 6. Request flexible working. 7. Paid time off for trade union duties and for ante-natal care, and unpaid time off to deal with emergencies for a dependant.
Both employees and workers are entitled to:	1. National Minimum Wage/National Living Wage. 2. A written statement of terms on the day the contract starts – workers as well as employees have this right from 06 April 2020. 3. An itemised pay slip on or before the day payment is made – from 06 April 2020. 4. Working time rights, such as weekly and daily statutory rest breaks, and a 48-hour maximum working week (although they can choose to opt out and work for longer). 5. A companion during a disciplinary or grievance hearing. 6. Protection from discrimination and from mistreatment following whistleblowing. 7. Protection from unlawful deduction from remuneration. 8. Health and safety protection. 9. Auto enrolment on to a pension scheme. 10. Paid annual leave.
Self-employed contractors have no employment rights, apart from:	1. Health and safety protection. 2. Protection from discrimination (in some cases) and from mistreatment following whistleblowing.

What are the Differences between Tax and Employment Definitions?

The self-employed pay their own tax and national insurance (NI).
- Businesses must deduct income tax and NI contributions, and pay employers’ NI, for both employees and workers.
However, the legal tests for tax purposes and to determine employment rights are not the same, so an individual may be taxed as an employee but not have full employment rights.
The ‘worker’ concept only exists in employment law, and is a catch-all category used to provide those who would otherwise be self-employed, but who have some employee characteristics (such as a degree of control by the business), with meaningful legal rights.
Employees work under a ‘contract of service’; the self-employed work under a ‘contract for services’.
Workers provide services personally to an organisation but under an arrangement that is looser than employment.
The principal statutory definition of a ‘worker’ is found in section 230(2) of the Employment Rights Act 1996.

I Think I Might be a Worker

The dividing line between employment and self-employment can be blurred, but factors suggesting self-employment include individuals:

Actively marketing their work outside the organisation, being able to decide how it is done, and (possibly) providing a substitute to carry it out.
Not being integrated within the business, or subject to a high level of control.
Supplying their own equipment.
Accepting the risk of not being paid if the work is not done.
Submitting invoices for payment.
Having no obligation to accept work.

Workers tend to have some of the characteristics of both, and the definition of a ‘worker’ has been further embellished by a number of gig-economy cases. Claims brought against organisations such as Uber, Pimlico Plumbers and CitySprint concerned whether the claimants were genuinely self-employed, or workers. Generally these workers could not be employees because they could choose to work when they wanted to, or work no hours at all.

Since the Supreme Court’s decision in Autoclenz Ltd v Belcher (2011), the courts are more willing to look beyond what the contract says (and the labels applied to each party) to how the relationship worked in practice. For example, in Aslam v Uber BV (2018), the employment tribunal and Employment Appeal Tribunal looked beyond the documentation and found that Uber drivers were workers despite the contracts saying the opposite. This decision was confirmed by the Court of Appeal and subsequently by the Supreme Court in February 2021.

In Pimlico Plumbers Ltd v Smith (2018), the Court of Appeal, and subsequently the Supreme Court, also emphasised the importance of the reality of the working relationship regardless of contractual terms. The courts found the claimant was not self-employed, as the company maintained, but a ‘worker’ and, therefore, entitled to working time rights.

Workers and Organisations

Organisations currently using a range of contracts, such as fixed-term, agency or zero-hours contracts, should consider whether these are still the right choice in terms of flexibility of resource, and the need for stability by those working for them.
It is good practice to ensure that all workers, or those on varying contracts, are aware of any vacant positions within the organisation, so they can apply for more stable contracts, if they so wish.
- This is a legal requirement for employees on fixed term contracts.
Statements of written particulars are required for employees and, from 06 April 2020, for workers too, setting out what rights they are entitled to.
- Employers’ legal obligation to provide an itemised pay slip for employees became a legal requirement for workers as well from 06 April 2019.
Organisations may have inserted an opt-out clause in relation to maximum working time in their employment contracts, but they should remember this does not exempt employees or employers from their duty of care under health and safety legislation.