Industrial Law

Distinction between 'contract of service’ and 'contract for service'

The relationship between an employer and employee is a contractual

relationship which is called a ‘contract of employment’ whereas a person who
engages an independent contractor or a self-employed person in some work
makes a ‘contract for service’ with him. The distinction between these two
types of contract is important because only 'employees' qualify for
employment protection rights and statutory benefits such as unfair
termination, terminations benefits, minimum standards in terms and
conditions of employment fixed by law etc. As there are no statuary
guidelines to identify this distinction one has to depend on the guidelines or
tests formulated by courts in this respect.

The Industrial Disputes Act No. 43 of 1950 has made radical changes to the
traditional theories and concepts of ‘contracts of employment’.

Workman

Section 48 of the Industrial Disputes Act defines a “workman” in the

following terms:

“workman” means any person who has entered into or works under a contract
with an employer in any capacity, whether the contract is expressed or
implied, oral or in writing, and whether it is a contract of service or of
apprenticeship, or a contract personally to execute any work or labour, and
includes any person ordinarily employed under any such contract whether
such person is or is not in employment at any particular time, and includes
any person whose services have been terminated.

As the Supreme Court has stated in Colombo Apothecaries Co. Ltd. v.

Wijesuriya 70 N. L. R. 481 at 504 & 505 the above mentioned definition can
be split up into three limbs as follows:

1. Any person who has entered into or works under a contract with an
employer in any capacity, whether the contract is expressed or
implied, oral or in writing, and whether it is a contract personally to
execute any work or labour.
2. Any person ordinarily employed under any such contract whether
such person is or is not in employment at any particular time.
3. Any person whose services have been terminated.

The contract of employment could be one of three kinds:

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 (i) Contract of service, or
(ii) Contract of Apprenticeship, or,
(iii) Contract personally to execute any work or labour.

In the Ceylon Electricity Board v Abrew 78 N. L. R. 79 the General Manager

of the Board made an application to a Labour Tribunal for relief when his
services were terminated. It was held that the General Manager was a
“workman” within the meaning of the Industrial Disputes Act.

Employer

Section 48 of the Industrial Disputes Act defines an “employer” in the

following terms:

“Employer” means any person who employs or on whose behalf any other
person employs any workman and includes a body of employers (whether
such body is a firm, company, corporation or trade union) and any person
who on behalf of any other person employs any workman”.

The above mentioned definition can be split into the following three limbs:

(i) Any person who employs any workman; or

(ii) Any person on whose behalf any other person employs any
workman; and
(iii) Any person who on behalf of any other person employs any
workman.

Industrial Dispute

Section 48 of the Industrial Disputes Act defines an “industrial dispute” in the

following terms:

“industrial dispute” means any dispute or difference between an employer

and a workman or between employers and workmen or between workmen and
workmen connected with the employment or non-employment, or the terms of
employment, or with the conditions of labour, or the termination of the
services, or the reinstatement in service, of any person, and for the purpose of
this definition “workmen” includes a trade union consisting of workmen.

Tennakoon J in Colombo Apothecaries Co. Ltd. v. Wijesuriya 70 N. L. R. 481

at 505/6 divides this definition into the following three limbs:

(i) There must be a dispute or difference.

(ii) This dispute or difference must be between an employer and a
workman, or between employers and workmen or between

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 workmen and workmen. (“workman” includes a trade union of
workmen).
(iii) The dispute or difference must be connected with employment or
non-employment the terms of employment or conditions of labour
or with the termination or reinstatement in service of any person.

Tests used by courts to distinguish a contract of service from a contract

for service

1. Control test,
2. Integration test,
3. Economic reality test and
4. Multiple test (pragmatic approach).

1. Control test

In Ready Mixed Concrete Ltd v Minister of Pensions [1968] 1 All E. R. 433

Mackenna J stated that a “contract of service” should satisfy the following
requirements:

(i) The employee agrees that in consideration of a wage or other

remuneration he will provide his work and skill in the performance
of some service for his employer.
(ii) He agrees expressly or impliedly, that in the performance of that
service he will be subject to the other’s control in a sufficient
degree to make the other master.
(iii) The other provisions of the contract are consistent with its being a
“contract of service”.

Under the "control' test the employer controls not only what the employee
was to do, but also the manner of his doing it - if so, that person was his
employee. In the context in which it mainly arose in the 19 th century, of
agricultural and manual workers, this test had much to commend it, but with
the increased sophistication of industrial processes and the greater numbers
of professional and skilled people being in salaried employment, it soon
became obvious that the test was insufficient (for example in the case of a
doctor, architect, skilled engineer, pilot etc.) and so despite certain
attempts to modernize it, it is now accepted that in itself control is no longer
the sole test, though it does remain a factor and perhaps, in some cases, a
decisive one.

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 2. Integration test

If control is not a decisive test what then are the other considerations
which are relevant? In Montreal Locomotive Works Ltd Vs. Montreal and
A. G. for Canada (1947) 1 D.L.R. 161 Lord Wright said at page 169:

“In earlier cases a single test, such as the presence or absence of control,
was often relied on to determine whether the case was one of master and
servant , mostly in order to decide issues of tortuous liability on the part of
the master or superior. In the more complex conditions of modern industry ,
more completed tests have to be applied. It has been suggested that a
fourfold test would in some cases be more appropriate, a complex involving
(1) control (2) ownership of the tools (3) chance of profit; and (4) risk of
loss”.

Control in itself is not always conclusive. In many cases the question can
only be settled by examining the whole of the various elements which
constitute the relationship between the parties. In this way it is in some cases
possible to decide the issue by raising as the crucial question whose business is
it, or in other words by asking whether the party is carrying on this business,
in the sense of carrying it on for himself or on his own behalf and not merely for
superior.

Denning L.J. In Stephenson, Jordan and Harrison Ltd. Vs. MacDonald and
Evans, (1952) 1 T.L.R. 101 at 111) suggested a more up-to-date test.
Under a contract of service, he said, "a man is employed as part of the
business and his work is done as an integral part of the
business.” The organizational test (integration test) has certain advantages,
particularly in relation to skilled mployees who are "integrated" into an
enterprise, eg. Doctors, nurses etc. in respect of whom the control test is
inappropriate. In Whittaker Vs. Minister of Pensions [1967] 1 Q. B. 156 an
artist broke her wrist as a result of a fall in her act. It was held that she was
an integral part of the circus business and thus an employee for the
purpose of claiming industrial injuries benefit.

According to the dictum of Lord Denning in Bank Voor

Handel en Scheepvaart N. V. Vs. Slatford (1952) 2 All E.R.956 the
'integral test' was further condensed and said that in the present days in
determining whether one is an employee or not it should not rest only on the
question whether one was bound to obey the commands of the other but
whether he was part and parcel of the organization or not.
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In Y.G.de Silva v. The Associated Newspapers Vol I Part III our Supreme
Court applied both control and integral tests in determining whether the
appellant was on a contract of service or not. In this case too our Supreme
Court was guided by the above mentioned English cases. The Supreme Court
held in this case that- "It is not possible to formulate principles and tests of
universal validity to determine the question as to what is a contract
of service. The cases merely indicate a number of factors which are relevant.
The presence or absence of any one of such factors is not conclusive
since a decision depends on the combined effect of all relevant
factors. The common tests are :- control, ownership of tools, chance of
profit, risk: of loss, performance of the work by the servant himself and not by
his delegate, carrying on of business by the a party for himself and not merely
for a superior, payment of wages but these tests are not always conclusive. A
modem test is - Is the work done an integral part of the business or merely
an accessory to it? This is the integration test. Is the person part and parcel of
the organization?

The terminology used is not always decisive nor the absence of contribution to
Employees Provident Fund. By the retainer the employer really bought the
applicant's labour. He became part and parcel of the Newspaper organization.

3. Economic reality test

The ‘economic reality test’ was formulated in US Vs. Silk (1946) 331 U.S.
704 and was first referred to by Cook J in Market Investigations Ltd v
Minister of Social Security (1968) 3 All E. R. 732. Us Vs. Silk is a case
where certain employees who were employed to load coal to trucks and
again unload them to railway carriages, were employees within the meaning of
the statute. The Supreme Court of the United States decided that the test to be
applied was not power of control, whether exercised or
not over the manner of performing service to the
undertaking but whether the men were employees as a
matter of economic reality. In this case the men had no
working hours and they could come at any time and attend to their
work. They were paid according to the tonnage loaded and
unloaded and they used their own tools and helpers and
they were supervised.

Cook J's test of the ‘Economic Reality Test’ was applied in

Free Lanka Trading Co. Ltd Vs. de Mel (1978) (79(II)
N. L. R. 158 and the following cases were referred to. Market
Investigation, Bank Voor, Ready Mixed Concrete and US Vs. Silk . In Free
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Lanka Trading Co. case the workmen had accepted in their letters of
appointment that they were independent agents (contractors) and do not fall
within the meaning of the 'workman as defined in labour law.

It was held that the respondents came within the category of ‘workmen’ in a
scheduled employment within the meaning of the Termination of Employment of
Workmen Act.

It appears that the ‘Economic Reality Test’ is an elaboration or a development of

the ‘integration test’ itself.

4. Multiple test

This test is also known as the ‘Dominant Impression Test’ or the

‘pragmatic approach’. The problems involved in this area are too complex
to be capable of being resolved by the application of any single simple test.
Therefore, the courts look at all the surrounding facts and apply a multiple
test. Certainly the power of selection, payment of wages, and the power
to suspend and dismiss are
all relevant features which need to be taken into account. In Ready
Mixed Concrete case the firm dismissed its drivers, sold all the lorries
to them and re-employed them under a contract which contained
obligations capable of leading to the conclusion that they were both
employed and self-employed persons.

The drivers had to wear the company’s uniforms, place

their lorries at the company's disposal for a certain number of hours,
only use them for the company's business , obey the orders of the
foreman, and sell the lorries back to the company at an agreed current
market valuation. On the other hand the drivers had to maintain the lorries at
their own expenses and pay all running costs. In addition they could
employ a substitute driver, and could own more than one lorry. They paid their
own tax and national insurance contributions, had no set hours or meal breaks
and made their own decisions as to how to drive the lorries and which routes
to take.

Mackenna J held that there were three conditions necessary to establish

that a contract of service existed. The first was that the employee agreed to
provide his own work and skill in the performance of a service for his
employer, the second was that there must be some element of control

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exercisable by the employer, and the third was that the other terms of the
contract must be consistent with the existence of a contract of employment.
The fact that the drivers could (and did) employ a substitute was clearly
crucial in deciding that they were self-employed contractors.

'More recently the entrepreneurial test seems to be the dominating feature. The
problem is looked at from a self-employed person's point of view, and the
question asked 'Is he in business of his own?' Again no exhaustive list of
considerations can be formulated. Does he provide his own equipment? Hire
his own helpers? Is there any degree of financial responsibility for investment
or degree of risk? Does he undertake any other sort of commissions,
business or employment? Is there any opportunity for profit by sound
management? These questions were raised in Market Investigations case.
Difficult cases of this nature could be resolved by using industrial, rather
than legal, terminology. Hence, the person could be asked a simple question.
'Are you your boss'?

This pragmatic approach was taken even further in Davis Vs. England College
of Arundel 177 ICR 6, where the applicant was engaged as a lecturer on a
yearly renewable contract. He specially asked to be treated as being self-
employed as he wished to retain that status for income tax and national
insurance purposes. His request to be treated as being self-employed, and
the fact that the college so regarded him did not alter the nature of the
contractual relationship between him and his employer. In Massey Vs.
Crown Life Insurance Co. (1978) 1 WLR 676, where it was agreed that the
employee should be treated as being self-employed, it was held that while
the parties cannot alter the nature of their relationship by putting a different
label on it, where the situation was in doubt, or was ambiguous, an
agreement which stipulated the nature of the relationship affords
evidence of what it is.

Y. G. de Silva Vs. The Associated Newspapers (1983) BALJR Voll Part

III page 118 - A District Group Correspondent employed on a fixed
term contracts of one year duration for several years on a
declared understanding that he was an independent contractor, was paid a
retainer. In this case it was held that "It is not possible to formulate
principles and tests of universal validity to determine the question as to what
is a contract of service. The case merely indicate a number of factors which
are relevant. The presence or absence of any one of such factors is not
conclusive since a decision depends on the combined effect of all
relevant factors."

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The court further states "The common tests are:- control,
ownership of tools, absence of profit, risk of loss,
performance of the work by the servant himself and rot
by his delegate, carrying on of business by the party for
himself and not merely for a superior, payment of wages
but these tests are not always conclusive. A modern test is-Is the work done as
an integral part of the business or merely an accessory to it? This is the
integration test. Is the person part and parcel of the organization? The
terminology used is not always decisive nor the absence of contribution to the
Provident Fund. By the retainer employer really bought the applicant's labour.
He became part and parcel of the Newspaper Organisation.

Ceylon Mercantile Union Vs. Ceylon Fertilizer Corporation (l984)

SRI K LR Vol II page 112 (SC) The workmen had been recruited through
a Labour Cooperative Society. In this case too the two cases Ready mixed
Concrete and Short Vs. Henderson were referred to. In this case the Court
heavily depended on the definition of the term "employer" in the
Industrial Disputes Act and Justice Tennakoon's interpretation of the word
in Carson Cumberbatch & Co. Ltd Vs, Nandasena (77 NLR 73).

In this case the view expressed in Ready Mixed Concrete was followed. In
the dissenting judgment delivered by Samarakoon CJ quoted the four
factors given in Short Vs. Henderson and said that these are by no means
conclusive.

C.J's view was that the Co-operative Society acted only as an agent.
Justice Wanasundara with Wirnlaratne J agreeing -" What is important is
not the relationship between the Corporation and the Co-op Society but the
relationship between the workers and the corporation. This is not a bilateral
situation but tripartite situation. Only nexus with the Labour Co-op
Society was that the payment due to them from, the Fertilizer Corporation
was paid to them thorough the Labour Society. It was argued for the
Respondents by Mr. Mark Fernando that the President of the Labour
Tribunal had wrongly applied the control test, because such a test should
not be applied unless there is a contract in existence between the
parties. He relied on the judgment of Tennakoon J in Carson
Cumberbatch & co. Ltd Vs. Nandasena -77 NLR 73. Court distinguished
that case with this . In that case the applicant who submitted that the
principle was his employer wanted to give an extended meaning to the
word 'employer' to include the agent also. In that case Justice Tennakoon
said “...it must be noted that the definition of the word employer
contains no reference to control or supervision or management
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 exercised by one person over the another, so that it certainly does not
have an effect of including cases in which a person not the contractual
employer.”

Court of Appeal went on the analysis of the facts in the Construction

Training Board Vs. Labour Force Ltd. (1970 (3) AER 220. That case also
dealt with a tripartite situation. In that case the Respondents were engaged
in supplying labour to the construction industry. Respondents agreed with
the contractors to supply workmen at certain rates payable by the
contractors to the Respondents. The workmen were paid by the
respondents on the basis of information supplied by the contractors,
but the Respondents had no control over the work carried out by the
workmen for the contractor and the contractors had the right to terminate
any workman's engagement. The workmen received from the contractor a
'Information Card' containing terms and conditions of employment on
the back of which in each case contained the following terms "I hereby
certify that I am engaged by the Respondents on a sub-contract basis. I
further declare that I shall be responsible for my own and any of my
employees' PAYEE Income Tax Returns, National Insurance
contributions and Holiday with pay payments or stamps."

The Court held that the Respondents did not act as an employment
agency because the workers had a written agreement with the Respondents
to work for them and to be paid for it, they were contacting with the
workmen as principles. In CMU case the position is materially different.
In this case the 1st Respondent who calculated and determined the wages and
advances to the workmen and not the 2 nd Respondent which acted as a
mere conduit for the transmission of the payment. The 2nd
Respondent had undertaken to supply labour and not to perform any
specific services. It is the actual conduct of the 1st Respondent that
matters.

Celltel Lanka Ltd Vs. The Commissioner of Labour (No.CA 1342/98

decided on 18.01. 2000 unreported- Justice J.A.N. de Silvd) A person
recruited as a consultant on a Consultancy Agreement on a monthly
retainer of Rs.24,000/=) According to the agreement he was to
advice the Management on taxation, industrial relations
etc. He was allowed to use the facilities in the company
office for his work and he could decide the time and
dates that he would attend office if that is necessary for
his work. It was held that the consultant was a workman.

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Ceylon Insurance Company Ltd. Vs. Commissioner of Labour- (No.CA
398/95 decided on 110.04 1996 –Justice F. N. D. Jayasuriya) Company
engaged some persons as Insurance Agents/Sales Representatives on a
commission basis. Their agreements contain a close to the effect
"Sales Representative shall not engage himself directly
or indirectly in any occupation, work or business with
any other company, corporation or individual whether in
the field of insurance or any other venture for payment or
remuneration during the pendency of the contract or in
the event of termination for a period of two years
immediately succeeding the date of termination of these
presents, without the consent of the company first
obtained in writing." It also prohibited to engage in
canvassing directly indirectly to any other person or firm
or company engaged in insurance business for a period of
two from the date of termination. It was held that the
Sales Representative/Insurance Agents were workmen
who entitled to EPF.

Perera Vs. MarikkarBawaLtd. (1989) I Sri LR -347 (CA) (Justice Viknarajah)

The appellant was the Head Cutter of the Company in the its Tailoring Division,
He worked in cubical supplied by the Company and used his own tools.
He also employed his own assistants. Company passed on tailoring orders
to him and execution he was paid a commission from the collection for
each month. The Company collected payment from the customers. He did
not sign any attendance register and was not entitle to bonus payable to other
employees. Held - that applicant's work was an integral part of the business
of the company and was a part and parcel of the organization.

Rev. Father Alexis Benedict of Youth Fisheries Training Project Vs.

E.A.Denzil Perera and others (CA -549/82 - 15.10.87 -unrep) Some
fishermen who were trained in the Training Project organized by the
Rev. was later, when they became skilled , sent for deep sea fishing on
an arrangement that 50% of the catch was given to the fishermen and the
balance 50% for expenditure of the accommodation and food and other
expenses of the project. They claimed they were employees. Court held
that they were employees of the Project.

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