Key Takeaways

  • A contract of service establishes an employer-employee relationship with ongoing obligations, rights, and protections under employment law.
  • It typically includes terms on wages, hours, benefits, duties, termination, dispute resolution, and workplace policies.
  • Courts use various tests — such as control, integration, and business-on-own-account — to distinguish contracts of service from contracts for services.
  • A contract for services involves a business-to-business or client-contractor relationship, focusing on results rather than ongoing employment obligations.
  • Understanding the legal distinctions between these agreements helps both employers and workers protect their rights and avoid misclassification risks.

A contract of service is an agreement between two parties where one party provides a service to another in return for a monetary reward. The contracted employee can hold companies and individuals accountable via the Employment Relations Act (ERA) of 2000, and parties cannot operate outside the confines of the act.

The ERA offers various protections, and all parties must act in good conscience, where mutual confidence and trust must be instilled to make an agreement conducive to all parties. In addition, an agreement should also have provisions for disputes to prevent conflicts from ending up in the courtroom.

Under a service contract, an employer establishes parameters under which an employee can operate. Take note of the following requirements pertaining to employers:

  • The agreement should be in written form.
  • Depending on state guidelines, an employee must be of a certain age to work (ex. 16 years-old).
  • Employers must keep adequate records of the agreements.
  • Employees must be paid a minimum wage depending on your state guidelines.
  • Employees are entitled to sick leave.

Any agreement that cannot be settled between parties should be resolved in the court system.

Contract Breakdown

Any matter that ends up in court falls under the guidelines of the ERA. Statements regarding relationship status are vital but are immaterial. There is no certain process or rule in determining if a worker is an employee or contractor. The ERA mandates that the courts must consider all pertinent matters when determining the employment status of a worker. When assessing the nature of a working relationship, the courts invoke common law tests and any other pertinent matters when relevant to the case. Vital attributes in which the courts determine a dispute status can involve various factors. The following is a list of vital differences between two types of contracts.

Contract of Service:

  • Employee-employer relationship
  • Continuous relationship
  • Duty of care employees are owed
  • Employers are usually held liable for acts of employees
  • Contract states that work must be continuous
  • Salary/wages payment

Contract for Service:

  • A relationship organized surrounding the completion of one-time work
  • Contract between an independent contractor and employer
  • Duty of care stemming from an occupier’s liability
  • The subject matter of the contract pertains to a one-time job
  • Lump sum payments for each job completed

These qualities entail additional principals regarding the determination of worker status in cases where disputes take place.

Essential Clauses in a Contract of Service

A well-drafted contract of service should clearly define the working relationship and protect both employer and employee. While specific terms may vary based on industry and jurisdiction, most contracts include:

  • Job Title and Duties: Clearly describe the employee’s responsibilities, reporting structure, and expected performance standards.
  • Work Hours and Location: Outline regular working hours, remote work provisions, overtime expectations, and location requirements.
  • Compensation and Benefits: Specify salary or wage structure, payment intervals, bonus or commission eligibility, and entitlement to benefits like health insurance, pensions, or paid leave.
  • Probation and Termination: State the length of any probation period, notice requirements, grounds for dismissal, and severance obligations.
  • Confidentiality and IP Ownership: Include non-disclosure clauses and define ownership of any intellectual property created during employment.
  • Non-Compete and Restrictive Covenants: Where enforceable, these clauses limit post-employment activities that could harm the employer’s business interests.
  • Grievance and Dispute Resolution: Provide procedures for handling workplace disputes internally and specify whether arbitration or mediation will be used before litigation.

These terms not only establish clear expectations but also help prevent misunderstandings and protect both parties in case of disputes.

Control Factor

The more controls that are in place mean that the agreement is a contract of service. The exception would be specialized employees who do not have any direction or have little guidance. With that, the Appeals Court turned over a decision on this matter. In addition, there is the preference of analysis of the following:

  • Obligations
  • Contract Rights

Legal Consequences of Misclassification

One of the most significant risks for employers is misclassifying workers — labeling an individual as an independent contractor under a contract for services when the nature of the relationship is actually that of an employee under a contract of service. Misclassification can result in:

  • Back Pay and Benefits: Employers may be required to pay unpaid wages, overtime, or benefits retroactively.
  • Tax and Social Security Liabilities: Failure to withhold income tax, Social Security, and Medicare contributions can result in substantial penalties and interest.
  • Employment Law Claims: Misclassified workers may bring claims for unfair dismissal, wrongful termination, discrimination, or unpaid leave.
  • Reputational Damage: Legal disputes over employment status can harm a company’s brand and impact future hiring.

To avoid these risks, companies should regularly review their contracts and working arrangements, ensuring they reflect the true nature of the relationship and comply with applicable labor laws.

Other Test Types

You should also consider the following tests:

  • A control test determines if a worker falls under autonomy or is controlled by an employer. The contractor tends to be autonomous, while an employee usually gets direction
  • A contractual intention test determines the beliefs, actions, and communications of parties pre-contractually
  • The integration test determines if a worker is vital to the company and not peripheral. Integration comprises factors in the form of wage payments and working on location. Factors that place workers within a workplace setting is a prime feature of employment with the company
  • A fundamental test determines if the worker is in business for his or herself on their own account based on a link with profits and losses

Practical Examples of a Contract of Service

Real-world scenarios can help illustrate how a contract of service operates:

  • Example 1: Full-Time Employment: A software engineer hired by a tech company under a permanent contract with set hours, regular salary, and employee benefits is working under a contract of service.
  • Example 2: Fixed-Term Employment: A marketing manager engaged for a 12-month maternity cover with similar benefits and control is also an employee, despite the temporary nature of the role.
  • Example 3: Casual or Part-Time Work: Even part-time retail staff or seasonal workers can be under a contract of service if they are integrated into the company and receive employment protections.

In each case, the defining features are continuity of work, employer control, and entitlement to statutory rights and benefits.

Contract for Services

A contract for service is a legally-binding agreement established between a company and a self-employed person. It is different from an employment contract, also called a contract of service, which takes place between an individual and employee who gains employment at the company. The difference lies between services and service. For instance, a self-employed person provides a work on a finite basis, while employed people provide services on a permanent basis.

Such divisions between the two forms also differentiate between individuals who obtain rights through employment and others that do not. A self-employed person does not usually get benefits or rights in the form of:

This is because they are expected to gain such benefits for themselves. You should use a contract for a service document in the following occasions:

  • The company will offer services for an individual or business

You will be in a contract with a business to receive certain services.

Choosing the Right Contract for Your Needs

Understanding the distinction between a contract of service and a contract for services is essential when structuring working relationships:

  • Use a contract of service when hiring employees who will be integrated into the business, subject to ongoing direction, and entitled to statutory employment rights.
  • Use a contract for services when engaging external contractors, freelancers, or agencies for specific projects or deliverables without creating an employment relationship.

Choosing the correct agreement ensures legal compliance, minimizes liability, and helps both parties set clear expectations regarding payment, performance, and dispute resolution.

Frequently Asked Questions

  1. What is a contract of service?
    A contract of service is a legally binding agreement between an employer and employee that outlines terms of employment, duties, compensation, and rights under labor law.
  2. How is a contract of service different from a contract for services?
    A contract of service establishes an employer-employee relationship with ongoing obligations and protections. A contract for services involves a contractor or freelancer providing specific results without employment benefits.
  3. What happens if a worker is misclassified?
    Misclassification can lead to tax penalties, back pay, legal claims for employment rights, and reputational harm for the employer.
  4. Do contract-of-service employees always receive benefits?
    Yes, employees typically receive benefits such as paid leave, health insurance, and pension contributions as required by law or company policy.
  5. Can a contract of service be terminated early?
    Yes, but termination must follow the terms in the contract and applicable employment laws, including notice periods, severance, and potential protections against unfair dismissal.

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