a. Factors that Determine Who is an Employee and Who is an Independent Contractor
The courts in India have applied the control and integration test to determine whether a person can be classified as an employee or independent contractor. The prima facie test is the control test to determine whether a master-servant relationship exists and it is not merely to direct the nature of work that has to be carried out but also to control the manner in which it is done. The nature and extent of such control may vary in different businesses and by its very nature is incapable of being precisely defined.2
The integration test plays a vital role in determining whether a person is fully integrated into the employer’s concern or remains independent of it. Another factor, which has been considered, is whether the payment of salary is by the principal employer or thecontractor3. Also, all the relevant facts and circumstances are to be considered including the terms and conditions of the agreement.
Though the control test has been considered as one of the decisive factors, the Supreme Court has decided that it is not the only test. Further, it was decided by the courts that several factors should also be considered which would have a bearing on the result such as: (a) who is appointing authority; (b) who is the pay master; (c) who can dismiss; (d) how long alternative service lasts; e) the extent of control and supervision; (f) the nature of the job, e.g. whether, it is professional or skilled work; (g) nature of establishment and (h) the right to reject.4
In another case decided by the Supreme Court, the Court took into consideration an intricate factor such as who provided the equipment for completion of work. The Court held that if the employer provides the equipment, it can be considered as a contract of service. Further, the Court substantiated that if the independent contractor is using the employer’s tools especially if it is of substantial value, it is normally understood that he will follow the directions of the owner in their use and this indicates that the owner is the master and therefore the employer.5
b. General Differences in Tax Treatment
An employer is required to withhold tax at the time of payment of salary to employees. The salary paid to an employee may include benefits and allowances that the employee is entitled to, which is beneficial to the employee from a tax perspective. However, with respect to independent contractors, the employer must withhold the applicable taxes; however, the amount paid may not be in the form of salary, but as professional fees for services performed. In both these cases, the employee and independent contractor/s will be required to file their income tax returns as prescribed under law.
c. Differences in Benefit Entitlement
An independent contractor is not statutorily entitled to any benefits. It is the terms of the agreement for service that solely govern the understanding between the employer and independent contractor. Therefore, typically in such cases, the question on benefits does not arise. In contrast, employer-employee including contractor-contract labourer relationships are governed by an agreement of service and all statutory benefits apply to these relationships. The benefits include but are not limited to provident fund, pension scheme and deposit-linked insurance scheme, employee state insurance, workman’s compensation, gratuity, statutory bonus, maternity benefit, leaves and holidays (either under central or state-specific laws) etc. It is imperative to note that in case of contract labourers, it is the responsibility of the contractor to ensure that the employees are receiving these benefits. It is only in the event of any default or failure of the contractor that the principal employer is held responsible.
d. Local Limitations on Use of Independent Contractors
There is no prohibition on the use of independent contractors. However, there are certain restrictions with respect to use of contract labourers. For instance, the Act prohibits employment of contract labour in certain instances and sets out that the Central/State government may prohibit employment of contract labour in any process, operation or other work in any establishment by notification in the orifical gazette. The Act provides that conditions of work and benefits to contract labourers are the key factors while determining such prohibition. The other relevant factors are whether (a) the process, operation or other work is incidental to, or necessary for the industry, trade, business, manufacture or occupation; (b) it is of perennial nature; (c) it is done ordinarily through regular workmen and (d) it is sufficient to employ considerable number of whole-time workmen. As of now, there are about 80 notifications that have been issued under Section 10 of the Act.6
e. Deputed or Seconded Employees
Secondment (or deputation as it is known in India) is a situation whereby an employee of a company is posted to work for another company, pursuant to an understanding between the companies. The Supreme Court7, on the question of deputation, decided that an employee when deputed does not become an employee of the company to which he/she is deputed. A deputationist (the company to whom the employee is seconded) has a lien on the secondee’s employment and as long as the lien remains with the said company the deputationist retains control over the secondee’s terms and employment.
In effect, an employee who is deputed or seconded to another company remains the employee of the deputee as long as he is being paid remuneration by the deputee and is required to comply with the terms and conditions governing the employment relationship.
f. Regulations of the Different Categories of Contracts
As discussed earlier, employer-employee and employer-independent contractor relationships are governed by the terms and conditions of an agreement. However, the employer would be required to comply with the provisions of the ID Act if the employee is a workman. An agreement between a principal employer and contractor is governed by the provisions of the Act and all other applicable laws, to the extent of the principal employer’s obligations in the event of failure of the contractor to perform the obligations of an employer.