Legal Framework Differentiating Employees from Independent Contractors
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.
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 the contractor. 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 paymaster;
(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.
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 of benefits does not arise. In contrast, employer-employee including contractor-contract laborer 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 the case of contract laborers, 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.