Both contract for service and contract of service in Malaysia are important for business relationships. With a difference of ‘for’ and ‘of’ between them, the differences between them are huge.
In this guide, we explain for your understanding the main differences between a contract of service vs contract of service and the main terms of a contract of service in Malaysia
Understanding Contract of Service vs Contract For Service in Malaysia
Distinguishing between different types of contracts is important in employment contexts. There are two main categories: contracts for service and contracts of service.
Contracts of Service
Are agreements between employers and employees where it creates an employment relationship/master and servant relationship exists. It is also commonly known as employment or labour contracts.
It can come in many forms, such as part-time contracts, apprenticeship contracts, or apprenticeship agreements, whereby, under the employment relationship, the employer hires another, respective employee, to do business for the employer and perform work.
It is governed by employment laws, with the main ones being Employment Act 1955 and Industrial Relations Act 1967. Under Section 2 of the Income Tax Act 1967, section 2 further clarifies ‘employment’ as follows:
employment" means-
(a) employment in which the relationship of master and servant subsists;
(b) any appointment or office, whether public or not and whether or not that relationship subsists, for which remuneration is payable;
Contracts for Service
These are also known as service contracts and involve a different relationship. Here, one party is the principal, and the other is an agent or contractor-type independent worker. The principal hires independent contractors or individuals to complete a specific task or work.
A contract for service example is when one hires a contractor to renovate his house. The contractor must carry out services for the renovation purposes as agreed between them, but not others.
All contracts, including service contracts, must comply with the law, with the main ones being the Contracts Act 1950. A valid contract, including a contract for service in Malaysia, can be made through oral/verbal or written.
However, it is recommended to have a written contract, as a verbal contract is harder to enforce.
The Distinction between a Contract of Service vs Contract for Service
To differentiate both types, there are 3 main differences:
Control and Supervision
In an employee relationship, the employer has more control over the labour arrangements and how it is done. Employees follow specific instructions and schedules, such as working hours, which are usually stated in an employment contract and the employee cannot find substitutes such as another person to get the work done.
On the other hand, contract-for-service agreements offer more independence for work-arrangements. Contractors decide based on their insights and experience the manner in which it is done and can get substitutes to get the work done.
Part and parcel
Under employment status, the employees of the company are considered an important part of the business where they are the representative of the business and this is often found among employment clauses.
On the other hand, an independent contractor cannot represent the company except for the scope of works agreed between them.
This is mentioned by the Federal Court in Hoh Kian Ngan v Mahkamah Perusahaan Malaysian & Anor [1995], which referred to another case, Stevenson, Jordan & Harrison, Ltd v Macdonald & Evans [1952] 1 TLR 101 (CA)
Remuneration
Another difference is that in an employer relationship, remuneration is one of the key employment terms where employees receive regular wages.
For contracts for service, remuneration can vary based on project completion or hours worked. Agents often negotiate their fees directly with principals. This flexibility highlights their independent status.
Results of The Differences
Due to the differences between them, both contracts differ in the
Benefits
In a contract of service Malaysia, the employee is entitled to benefits under the laws such as sick leave, annual leave, and public holidays which are usually stated as employment clauses. These statutory benefits are not for service contracts.
Compensation
An employee is protected under the labor laws for amongst others, unpaid wages and termination without just cause. However, independent contractors do not have these benefits and can only seek their rights under the contract by filing cases at civil courts such as High Court of Malaya.
Taxation purposes
Employee wages are considered part of employment income and can be deducted for tax obligations purposes. While in a contract of service, independent contractor income is seen as a business income.
Essential Elements of a Contract for Service Malaysia
Contract for service in Malaysia contracts usually should contain these terms:
Parties details
The scope of services provided
Deadlines for completion of works
Payment details.
Confidentiality clauses- This prevents leakage of information received during dealing and is often found in non-disclosure agreements in Malaysia.
Well-drafted service agreements can prevent confusion. Meanwhile, the usual terms covered by employment contracts in Malaysia include wages, job scope, duties, and other employment terms such as working hours.
Conclusion
Understanding the differences between the contract of service vs contract for service in Malaysia is crucial. If you need any help with a contract for service Malaysia or an employment contract and looking for a law firm in Kuala Lumpur, do contact our professionals for an appointment at our office.
Frequently Asked Questions
What is a contract for services in Malaysia?
A contract for service in Malaysia is an agreement between a service provider and a client, specifying the terms of service delivery without establishing an employer-employee relationship.
What is the difference between a contract for service and a contract of service?
The difference between a service contract is that it creates a principal-independent contractor relationship, whereas a contract of service is of employer-and-employee relationship.
Does a contract for service need to pay an EPF?
No. Under a contract for service, it is not of an employer and employee relationship, thus is not required to pay the contribution for EPF.
