Contract of Service vs. Contract for Service in Singapore

Becoming an independent contractor has its pros and cons. Some of the top benefits of becoming your own boss is having flexibility in your work arrangement, the opportunity to earn more income, and less involvement with office politics. These are promising goals to achieve for independent contractors. According to the 2020 Ministry of Manpower (MOM) report about the Singapore labour market, self-employment in the resident workforce rose from 13.5% in June 2019 to 14.7% in June 2020. The reason behind the increase in self-employment is that more residents are starting to realise and enjoy the flexibility and freedom associated with operating their own business. This is definitely a positive outlook for those who are planning to set-up a business as an individual contractor in Singapore. 

However, you have to take into account the legal labour obligations assigned to self-employed individuals. Compliance with the MOM’s rules for independent contractors must be followed in order to avoid risks and penalties for being misclassified in your work status. One of the important things to check is whether you perform under a “contract of service” or “contract for service”. What are the distinct differences between the two? Once you know where your contract falls under, you’ll have a clear definition and understanding about employer-worker relationship and how it will determine your classification and status. 

Contract of Service vs. Contract for Service

The MOM identifies self-employed persons as “own account workers”, which means business owners without any hired employees. On the other hand, the Inland Revenue Authority of Singapore (IRAS) defines self-employed persons as individuals who perform work for others under a contract for service.  Self-employed persons can register as the sole proprietor of the business or a partner in a partnership business. Contract of Service, meanwhile, refers to an agreement between an employer and employee. The employee does the business for the employer using the tools, equipment and working space provided by the business owner. 

Here are some of the factors used by IRAS to determine whether the individual  is an employee or a self-employed person: 

#1: Exposure to Financial Risk and Ability to Realise Profit/Loss

• Self-employed

• • • financially liable if the obligations of the contract is not fulfilled 
    • has a capital investment in the business
    • negotiates the price or unilaterally sets the price of the goods or services

• Employee

• • not financially liable for any losses 
  • has no capital investment in the business
  • not in the position to realise a business profit or loss

#2: Payment Received

• Self-employed

• • paid on a per-job or hourly basis

• Employee

• • paid a regular wage (fixed hourly/weekly/monthly)
  • entitled to overtime and bonus payments
  • may receive a commission payment on top of the regular wage

#3: Level of Control 

• Self-employed

• • controls own hours of work
  • can refuse or accept work from the payer
  • can hire others to complete the task at the self-employed person’s own expense

• Employee

• • the individual is a subordinate to another person and must take instructions to fulfil the task 
  • training on how to do the work is provided
  • working hours are stated

Avoiding independent contractor risks 

It is both the responsibility of the self-employed person and the payer to have a clear understanding of their working relationship. In 2019, a total of 308 alleged cases of misclassified workers have been reported to the MOM, with 160 cases involving individuals misclassified as self-employed. If the company is found guilty, it will not only damage the business’ reputation but it is also costly to pay the hefty fines involved in this labour violation. The financial penalties for a company that is found to misclassify its workers will be payment of compensation and benefits by the company to its regular employees and employer’s CPF contribution and tax filings to mention a few. 

Independent contractors, on the other hand, can protect themselves by documenting their contract agreements in writing and to avoid hiring another person as a substitute to fulfil the obligation. Additionally, companies who require the expertise of an independent worker can hire the services of a trusted third-party company that can help them find reliable and outstanding independent contractors. 

CXC is a global HR outsourcing organisation with 30 years of experience in workforce management. Our innovative and cost-effective solutions help companies gain a competitive advantage by improving efficiency while reducing risks. 

Contact CXC today to start enabling your future workforce.