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Introduction
Contracts of
service and contracts for service both connote an employment relationship
between the parties. However, they differ in their nature and the legal
consequences.
  Understanding the
difference between both contracts is important for two main reasons, namely,
the nature of each party’s respective obligations, and which court has
jurisdiction in the event of dispute between the parties.

Delineation
A contract
of service is an agreement between an employer and an employee. In
a contract for service, an independent contractor, such as a self-employed
person or vendor, is engaged for a fee to carry out an assignment or project.
The line of
demarcation between an independent contractor and an employee is very thin and
the two concepts sometimes overlap. In such a situation, the question about the
relationship of employer and employee needs to be determined with reference to
the facts and circumstances of each case as to who are the parties to the
contract, who pays the wages, who has the power to dismiss, what is the nature
of the job, and the place of executing the job, all have to be kept in mind.
The Supreme Court, in Shena Security Co.
Ltd v. Afropak (Nig.) Ltd & 2 Others
[2008] 18 NWLR (Pt. 1118) 77 SC; [2008] 4 – 5 SC (Pt. II) 117
laid
down the following factors that should guide courts in determining which kind
of contract the parties entered into –
If
payments are made by way of
“wages” or salaries” this is indicative that the contract is one
of service. If it is a contract for service, the independent contractor gets
his payment by way of
fees”. In like manner, where payment
is by way of commission only or on the completion of the job, that indicates
that the contract is for service.
Where
the employer supplies the tools and other capital equipment there is a strong
likelihood that the contract is that of employment or of service. But where the
person engaged has to invest and provide capital for the work to progress that
indicates that it is a contract for service.
In a
contract of service/employment, it is inconsistent for an employer to delegate
his duties under the contract. Thus, where a contract allows a person to
delegate his duties there under, it becomes a contract for services.
Where
the hours of work are not fixed it is not a contract of employment/of service.
See Milway (Southern) Ltd v. Willshire
[1978] 1 RLR 322.
It is
not fatal to the existence of a contract of employment/of service that the work
is not carried out on the emjployer’s premises. However, a contract which
allows the work to be carried on outside the employer’s premises is more likely
to be a contract for service.
Where
an office accommodation and a secretary are provided by the employer, it is a
contract of service/of employment.
Dispute resolution in contracts of service
and for service
Jurisdiction is the all important factor
that the courts will consider in any case that is brought before them. It is
tempting to assume that all employment or work related disputes are to be
settled by the National Industrial Court (NIC) by virtue of the Constitution of
the Federal Republic of Nigeria (Third Alteration) Act 2010. However, this is
not always the case.
Section 254 C (i) (a) of the Act provides
that “the National Industrial Court shall
have and exercise jurisdiction to the exclusion of any other court in civil
causes and matters (a) relating to or connected with any labour, employment,
trade unions, industrial relations and matters arising from workplace, the
conditions of service, including health, safety, welfare of labour, employee,
worker and matters incidental thereto or connected therewith
”.
The above provision notwithstanding, the NIC
has held in many cases that its jurisdiction covers only disputes relating to contracts
of service, and not contracts for service. This means that only strictly
employment contracts may be litigated before the NIC. Cases of an independent
contractor, such as a self-employed person or vendor, engaged for a fee to carry
out an assignment or project, are not justiciable before the NIC. Such cases
may therefore be more appropriately brought before the regular courts (i.e High
courts or magistrates courts, depending on the circumstances). In other words,
breach of contract for service is regarded as any other breach of contract and
treated as such.
In a recent case of The Registered
Trustees of Three Wheeler Beneficiaries Operators Association, Lagos State v.
Road Transport Employers Association of Nigeria
(unreported Suit No.
NICN/LA/407/2013), the ruling of which was delivered on 10th May 2017, the NIC held
thus:
“This
Court does not have jurisdiction over every workplace issue. For instance, as
against contracts of service,
this Court does not assume jurisdiction over contracts for service, and yet contracts for service are workplace issues
strictly so called. See Mr. Henry Adoh
v. EMC Communications Infrastructure Limited [2015] 55 NLLR (Pt. 189)
546 NIC, Ozafe Nigeria Limited v.
Access Bank of Nigeria Plc unreported Suit No. NICN/LA/179/2014 the
ruling of which was delivered on 16th March 2016 and Engr. Jude Ononiwu (Trading under the name of Judeson Chemical and
Engineering Co. Ltd) v. National Directorate of Employment & Another
unreported Appeal No. CA/OW/32/2015 the ruling of which was delivered on 22nd
May 2015”.
In the case of Lawrence Igwegbe v. Standard Alliance
Life Assurance Limited
(unreported Suit No. NICN/LA/465/2013),
the judgment of which was delivered on 11 July 2017, the NIC had to determine on
the facts before it, if the relationship between the Claimant and the Defendant
was one of an employment relationship (contract of service) or one in
which the claimant was an independent contractor (contract for service).
The court held that the fact that the Claimant was on commission and not on
salary was very suggestive that the relationship was one of a contract for
service. The court relied on the Supreme Court decision in Shena Security Co. Ltd and held
that salary is a component part of the employment relationship strictly
speaking (contract of service).
The facts of the case are that the Claimant
was employed as Agency Manager by the Defendant, who is an insurance company.
While the Claimant argued before the court that his relationship with the
Defendant was an employment relationship, his evidence before the court showed
that he was on commission and not on a salary. This meant that he was an
independent contractor to the Defendant, and not necessarily its staff. The
court in this case took judicial notice of the fact that insurance agents are
in the main not salaried employees, but are paid commission based on the volume
of insurance business they bring in. The court declined jurisdiction, since it
was a case of contract for service as against contract of service.  
In the case of Engr.
Jude Ononiwu (Trading under the name of Judeson Chemical and Engineering Co.
Ltd) v. National Directorate of Employment & Another
,
the claimant had
entered into a contract as a trainer with the 1st defendant under the 1st
defendant’s National Open Apprenticeship Scheme of Skill Acquisition Programme.
As a result, the 1st defendant sent trainees to the claimant for training.
Between 1996 and 2000, the claimant trained for the 1st defendant a total
number of 2204 trainees at the training cost of N6,000.00 per trainee bringing
the total debt owed the claimant to N13,776,000.00 only. When the 1st defendant
refused to pay this sum after repeated demands, the claimant accordingly sued
for it at the Federal High Court. The Federal High Court transferred the matter
to the Owerri Division of the NIC on the ground that the issue is a labour
issue in respect of which it had no jurisdiction given the provision of section
254C(1) of the 1999 Constitution, as amended.
The NIC, not certain as to whether it had
jurisdiction either, decided to refer the case to the Court of Appeal to
determine if the NIC has jurisdiction over contracts for service. In
determining this issue, the Court of Appeal held that the court with
jurisdiction, considering the facts of the case, was the State High Court, and
not the Federal High Court nor the NIC. The Court of Appeal based its decision
on the fact that the case arose from a simple contract between the claimant and
the 1st defendant/respondent; and that the relationship between the parties was
contractual, the contract being one of contract for service as opposed to a
contract of service. The Court of Appeal then considered section 254C (1) in
terms of the jurisdiction of the NIC, section 251(1) in terms of the
jurisdiction of the Federal High Court and section 272(1), (2) and (3) in terms
of the jurisdiction of the State High Court, and then concluded that the claims
of the claimant in the case do not relate to the sections dealing with the
jurisdiction of the NIC and the Federal High Court. Relying on
Onuorah v. Kaduna refining and Petrochemical Co. Ltd [2005] LPELR 2707 (SC)
and Integrated Timber & Plywood Products Ltd v. Union Bank of Nig. Plc
[2006] 5 SCNJ 289, the Court of Appeal held that neither the NIC nor the
Federal High Court had jurisdiction over the matter.
Employer tax obligations in contracts of
service and contracts for service
Employees under contract of service are deemed to
have employment contract with the organisation that they work for, which
entitle them to employment benefits such as wages and salary, pension, medical
insurance and other similar employment benefits. In a contract for service,
however, an independent, self-employed, individual is contracted to provide a
specific service for the organisation in return for a fee. There is no
employer-employee relationship between the organisation and the employees of
the independent contractor.
Section 81 of the Personal Income Tax Act Cap P8,
LFN 2004, as amended to date (PITA) provides that for employees – under a
contract of service, it is the responsibility of their employers to deduct and
remit income taxes from the emoluments paid to such employees. Section 82 of
PITA provides further that the employer is answerable to the tax authorities
for taxes deducted from the employees. The employer is required to file annual
returns in respect of emoluments paid to their employees and account for the
taxes withheld and remitted to the relevant tax authorities.
Section 81(2) of PITA requires the employer to file
annual returns not later than 31 January of every year in respect of all
emoluments paid to its employees in the preceding year. Failure to comply
attracts a penalty, upon conviction. Whenever the tax authorities intend to
conduct tax audit enquiries in respect of employees’ personal income taxes, the
employer is usually held answerable.
In cases of contracts for service, however, the
independent contractor or self-employed individual is personally responsible
for his own taxes. Such individuals are expected to file personal income tax
returns under the self-assessment regime. However, the company to whom the
services are rendered has the responsibility for deducting and remitting
withholding taxes on the fees payable under the contract at applicable rate. In
the same vein, a self-employed individual has an obligation to register for
value added tax (VAT) and charge VAT on invoices issued for services rendered,
unless such service is specifically exempt from VAT.
The Value Added Tax Act Cap V1 LFN 2004 as amended
(VATA) defines a taxable person as an individual or body of individuals,
family, corporations sole, trustee or executor or a person who carries out in a
place an economic activity, a person exploiting tangible or intangible property
for the purpose of obtaining income therefrom by way of trade or business or a
person or agency of government acting in that capacity. For the purpose of
VATA, an individuals under a contract for service falls under this category.
In addition to the need to account for tax, the Pension
Reform Act, 2104 mandates employers with five or more employees to make
contributions on behalf of their employees into an approved pension fund. As
explained earlier, individuals with contracts of service are employees. Hence,
pension contributions are mandated for them but not for individuals with a
contract for service. Individual with a contract for service could make
voluntary pension contributions into their Retirement Savings Account (RSA) if
they so desire.
Conclusion
In the world of work, it is not always easy
to distinguish a contract of service from a contract for service. Sometimes,
the nature of the relationship between the parties is deliberately made nebulous
in order to hide its true identity (and thereby deny one party of certain
rights). The
International Labour Organisation (ILO), well aware of
this fact, has provided guidance on how Courts should approach the issue, if it
arises. In the ILO Report titled, The Scope of the Employment Relationship
(ILO Office: Geneva), 2003 at pages 23 – 25, it is stated thus:
The
determination of the existence of an employment relationship should be guided
by the facts of what was actually agreed and performed by the parties, and not
by the name they have given the contract. That is why the existence of an
employment relationship depends on certain objective conditions being met (the
form in which the worker and the employer have established their respective
positions, rights and obligations, and the actual services to be provided), and
not on how either or both of the parties, describe the relationship. This is
known in law as the principle of the primacy of facts, which is explicitly
enshrined in some national systems. This principle might also be applied by
judges in the absence of an express rule.
The ILO concluded by advising that the
Judge in a labour dispute must normally decide on the basis of the facts,
irrespective of how the parties construe or describe a given contractual
relationship.

Micheal Dugeri

Corporate Commercial Lawyer at Austen-Peters & Co.