In a recent case titled “Latha & Anr. vs. T V Sahadevan & Ors.” Kerala High Court while hearing an appeal against the order of Employees Compensation Commissioner (“EC Commissioner”) enunciated the legal distinction between an independent contractor and a workman for claiming terminal benefits.
As per the facts of the case, one Babu (deceased) worked as a light and sound provider in programs and on the day of the incident was throwing the cable for connecting the mike set across the telephone post. The cable came in contact with the 11 KV electric line as a result of which he died due to electrocution. The dependents of the deceased approached the EC Commissioner for claiming compensation under Employee’s Compensation Act, 1923 (“ECA”) for the death of the deceased, however, the claim was dismissed on the ground that the deceased was a contractor and not a workman. Aggrieved, the dependents/appellants filed appeal before Kerala High Court contending that the finding of the EC Commissioner that deceased was not an employee coming under Section 2(1) (dd) of ECA was not correct as he could not be treated as a contractor and at the most, he could be considered as a petty contractor. According to them, ECA being a social security and welfare legislation, it should not be interpreted narrowly to deny compensation to the employee. Therefore, the appellants prayed for setting aside the impugned order passed by the EC Commissioner and to allow the claim petition.
The question that arose for consideration before the High Court was whether a person engaged in hiring mike set for rent was an employee coming within the purview of Section 2(1) (dd) of the ECA?
The Court considered various precedents to observe the distinction between an independent contractor and a workman and between contract for service and contract of service and observed that unlike an employee, a ‘contractor’ is a person who, in the pursuit of an independent business, undertakes to do specific jobs of wok for other persons, without submitting himself to their control in respect to the details of the work. The identifying mark of an employee is that he should be under the control and supervision of the employer in respect of the details of the work. The main features or identifying marks that distinguish a worker from an independent contractor are that in case of an independent contractor, he is not controlled by an employer regarding the manner in which the work allotted to him is done. He also need not do the work personally and may get it done by employing others.
The Court observed that of course, every person who makes an agreement with another for the doing of work is a contractor, in a general sense; but as used in ECA, contractor and workman have come to have a more restricted and distinctive meaning, and contractor means one who makes an agreement to carry out certain work specified, but not on a contract of service.
The Court observed that in the instant case, the respondents for the purpose of conducting a public function, hired the mike set of deceased claimant, who was an electrician. The mike set used in this case belonged to the deceased. Since it was only a hiring of mike set for the purpose of a programme, there was no necessity for the deceased to do the work personally.
Instead, he could have done the same by engaging his own employees and his work of connecting the mike set was not controlled by the respondents.
The Court thus held that the deceased Babu was not an employee but an independent contractor and therefore found no grounds to interfere with the EC Commissioner’s order which was perfectly justified.
Anhad Law’s Perspective
The judgment again emphasized that in the world of employment law and especially employee’s compensation, the subject of employee vs. self-employed independent contractor is a complex one. In addition, the distinction is more prominent in case of engagement of contract labors in India where there are higher risks of misclassification of an independent contractor with an employee. In such cases, there remains a risk that independent contractor or workers engaged through contract labor may bring a claim against the company that they are in fact company’s employees thereby entitled to similar employment obligations owed to the company’s employees (such as statutory leave pay, statutory bonus, gratuity, overtime pay, termination pay, compensation and social security contribution, etc.).
Additionally, the classification has an impact on tax liability also, as income earned by an independent contractor in India falls under the head “income from business or profession” with a 10% withholding/ tax deducted at source (TDS) rate, whereas income earned by an employee fall under the head “salary” (with a 30% TDS rate for the highest slab). If the tax authorities are of the view that an independent contractor is in substance an employee warranting a re-classification of the income (and therefore tax rate), they may resort to initiating proceedings against the employer company under Section 201 of the Income Tax Act 1961, for short deduction of tax which includes penalty imposition of a penalty (up to 200%) for default of the company, levy of simple interest at the rate of 1% per month for the period of default and recovery proceedings against the company or the re- categorized contractor.
In India, an independent contractor has more control and autonomy over their work. They typically determine their own working hours, use their tools and equipment, and have more independence in how they perform their tasks. Independent contractors are responsible for handling their own taxes, including income tax and any
applicable goods and services tax (GST) and organisations do not deduct taxes at the source for independent contractors. Independent contractors are not entitled to employee benefits such as health insurance, provident fund, or gratuity and are also not covered by labor laws that protect employee’s rights and working conditions. Independent contractors are often engaged for specific projects or a defined period and once the project is completed, the contractual relationship may end, and the contractor may move on to other projects.
Independent contractors are typically responsible for their own liabilities and risks associated with their work. They may need to carry their own insurance and are not covered by the organization’s liability.
Therefore, in India, distinguishing between independent contractors and employees is crucial for legal and compliance reasons, as misclassification can lead to various risks, including legal liabilities, financial penalties and disputes.
Employment laws in India vary across regions, and understanding the nuances is essential to compliance. By taking a proactive approach, understanding local regulations, and seeking legal guidance, an organization can minimize the risks of misclassification besides creating a clear and compliant working relationships in India.