The Supreme Court has repeatedly faced the question as to how it can be decided if a person is an employee or not. In a recent insurance claim in the case of Sushilaben Indravadan Gandhi & Anr. v. The New India Assurance Company Ltd. and Ors.,(“the Appeal“) the Supreme Court has elaborated, in detail, the distinctions between a ‘contract of service' and a ‘contract for service'.

Facts of the case :

Dr. Alpesh Gandhi, the deceased husband of Appellant, Sushilaben Indravadan Gandhi, had entered into a contract for services (“the Contract“) as an Honorary Ophthalmic Surgeon with Rotary Eye Institute, Navsari, (“the Institute“). He was travelling in a minibus, that was owned by the Institute, and met with an accident due to the driver losing control of the minibus. Gandhi suffered serious injuries and ultimately died.

A car insurance policy ("the Policy) had been availed by the Institute a few months before the accident occurred, from the Respondent insurance company, The New India Assurance Company ("the Company"). In the Policy, the limitation of liability clause stated that it covered the insured, but it would not cover the employees of the Institute. The Institute had paid an additional premium for an endorsement called "IMT 5", under which the Company would give compensation for any unnamed passengers other than the insured and/or his paid driver attendant or cleaner and/or a person in the employ of the insured, that would come under the scope of the Workman Compensation Act, 1923, and is engaged in the employment of the insured, at the time of injury. Hence, even under the IMT 5, employees of the Institute were excluded from the Policy.

So, upon death of Dr. Gandhi, the Appellants filed a petition before the Motor Accidents Claims Tribunal (“the Tribunal“) under Section 166 of the Motor Vehicles Act, 1988, against the driver, the Institute and the Company, claiming a compensation of Rs. 1 crore for the death of Dr. Gandhi. Opposing the petition, the Company claimed that the deceased was an employee of the Institute and that's why the Company did not have any liability as per the Policy. The Tribunal allowed the petition, and held that the Contract was a ‘contract for service', due to which the deceased, at the time of the accident, could not have been held to have been an employee of the Institute. It further held all three Respondents jointly and severally liable, and ordered them to pay compensation of Rs. 37,63,100/- (Rupees Thirty Seven Lakhs Sixty Three Thousand One Hundred Only) to the Appellants.

However, the Gujarat High Court (“the High Court“), decided that the Contract amounted to be of ‘contract of service' and therefore the Company would be liable to pay only to the extent of Rs. 50,000/- (Rupees Fifty Thousand), under Regulation 27 of the General Regulations of the Indian Motor Tariffs. The rest of the amount would have to be compensated by the driver and the Institute.

The Supreme Court's observations :

The Supreme Court set aside the order of the High Court and restored the order passed by the Tribunal.

After referring to various other judgments and the tests laid down in those judgments to determine whether the Contract is a ‘contract for service' or a ‘contract of service', it made the following observations :

1. Where previously the test stood only at the factor of how much control an employer holds on the employee, it has been seen to be necessary in the modern era to change this test according to the sense of controlling not just the work that is given, but the manner it is to be done in, which is also dependent upon the professionals who may be employed.
2. Another important test is to see whether a person employed is integrated into the employer's business or is a mere accessory of it.
3. A test that would be elastic to a large variety of cases would be the three-tier test laid down by some of the English judgments, namely, whether wage or salary is paid by the employer, whether there is a sufficient degree of control by the employer and other factors.
4. Another test, laid down by some U.S. decisions is the economic reality test of whether the employer has economic control over the workers' subsistence, skill and continued employment.

It was noted by the Supreme Court that no single test could be of universal application and yield the correct result. It observed that an amalgamation of all the applicable tests taken on the totality of the facts in a given case would ultimately yield whether the contract is a ‘contract of service' or a ‘contract for service'. This would thus depend on the facts of each case. Finally, the Supreme Court opined that it can only perform a balancing act and weigh all the relevant factors to arrive at the right conclusion on the facts of each case. It further noted that where the context of a case is one of a beneficial law being applied to weaker sections of society, the balance would tilt in favour of declaring the contract to be that of service. However, where it is not, or is only in the doctrine of contract, and the context of that law or contract is pointing in favour of a contract for service, and other things being equal, the context would tilt in favour of the contract being one for service.

Therefore, after making these observations, the Supreme Court, applied the economic reality test, and came to the conclusion that the Contract was between the Institute and an independent professional. It held that the factors to make the Contract a ‘contract for service' far outweighed the factors pointing to it being "of service".