Contract of Service vs Contract for Service in Malaysia Explained

 Key Takeaways

• Distinguish legal control between contract of service and for service to prevent non-compliance under Malaysia’s 2025 employment laws.
  
• Map EPF, SOCSO, and PCB duties clearly to avoid payroll errors and misclassification penalties with contractors or employees.
  
• Run the control, integration, and payment tests to determine which contract structure fits your worker relationship.
  
• Use checklist-based drafting guidance to formalise compliant agreements and reduce future disputes or audits.
  
• Align your contracts with 2025 updates to the Employment Act and LHDN tax rules for SMEs and independent contractors.

A contract of service is a legally binding agreement between an employer and an employee. A contract for service is a commercial contract between a business and a self-employed individual or contractor.

Confusing the two (which is very easy to do), can land you in hot water. Why? Because the type of contract you offer can significantly affect your tax obligations, payroll responsibilities, and legal exposure. 

In Malaysia, choosing between a contract “of” service and “for” service isn’t just about semantics, it’s about compliance. So let’s get the confusion out of the way and explain clearly what both of them mean.

Contract of Service vs Contract for Service: Quick Comparison

What Is a Contract of Service in Malaysia?

This contract type creates a full legal employment relationship under Malaysian labour law.

A contract of service is regulated by the Employment Act 1955, including its 2022 amendments. It binds an employer to provide certain protections and contributions for the employee:

• Statutory benefits: Annual leave, sick leave, public holidays, and maternity leave
• Monthly salary payments
• EPF: Employer contributes 13% for employees earning a monthly wage of RM5,000 or less, and 12% for those earning above RM5,000. The employee’s statutory contribution is 11%.
• SOCSO & EIS: Mandatory for all employees
• Tax: Employer is responsible for monthly PCB deductions

What Is a Contract for Service?

This contract applies to freelancers, vendors, or self-employed individuals engaged on a project basis.

A contract for service is not governed by the Employment Act. Instead, it is a commercial agreement under civil contract law.

• No legal entitlements to annual leave, medical leave, or statutory benefits
• Contractor handles their own EPF (if voluntary) and LHDN income tax
• Payment is typically based on milestones, deliverables, or per project
• No PCB or EIS deductions by the client

How Do EPF, SOCSO & Tax Apply to Each?

Only employees under a contract of service are entitled to mandatory contributions and tax deductions.

Contract of Service:

• EPF: Employer must contribute 12 & or 13% depending on salary, while employee contributes 11%
• SOCSO & EIS: Employer pays based on salary scale
• Income Tax: Employer deducts PCB monthly

Contract for Service:

• EPF: Optional (i-Saraan or self-contribution)
• SOCSO: Not applicable
• Income Tax: Contractor submits own returns under Form B

“According to Finance Minister II Datuk Seri Amir Hamzah Azizan, total i-Saraan contributions reached RM2.6 billion in 2024.” (Bernama, 13th March, 2025)

The Differences Between Contract of Service and Contract for Service

The main differences lie in control, payment structure, and how integrated the person is in your business operations. 

To determine the right contract type, assess the working relationship using these three quick tests:

• Control: Do you set their working hours, assign tasks directly, or supervise them regularly?
  
• Integration: Are they part of your team, using your tools, attending meetings, or listed in your org chart?
  
• Payment Structure: Are they paid a fixed monthly salary or only per project or milestone?

If you answered “yes” to most of the above, you’re likely dealing with a contract of service, and all employer obligations (EPF, SOCSO, EIS, PCB) will apply.

If the person works independently, on project terms, and invoices you for deliverables,  it’s a contract for service.

Examples:

• Hiring a full-time admin for your office? → Contract of Service
• Outsourcing a one-off logo design project? → Contract for Service
• Paying a commission-based real estate agent? → Usually Contract for Service

Although It’s a Word of Difference, It Can Cost You Everything

Misclassifying a contract isn’t a small admin error, it’s a legal time bomb.

Many Malaysian SMEs assume the difference between a contract of service and a contract for service is just technical jargon like Account Management vs Management Account (yes they are different). 

But getting it wrong can trigger serious financial, tax, and legal consequences, often years after the work is done.

Here’s why it matters:

1. You Could Owe Years of Unpaid EPF & SOCSO

If an “independent contractor” is later deemed to be a full-time employee, EPF and SOCSO can demand backdated contributions, including penalties and late payment interest.

2. LHDN May Audit Your Tax Records

If you didn’t deduct PCB (Potongan Cukai Bulanan) from someone you treated as a contractor, but who functioned like an employee,  LHDN may audit your company and apply penalties for non-compliance.

3. You Risk Wrongful Dismissal Claims

A misclassified worker who’s terminated could file a case for constructive dismissal, claiming they were effectively an employee with legal protections.

4. You May Breach the Employment Act

Misclassification can violate multiple provisions of the Employment Act 1955, especially if you deny someone annual leave, paid holidays, or medical benefits they were legally entitled to.

How to Protect Your Business

• Always clarify the working relationship upfront
  Use a written agreement that states the exact contract type: “contract of service” or “contract for service.”
  
• Define the scope, control, and payment terms clearly
  This helps prove intent and manage future disputes.
  
• Retain all supporting documents
  Keep emails, invoices, job orders, and payment records for at least 7 years, especially for contractors.

Reminder: If you’re exercising control over how, when, and where someone works, you’re likely an employer, and Malaysian law will treat you as such. No contract wording can override that reality.

What Should Be Outlined in a Contract of Service vs Contract for Service?

A poorly drafted agreement can expose your business to disputes, tax penalties, or claims of unfair dismissal. Use the list below to ensure you’ve included the right terms for the right contract.

Contract of Service (For Employees)

This agreement forms an official employer-employee relationship and is governed by the Employment Act 1955. At minimum, it should include:

• Full names and IC/passport details of both employer and employee
• Job title and duties
• Starting date and probation terms
• Wages and salary structure (basic pay, allowances, overtime, etc.)
• Working hours and days
• Leave entitlements (annual, sick, public holidays, maternity/paternity)
• Termination terms and notice period
• EPF, SOCSO, EIS contributions
• Code of conduct or disciplinary process
• Confidentiality and data protection clauses (if needed)

If the employee earns RM4,000 or less, most of the Employment Act’s protective clauses are mandatory.

Contract for Service (For Freelancers & Vendors)

This is a commercial agreement, not subject to employment law. Instead, it should focus on the deliverables and project scope. Key clauses include:

• Full legal names of both client and contractor
• Scope of services (describe what’s being delivered, and how)
• Project timeline or milestones
• Payment terms (fixed rate, hourly, per milestone)
• Late delivery or non-performance penalties (optional)
• Intellectual property rights (who owns the final work?)
• Confidentiality or NDA clauses
• Termination clause (how either party can exit the agreement)
• Dispute resolution method ( arbitration, legal action)
• Independent contractor clause (stating no employer-employee relationship)

Without a properly signed contract, your freelancer may be deemed an employee, especially if they work long-term under your supervision.

“We always recommend our clients to clearly list the scope of work, payment terms, and termination clauses, whether it’s a contract of service or contract for service,” – HR Consultant from Accounting.My.

Crafting the Right Contract in 2025: Final Thoughts

Choosing the right contract affects compliance, tax, and worker rights. For Malaysian SMEs, this distinction could mean the difference between a smooth operation and a legal headache. 

Know the law, structure the work clearly, and document everything.

At Accounting.my, we help Malaysian businesses draft contracts that align with the latest Employment Act amendments, LHDN tax services, and HR compliance standards. 

Whether you’re onboarding full-time staff or engaging freelancers, we ensure your agreements are clear, defensible, and fully compliant.

Need help reviewing your current contracts or setting up compliant HR systems? We’ve got you covered.