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A consultant is not an employee of the organisation. He/she is normally a professional who is offering services as per the scope of her/his assignment.  A consultant may render services as an individual or as a firm or even as a corporate entity.

As an employee, one is bound by the rules of the organisation concerning employment, such as leave, attendance and working conditions. This is not the case in case of a consultant.

"Consultant" position also does not entitle the person to the legal rights of the employment nor entitles him to the rights of an employee (such as PF, gratuity etc).

There are certain benefits that an organisation enjoys when it hires a person as a consultant, rather than an employee. Some of those benefits include:-

●       The organisation is not bound to comply with labour laws related to an employee's PF, Gratuity and other terminal benefits on retirement or resignation.

●       Flat 10% Tax will be deducted by the organisation on every payment it makes to the consultant as against for employees, where appropriate tax as per their income tax slab is deducted.

●       You can discuss deliverables with the consultant you plan to hire and only pay on completion of the task.

●       Since contractors are not technically employees of your company, it gives your greater flexibility to control the conditions of their work and remuneration.

●       Again, since consultants aren't technically employees, your company does not bear full responsibility for their actions on the job.

●       The organisation has to ensure lesser compliances in terms of consultant, than what it has to do in case of employees.

A Consultancy Agreement provides clarity to both the parties, i.e. an employer and the consultant, as to the exact expectations of the job, compensation structure, deliverables, timelines, termination mechanism, besides other important terms.

This kind of clarity helps to prevent disputes between the parties, and if in case there is a dispute, the consultancy contract acts as an evidence of the arrangement mutually agreed to between both the parties.

No, it is not mandatory.

However, even though there is no law that mandates it, it is however very important to enter into such an agreement, in order to provide clarity to the both the parties as to the exact expectations of the job, compensation, deliverables, timelines, termination mechanism, besides other important terms. This kind of clarity helps to prevent disputes between the parties, and if in case there is a dispute, the consultancy contract acts as an evidence of employment arrangement agreed to between both the parties.