Client Secondment Risks in IT Services

Client secondment in IT services occurs when an IT employee of a service provider is temporarily assigned to work at or for the service provider’s client. The employee may work from the client’s premises or remotely, and the client may exercise day-to-day operational control over the employee while the original IT company continues to remain the formal employer.

Secondment is commonly used for software implementation, technology consulting, cybersecurity projects, cloud migration, application development, technical support, and managed services. Although commercially useful, it creates significant employment, tax, labour, confidentiality, intellectual-property, data-protection, immigration, and contractual risks.

The central legal question is often: Who is the real employer during the secondment, and who exercises effective control over the employee? Indian courts have repeatedly emphasised that the answer depends on the substance of the arrangement and the totality of circumstances rather than merely the terminology used in the agreement.

1. Employer-employee relationship risk

A secondment agreement should clearly distinguish between the original employer and the client. If the client exercises extensive control over hiring, firing, salary, disciplinary action, leave, performance evaluation and other employment matters, an argument may arise that the client has become the employee’s employer, or that the arrangement is effectively a manpower-supply arrangement.

In IT services, this risk is particularly significant where a developer or engineer works exclusively under the client’s instructions for a prolonged period.

2. Risk of excessive client control

Operational control is normally expected during a secondment. However, excessive control can create legal complications.

For example, the client may:

• allocate daily work;
• determine working hours;
• supervise performance;
• approve leave;
• provide equipment;
• determine project responsibilities;
• conduct performance reviews; and
• directly instruct the employee.

These factors can become relevant when determining the true nature of the relationship. The Supreme Court has held that control is an important factor but should not necessarily be treated as the sole determining test in complex employment arrangements.

3. Tax and permanent-establishment risks

Cross-border IT secondment can create substantial tax exposure.

Where an overseas IT company sends employees to an Indian group company or client, Indian tax authorities may examine whether the overseas company is actually rendering services in India through its employees.

In Director of Income Tax v. Morgan Stanley & Co., the Supreme Court observed that deputed employees could retain their employment lien with the overseas company and that, depending upon the circumstances, the activities of the multinational enterprise through such employees could contribute to a service permanent establishment (PE) in India.

Therefore, international IT companies must carefully assess:

• duration of secondment;
• control over employees;
• responsibility for employee work;
• payment and reimbursement arrangements;
• employee's continuing employment relationship; and
• nature of services performed in India.

4. GST/service-tax and manpower-supply risk

Secondment arrangements may also raise indirect-tax issues.

In C.C., C.E. & S.T. v. Northern Operating Systems Pvt. Ltd., the Supreme Court examined an arrangement where employees of overseas group entities were seconded to an Indian company. Although the Indian company exercised day-to-day control, the Court examined the broader arrangement, including the overseas employment relationship, salary arrangements, repatriation and the commercial purpose of the secondment. The Court concluded that the arrangement could constitute a taxable service arrangement rather than merely an employer-employee relationship.

This is especially important for IT groups using global mobility arrangements.

5. Salary and reimbursement risk

A common structure is that the original IT employer continues paying the employee and the client reimburses the salary and associated costs.

This creates questions regarding whether the payment is:

• genuine reimbursement;
• consideration for services;
• manpower-supply charges;
• taxable service consideration; or
• part of an inter-company service arrangement.

The agreement should therefore clearly describe the commercial basis for salary payments, benefits, reimbursements and other costs.

6. Intellectual-property risk

IT employees frequently create valuable intellectual property during secondment, including:

• source code;
• software architecture;
• algorithms;
• databases;
• technical documentation;
• AI models;
• scripts;
• designs;
• technical specifications; and
• security tools.

A dispute may arise concerning whether the IT service provider, client or employee owns the resulting intellectual property.

The secondment agreement and the master services agreement should therefore contain consistent provisions dealing with ownership and licensing of work created during the secondment.

7. Confidentiality and trade-secret risk

An employee seconded to a client may have access to confidential information belonging to both organisations.

For example, the employee may simultaneously encounter:

• the IT company's proprietary code;
• client's customer information;
• security credentials;
• business strategies;
• source code;
• pricing information; and
• technical architecture.

The parties should establish separate confidentiality obligations and specify what information can be retained after completion of the assignment.

8. Data-protection risk

IT secondments increasingly involve access to personal data and sensitive business information.

A seconded employee may access:

• customer databases;
• employee records;
• financial information;
• health-related information;
• authentication data;
• cloud infrastructure; and
• confidential communications.

The parties should therefore establish responsibility for data security, access control, breach reporting, monitoring and deletion/return of information at the end of the secondment.

9. Employment-law and disciplinary risk

A difficult issue arises when the client wants to discipline or terminate a seconded employee.

Normally, the client may have authority to request removal of the employee from the project, while the original employer retains formal employment powers.

A well-drafted agreement should therefore distinguish between:

Client's authority:
Day-to-day supervision, project allocation and operational instructions.

Employer's authority:
Salary, employment status, formal disciplinary action, termination and employment benefits.

Failure to distinguish these powers may result in disputes over wrongful termination or disciplinary proceedings.

10. Repatriation risk

Secondment is generally temporary. The agreement should specify:

• start date;
• end date;
• extension procedure;
• right to terminate early;
• notice requirements;
• repatriation;
• employee's position after return; and
• responsibility for travel and relocation costs.

The Supreme Court has recognised the significance of the employee's continuing relationship with the original employer and the temporary nature of secondment arrangements.

11. Employee consent and transfer risk

Secondment should ordinarily be supported by clear employee consent, particularly where the employee's location, duties, reporting structure or employment conditions materially change.

The courts have recognised that deputation/secondment involves assignment of an employee to another organisation and that consent can be relevant to the validity of such an arrangement.

12. Immigration and work-authorisation risk

For cross-border IT secondments, the employee may require an appropriate visa or work authorisation.

A company should not assume that an employee can lawfully perform productive work merely because the employee entered the country for business purposes.

The nature of the work, duration of stay, employer, client and place of performance may all be relevant.

13. Non-compete and employee-poaching risk

The client may become familiar with the skills and performance of a seconded IT employee and subsequently attempt to hire that employee directly.

This can create disputes involving:

• employee solicitation;
• non-solicitation clauses;
• confidentiality;
• trade secrets;
• conversion/absorption of employees; and
• recruitment fees.

The secondment agreement should contain an appropriate mechanism for direct hiring, if permitted, including any agreed notice or transition procedure.

14. Occupational health and workplace responsibility

Where the employee works at the client's premises, responsibility for workplace safety, harassment prevention, access controls and workplace policies should be clearly allocated.

The client will ordinarily need to ensure that the employee complies with its workplace rules, while the original employer continues to manage the employment relationship.

15. Risk of permanent integration into the client

A long-term secondment can gradually become indistinguishable from direct employment.

Risk increases where the employee:

• works exclusively for the client;
• uses the client's systems;
• reports only to client managers;
• receives client benefits;
• has no meaningful interaction with the original employer; and
• remains with the client for an extended period.

The longer and more integrated the arrangement becomes, the greater the possibility of disputes regarding the true nature of the relationship.

Important Case Laws

1. C.C., C.E. & S.T. v. Northern Operating Systems Pvt. Ltd., 2022

This is one of the most important Indian Supreme Court decisions on employee secondment.

The Supreme Court examined overseas employees seconded to an Indian company. The employees worked under the Indian company's operational control, while their overseas employer continued to pay them and retained important elements of the employment relationship.

The Court emphasised that the arrangement must be examined as a whole rather than relying upon one factor such as day-to-day control. The judgment is particularly important for multinational IT and technology groups using employee secondments.

Principle: The substance and totality of the secondment arrangement determine its legal character.

2. Director of Income Tax v. Morgan Stanley & Co., (2007) 292 ITR 416 (SC)

The Supreme Court considered deputation of employees from Morgan Stanley's overseas entity to its Indian associated entity.

The Court observed that deputed employees could retain a lien on employment with the overseas entity and that the overseas company could potentially create a service PE in India through activities performed by such employees.

Principle: Cross-border employee deputation can create permanent-establishment consequences where the foreign enterprise continues to be responsible for the work performed through its employees in India.

3. Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd., (2021) 7 SCC 151

The Supreme Court considered the distinction between a contract of service and a contract for service.

The Court rejected the idea that one universal test can resolve every employment relationship. Instead, the totality of relevant circumstances must be examined.

Principle: In complex employment arrangements, courts should consider the overall relationship rather than relying exclusively upon a single factor such as control. This principle was subsequently relevant in the Northern Operating Systems secondment decision.

4. Workmen of Nilgiri Cooperative Marketing Society Ltd. v. State of Tamil Nadu, (2004) 3 SCC 514

The Supreme Court examined questions concerning the existence of an employer-employee relationship and the relevance of control and supervision.

Principle: Determining who is the real employer requires examination of the actual relationship and relevant circumstances rather than simply relying on contractual labels.

This principle is useful when analysing whether an IT professional remains an employee of the service provider or has effectively become integrated into the client's workforce.

5. Silver Jubilee Tailoring House v. Chief Inspector of Shops & Establishments, (1974) 3 SCC 498

The Supreme Court considered the meaning of an employer-employee relationship and recognised that the traditional control test cannot always be applied mechanically.

Principle: The nature of the relationship must be determined from the realities of the working arrangement, including the degree of supervision and integration.

This reasoning is relevant to modern IT secondments where technical professionals may work under the client's day-to-day direction while formally remaining employees of the IT company.

6. Hussainbhai, Calicut v. Alath Factory Thozhilali, (1978) 4 SCC 257

The Supreme Court adopted a substance-oriented approach to identifying the real employment relationship, particularly where contractual arrangements involve intermediaries.

Principle: Courts may look beyond the formal contractual structure to identify the real economic and employment relationship.

This principle can become relevant where an IT company, group entity or staffing intermediary is used to structure a secondment arrangement.

7. Managing Director, U.P. Rajkiya Nirman Nigam Ltd. v. P.K. Bhatnagar, (2007) 14 SCC 498

The Supreme Court dealt with deputation and observed that the mere fact that an employee has served for a long period in the borrowing organisation does not automatically convert the employee into a regular employee of that organisation.

Principle: Long duration alone does not necessarily change the legal character of deputation, although the contractual and factual circumstances remain important.

Key Legal Risks for IT Companies

Conclusion

Client secondment is an important business model in IT services because it allows clients to obtain specialised technical expertise while allowing IT companies to deploy skilled personnel for particular projects. However, the arrangement can create substantial legal risks when the contractual structure does not match the actual working relationship.

The safest approach is to clearly define who remains the employer, who controls day-to-day work, who has disciplinary authority, who bears employment costs, who owns the resulting intellectual property, who is responsible for data security, how confidentiality is protected, how long the assignment lasts, and what happens when the secondment ends.

Indian case law, particularly Northern Operating Systems and Morgan Stanley, demonstrates that courts and tax authorities may look beyond the terminology of a "secondment agreement" and examine the substance of the arrangement.