This is one of the most misunderstood areas of Kenyan business law — and getting it wrong is expensive. Many Kenyan businesses hire people as "consultants" or "contractors" when the law considers them employees. The consequences: unpaid PAYE, NSSF, NHIF, and potential claims for unfair dismissal.
Understanding the difference between a service agreement (for consultants) and an employment contract (for employees) is essential for every Kenyan business owner.
The Core Difference
| Factor | Employment Contract | Service Agreement |
|---|---|---|
| Relationship | Employer–Employee | Client–Independent Contractor |
| Who controls the work? | Employer controls how, when, where | Contractor controls method and timing |
| Equipment | Usually provided by employer | Contractor provides own tools |
| Exclusivity | Usually exclusive | Can work for multiple clients |
| Tax (PAYE) | Employer deducts and remits | Contractor pays own tax (Turnover Tax or corporate) |
| NSSF / NHIF | Employer contributes | Contractor's own responsibility |
| Leave entitlement | Full statutory leave applies | No statutory leave obligation |
| Termination protection | Full Employment Act protections | Notice period per contract only |
The "Control Test" — How Kenyan Courts Decide
If there's a dispute about whether someone is an employee or a contractor, Kenyan courts apply what's called the "control test" and the "integration test":
- Control test: Does the person who hired you control not just what you do, but how you do it? If yes — you're likely an employee, regardless of what the contract says
- Integration test: Is the person's work integrated into the business (regular hours, company email, team meetings)? If yes — likely an employee
- Economic reality test: Is this person economically dependent on one "client" for substantially all their income? If yes — likely an employee
Red flag: If you have a "consultant" who: works fixed hours in your office, uses company equipment, only works for you, and has been doing so for over 6 months — KRA and the Employment Court will likely classify them as an employee. The liability for back-PAYE, NSSF, NHIF, and potential unfair dismissal claims can be substantial.
What a Service Agreement Should Include
A properly drafted service agreement for a genuine consultant/contractor should include:
- Specific deliverables (not general duties)
- Project-based or retainer fee structure
- Clear statement that the contractor is an independent contractor, not an employee
- Contractor is responsible for their own taxes and statutory contributions
- Contractor may work for other clients simultaneously
- Intellectual property ownership clause
- Confidentiality obligations
- Either party can terminate with notice (typically 14–30 days)
When You Must Use an Employment Contract
Use an employment contract (not a service agreement) when:
- The person works fixed hours under your direction
- They work exclusively for your business
- They use your equipment and work at your premises
- The engagement is ongoing with no defined project end date
- You're paying them a regular salary (as opposed to project fees)
Safe approach: When in doubt, use an employment contract. The penalties for misclassifying employees as contractors (unpaid PAYE, NSSF, NHIF, potential court claims) are far more expensive than the administrative cost of running payroll.
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