Are you an Employee or an Independent Contractor
You have a gardener who tends to your garden from Monday to Saturday. You pay them a monthly salary. However, your gardener is only in your house from 6 a.m. to 9.00 a.m., and then he leaves for work elsewhere. Is he your Employee, or is he an independent contractor.
There has been an increase in the flexibility of employment relationships, with many adopting independent contractor agreements as opposed to Employees. The law distinguishes Employees from independent contractors. An Employer-Employee relationship creates an employment contract known as a contract of service while a client contractor relationship creates an independent contractor agreement known as a contract for services. What distinguishes the two contracts?
What is a Contract of Service
Section 2 of the Employment Act defines a contract of service as an agreement, whether oral or in writing, to employ or to serve as an Employee for a period of time. It includes internships. Therefore, a contract of service is an agreement between an Employer and an Employee containing the terms of engagement.
Section 9 of the Act provides that a contract for service for three months or more must be in writing. This contract must state particulars of employment and must be given within two months of employment.
The case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance (1968) set out the conditions required to establish a contract of service. It stated that a contract of service will be established where:
- The servant agrees to provide his own work and skill by providing a service for their master, in consideration of a wage or other remuneration.
- The servant agrees that in the performance of that service they will be subject to the master’s control. Control includes the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time, and the place where it shall be done.
- The contract of service complies with the terms of an employment agreement. This entails complying with the statutory requirements in the Employment Act including minimum wage, provision for leave and payment of income tax.
What does a contract of service entail?
- the Employees details;
- the Employers details;
- the job description;
- commencement date of the employment;
- the duration of the contract;
- the place of work;
- the hours of work;
- the remuneration and details of any other benefits;
- the intervals at which remuneration is paid; and
- any other prescribed matter.
Who is an Employer?
An Employer is defined in the Act as any person, or body who has entered into a contract of service to employ any individual or company. According to the Black’s Law dictionary, an Employer is one who controls a worker under a contract and pays the worker a salary or a wage. A salary is defined as an agreed compensation for services paid at regular intervals, normally monthly. A wage on the other hand is payment for labour or services usually based on time worked or quantity produced. It includes every form of remuneration for personal services.
The Income Tax Act defines an Employer as any resident person responsible for the payment of, or on account of, emoluments to an Employee.
Therefore, an Employer is one who enters into a contract with an individual or company, is in control of the worker, pays them a salary and then remits their taxes to the Kenya Revenue Authority.
Who is an Employee?
Section 2 of the Act defines an Employee as a person employed for wages or a salary and includes an intern. According to the Black’s law dictionary, an Employee is one who works in the service of another person, under the Employer’s control.
Rights of an Employee
Rule 7 of the Employment General Rules states that an Employer shall issue a statement stipulating the rights of an Employee. This statement shall be placed in a conspicuous place, which is accessible to all Employees. The statement should include the following rights. The right:
- To be issued with a letter of appointment for an Employee engaged on a continuous service for more than three months. The letter of employment should include the employment details;
- To one rest day in every period of seven days;
- To at least twenty-one working days leave during a period of twelve months continuous service;
- To three months maternity leave with full pay for female Employees;
- To sick leave of at least seven days with full pay and seven days at half pay;
- To housing allowance or provision of a house or a wage which is inclusive of house allowance;
- To compensation by the Government in the event of insolvency of the Employer;
- To be paid wages at intervals agreed, subject to deductions authorized by law;
- To work for a maximum of fifty-two hours of work spread over six days of the week ,sixty hours of work per week for a person employed on night work, and less than six hours a day for a person under the age of sixteen years;
- To be paid wages at the end of each day where the Employee is a casual Employee;
- To be issued with an itemized pay statement where an Employee is on a continuous contract for more than six months;
- To termination notice of 28 days, however, where the contract is for payment of daily wages, either party may terminate at the close of any day without notice;
- To at least fifteen days pay for each completed year of service where the Employee is terminated on account of redundancy;
- To a disciplinary hearing for misconduct where the Employee has had a continuous contract with an Employer for more than thirteen months; and
- To a certificate of service upon termination of the contract.
The case of Everret Aviation Limited vs the Kenya Revenue Authority (2013) determined whether a contract of service or a contract for services existed. The facts of the case are that Everret sub-contracted pilots to undertake special tasks. They had two sets of pilots, that is resident freelance pilots and non-resident freelance pilots who both did the same work. KRA audited the Companies accounts as it considered the payments made to the pilots as salaries that were subject to PAYE. KRA held that PAYE was payable for the resident pilots while withholding tax was payable for the non-resident pilots and demanded Kshs. 6,699,425 being PAYE for the years 2000-2002. Everret contested KRA’s finding stating that the pilots were not Employees as:
a. the pilots were not integrated into the appellants business;
b. the pilots procured their pilot licences independently;
c. they were employed for a few hours or weeks;
d. they were not paid a monthly wage; and
e. the Employer had no control over the pilots.
The High Court held that Everret was in control of the pilots as it bore the risk of profit, paid the pilots, released them, and identified their tasks. The court argued that the pilots were being paid directly and not to a 3rd party and therefore, it was a contract of services, making the Employer Liable to pay PAYE for both the resident and non-resident pilots. It held that when distinguishing a contract of service from a contract for services, the traditional tests of control of the work by the Employer and its integration into the Employer’s core business are no longer conclusive. The fundamental behaviour of the parties such as the form of documentation evidencing the relationship and the mode of payment is critical.
In my opinion, this conclusion is contradictory as the court based its judgement on the level of control the Employer exercised over the pilot, and then went on to say that the level of control is no longer a conclusive measure. They also stated that the courts should look at the mode of payment where monthly salaries and wages are paid to Employees and not independent Contractors. The pilots were not paid a monthly salary and the courts still went ahead and concluded that the pilots were Employees and not independent Contractors.
In the case of Paul Ochieng’ Agola v Gateway Marine Services Limited  EKLR, the Claimant averred that he was an Employee of the respondent as a Machine Operator, in the year 2012 where he earned a monthly salary of Kshs. 24,000. The Respondent summarily dismissed him, on 19th March 2016. He sued the Employer, stating that his dismissal was unfair. The terms of employment were that he was employed as a Casual Employee, who was engaged on and off, depending on availability of work, between 2012 to 2015 and was paid a daily wage. The Respondent however held he was an independent contractor. The Claimant adduced evidence including a copy of leave application supporting the view that he enjoyed an employment benefit of paid annual leave.
The Court held that there was no independent contract between the Parties, as there was no oral or documentary proof of such a contract. It held that the Claimant was a casual worker, who was paid a monthly wage and enjoyed the benefits of an Employee, and therefore, he was unfairly dismissed. The court stated that Independent Contractors do not enjoy employment benefits like annual leave and neither are they paid wages.
In this case, the court looked at the terms of engagement of the parties such as the mode of payment and the employment benefits to determine whether the Claimant was an Employee. A contractor would not enjoy leave days and therefore it was rational to conclude that the Claimant was indeed an Employee and not an independent Contractor as insinuated by the Employer.
What is a Contract for Services
This is an agreement between two parties, where one party provides a service to the other in consideration for payment. This agreement appoints a self-employed person (Independent contractor) such as a consultant to carry out services for another party.
Who is an independent contractor?
The Black’s Law dictionary defines an Independent Contractor as one who is entrusted to undertake a specific project, but who is left free to do the assigned work and choose the method for accomplishing it. The independent contractor is liable for their actions unlike an Employee where the Employer is vicariously liable for their actions.
An Independent Contractor performs work for another Person, according to the Independent Contractor’s own processes and methods. They carry out business on their own account. They are not under the control of the client. They are bound by the terms of the contract and do not get statutory benefits unlike Employees. A contract for services agreement does not create an Employer-Employee relationship.
In the case of Fredrick Byakika v Mutiso Menezes International Unlimited (2016), the Claimant sought payment for unfair dismissal. The facts of the case are that he was employed as a resident engineer for a project in Kampala for a period of 12 months. The terms of the contract were that the claimant would be paid a monthly gross remuneration of $5,260.00 upon issuance of an invoice and subject to withholding tax at 5%. One month into the contract, he fell ill and could not perform his duties. The respondent then terminated the contract. The Claimant was paid Kshs. 240,000.00 as terminal dues. The Claimant then sued the Employer, stating that the summary dismissal was wrongful. The Claimant argued that he was the Respondents Employee as he was the project representative meaning he was under the control of the respondent. He also stated that he had a schedule where he was required to follow and therefore argued that he was integrated within the work of the respondent. The court however held that the Claimant was appointed as a Consultant and was required to be part of the Project Consultancy Team as a Resident Engineer for the project. He was therefore not entitled to the Employee benefits he was seeking.
The Court described an Independent Contractor as a registered taxpayer who will work their own hours, run their own business, is free to carry out work for more than one Employer at the same time, invoices the Employer each month, and is not subject to employment terms such as deduction of PAYE, annual leave, and sick leave. It also held that the use of the terms such as salary, employment terms and conditions, summary dismissal do not, by themselves, confer an employment relationship. The Courts would have to look into factors such as the intention of the parties, to determine whether they give rise to an employment contract or that of an independent contractor.
Therefore, even though the Claimant was paid a monthly salary, the salary was subject to withholding tax and not PAYE. Where the payment is subject to withholding tax, it means that there is no Employer-Employee relationship but an independent contractor relationship. In an Employer-Employee relationship, the Employer will pay the Employee’s tax as PAYE to KRA.
In Maurice Oduor Okech v. The Chequered Flag Limited  EKLR, the court held that the Claimant was an independent contractor and not an Employee. The facts of the case are that the Claimant was by oral agreement, employed by the Respondent as a cushion maker on 7th August 1998. He was paid between Kshs. 25,000-30,000 at the end of each completed assignment. His contract was terminated in October 2010. He brought a claim seeking remedies for unfair termination.
The respondent held that the Claimant was an independent Contractor, and not an Employee, and therefore unable to claim remedies as an Employee. The Claimant stated that he was an Employee as he was integrated into the business as he was working in the respondent’s office. He then produced an employment card and a photo in the company uniform to prove that he was an Employee. According to the respondent, he issued the Claimant with an Employee card, which did not have an Employee number, in order to avoid harassment by the Police while going home at night. He also claimed that he had allowed the Claimant to work from his office for some time but later asked him to leave after he brought unauthorised people to the office on various occasions. On 13th of October 2013, the Respondent sent the Claimant Kshs. 11,500 to buy material for a customer but failed to deliver. The respondent then terminated the contract.
The court held that the documentation produced i.e. the local purchase orders and the payment vouchers were documents used in contracts for services. It also held that the mode of payment i.e. payment after completion of a job and issuing of an invoice to the respondent to pay, are modes of payment used in contracts for services. Therefore, the Claimant was not an Employee of the Respondent but an independent contractor under a contract for services.
Therefore, an independent contractor could be integrated into the Employers business, including adhering to the dress code, reporting time and having an employment card, but still be an independent contractor. In this case, it was clear that the Claimant was contracted for a specific service and was paid after issuing an invoice after delivery of the service. The courts will therefore look beyond the traditional test of integration into the Employers business, and will look into the engagement of the parties in order to determine whether it is a contract of service or for services.
The Employment Act will bind an Employer-Employee relationship. However, it does not bind an independent contractor agreement.
Employers are very quick to state that the Employee is an independent Contractor and not an Employee when an issue arises, in order to escape from the responsibilities required in an Employer-Employee relationship. It is prudent for Employers to have contracts with their Employees in order to avoid blurring the line and having an ambiguous contract that does not have clear terms. The illustration given above of the gardener could create either contract. Where the terms of engagement are not clear, the gardener could be considered a part time domestic worker who has the rights of an Employee. However, if the Employer draws up a contract and stipulates that the gardener be contracted as an independent Contractor for the provision of gardening services, then the gardener will be an independent Contractor. It is advisable for Employers and Employees, and Clients and independent Contractors to reduce their relationship in writing to avoid ambiguity.#knowyourlawkenya.
1. Employment Act (Act No. 11 of 2007).
2. Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance (1968) 2 QB 497.
3. Section 2 Income Tax Act.
4. The Black’s Law Dictionary eighth edition.
5. The Employment General Rules 2014.
6. Paul Ochieng’ Agola v Gateway Marine Services Limited (2018) EKLR.
7. Everret Aviation Limited vs the Kenya Revenue Authority (2013) EKLR Income Tax Appeal 2 of 2009.
8. Fredrick Byakika v Mutiso Menezes International Unlimited (2016) EKLR Cause 327 of 2014.
9. Maurice Oduor Okech v. The Chequered Flag Limited (2011) EKLR.