How to distinguish between a consultant and an employee
1 year ago
How can you lawfully categorise a person as a consultant or an employee?
I often come across situations where a person is engaged as a consultant when they are an employee for all intents and purposes.
The aim of this article is to once more look at how to distinguish the two. This distinction is critical because of tax and labour law obligations.
A ‘consultant’ is a self-employed independent business person who has a special field of expertise or skill and who agrees to do work for another usually for a fixed price.
An ‘employee’ is a person who is employed for wages or salary and includes an apprentice or indentured learner.
The former are given ‘service contracts’ or ‘contracts for service’ whereas the latter are given ‘contracts of service’.
How do you distinguish an employee from a consultant?
Various tests have been developed by our courts.
In Stanley Mungai Muchai vs National Oil Corporation of Kenya  eKLR, the following tests were reiterated: –
- The control test – an employee is subject to the command of the employer as to the manner in which the work is to be done work.
In Everret Aviation Limited (“Everret”) vs Kenya Revenue Authority  eKLR, Everret engaged pilots as independent consultants and applied withholding tax to their income. KRA, after an audit of Everret’s operations, demanded Kshs. 6,699,425/= being PAYE, penalties and interest, for the years of income 2000 to 2002. On appeal to the High Court, it was held that Everret was substantially in control: it bore the risk of loss and chance of profit; it identified the task; it paid the pilot and released them, consequently, the pilots were employees and Everett was liable to deduct and remit PAYE from their income.
- The integration test – an employee is subject to the rules and procedures of the employer rather than to their own personal command. The employee is part of the business and their work is primarily part of the business.
In Christine Adot Lopeyio vs Wycliffe Mwathi Pere  eKLR, the Claimant was engaged to clean the Respondent’s premises occasionally and she was not prevented from undertaking other tasks that were personal or of her own choice. Because of this and the fact that she was not subject to the Respondent’s rules and procedures, the Court found that she was an independent contractor, not an employee.
In Kenya Hotel & Allied Workers union vs Alfajiri Villas  eKLR the Court held as follows:–
“…a true independent contractor… will be a registered taxpayer, will work his own hours, runs his own businesses, will be free to carry out work for more than one employer at the same time, will invoice the employer each month for his services and will be paid accordingly and will not be subject to usual ‘employment’ matters such as the deduction of PAYE, will not get annual leave, sick leave …”
- The test of economic or business reality – this test takes into account whether the person is in business on their own account, as an entrepreneur, or whether they work for another person, the employer, who takes the ultimate risk of loss or chance of profit.
- Mutuality of obligation – in an employment relationship, the parties commit to maintaining the employment relationship over a period of time. There is a continuing obligation on the employer to provide work and pay and a continuing obligation on the employee to do the work.
Terminology – using terms such as ‘employment agreement’, ‘annual leave’, ‘discipline’ etc., may lead to an interpretation that a person is an employee.
Equipment – generally, where equipment or tools are provided by the employer, a contract of service is deemed to exist and where a person provides their own tools of trade, a contract for service is deemed to exist.
Consequences of non-compliance
If a person is engaged as a ‘consultant’ when they are truly an employee, they can sue for a declaration that they are an employee and for the employer to be compelled to pay the mandatory statutory payments, particularly NSSF and NHIF. They can also sue for unfair termination.
In addition, KRA can demand outstanding PAYE, accrued penalties and interest.
Question: if the employer has been deducting withholding tax and it is later found that they ought to have been deducting and remitting PAYE, is it solely on the employer to pay the difference?
To determine whether one is a consultant or an employee, the Court will give greater emphasis to the substance of the agreement as opposed to the form or the words used by the parties to refer to the nature of their arrangement. The various tests are applied jointly, not separately – you have probably noticed that each of the tests can have exceptions.
In Vitalis Oliewo K’omudho vs. AAR Health Services Ltd  eKLR, the Court observed that it must go into the intentions of the parties and look at the relationship between the parties and the true tenets of it such as the object of control; whether there is payment of salary; eligibility to benefits at work; ability to hire and have own staff; and reference to the contract document.
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