Kenya’s labor force makes up more than 50% of the country’s total population. This figure has steadily increased over the past decade, driven by the government’s focus on digitalization and globalization. The workforce is young, affordable, and eager to capitalize on the growing corporate interest. Flexible hiring processes in Kenya’s booming gig economy continue to attract employers from around the world, particularly in the healthcare and IT industries.
Labor laws have also evolved to keep up with this demand, with many safeguarding worker rights vigorously. Courts also disregard labels on agreements and levy tests to verify worker classification. Thus, getting entangled becomes an easy pitfall for many global employers hiring in Kenya.
It is crucial to distinguish between employees and independent contractors, as there are significant differences in taxation, contributions, and payouts. Legal troubles in these cases often result in substantial penalties and back pay for the employer, along with reputational damage that is difficult to recover from.
“Read on to learn how to hire compliantly in Kenya by correctly classifying your workers, with accurate financial planning, for a sustainable business operation. This is where Multiplier’s Contractor of Record (COR) – also known as Agent of Record (AOR) helps you work with Kenya’s rich talent pool stress-free.
Worker classification in Kenya
Let’s begin by understanding how employees and contractors are legally defined under Kenyan law. Similar to many countries, while focusing on the substance of the working relationship, courts often refer to a strict definition of an employee. At the same time, the ‘other’ is typically referred to as a contractor or gig worker. This happens because most cases of misclassification occur when an employee is labeled as a contractor, resulting in inaccurate taxation, loss of benefits, and lack of termination protection. Here, we look at their legal interpretation in Kenya.
Legal understanding of ’employee’
- Governed by the Employment Act 2007
- Works under the employer’s direction and control
- Integrated into the company with recognition
- Provided remuneration in a regular cycle
- Resources and equipment required for work are provided by the employer
Legal understanding of ‘contractor’
- Governed by the Law of Contract Act
- Works independently to provide a service
- Holds its own identity as an individual or legal entity
- Paid fees for projects, deliverables, or limited-time service.
- Uses their resources and handle their taxes themselves
Key legal distinctions between employees and contractors in Kenya
The comparison given below will help you clarify any doubts about the legal meanings and differences between the two worker types, facilitating proper classification.
Legal Aspect | Employee | Contractor |
Governing law | Employment Act 2007 | Law of Contract Act |
Control and supervision | High | Minimal supervision required |
Tax deduction | Employer deducts Pay As You Earn (PAYE), employees’ share of National Social Security Fund (NSSF), and National Hospital Insurance Fund (NHIF) | Contractor handles their taxes themselves, apart from Withholding Taxes (WHT) by employers |
Entitlements | Statutory benefits like paid leave, maternity and paternity leave, employer contribution to NSSF and NHIF, pre-adoptive leave, working hours, and overtime | None, unless specified in their contract |
Termination protection | Notice period, redundancy procedure, and unfair dismissal claims | None, other than the specification in the contract |
Contract type | Contract of service | Contract for services |
Notice how the ‘independent’ factor of contractors clearly shows up in their legal definition. This signifies that their working relationship with one employer is limited to the project or service and does not impact their contract with a different client.
Worker classification test in Kenya
As explained before, courts in Kenya follow the practice of substance over form. In these misclassification cases, if the court interprets the worker’s identity type to be different from what is stated in the contract, it provides a legal basis for rulings to be made in favor of the employee or contractor.
The tests are based on factors that mainly define the difference between employees and contractors. They are:
1. Control
Question: Does the employer regulate and direct the worker?
Interpretation:
- High employer control→ Likely an employee
- Independence in work → Likely a contractor
2. Integration
Question: Is the worker part of the core business functions?
Interpretation:
- Internal operation → Likely an employee
- External service → Likely a contractor
3. Economic dependence
Question: Does the worker financially depend on the employer alone?
Interpretation:
- Exclusive service → Likely an employee
- Serving multiple clients → Likely a contractor
4. Obligation and remuneration
Question: Is the employer obliged to give compensated work to the worker regularly?
Interpretation:
- Regular recurring work and pay → Likely an employee
- Project-based work depending on needs → Likely a contractor
Worker classification checklist for Kenya
Make use of this quick checklist to help determine whether your new hire should be classified as an employee or a contractor in Kenya.
Question | If “Yes” → Likely an employee |
Do you control how, when, or where the worker performs tasks? | Yes |
Do you provide the primary equipment, tools, or resources for the work? | Yes |
Is the worker’s role tied directly to your core business functions and operations? | Yes |
Is the relationship ongoing, indefinite, or expected to be long-term? | Yes |
Is the worker financially dependent on your payments as their primary source of income? | Yes |
Do you manage their leaves, attendance, and working hours? | Yes |
Do you have the right to supervise and direct their day-to-day activities? | Yes |
Is the worker paid a fixed salary or wage regularly? | Yes |
✔️ If you answered “yes” to most of these, the person is likely an employee, not a contractor.
Employee vs contractor pay in Kenya
Another distinction between employees and contractors is their cost to the company. Varying in amount as well as legality, it can be a nightmare if you do not account for the changes in local laws and income brackets.
Furthermore, correct classification saves you expenses that would have been incurred for unnecessary benefits or legal help in case of audits. It is this local law awareness that makes for sound financial decisions when hiring in different countries.
Here is a $2000 sample cost comparison between employees and contractors for your reference.
Component | Employee | Contractor |
Gross salary | $2000 | $2000 |
Employer contributions – NSSF + NHIF | $155 | — |
Other benefits | None, unless offered voluntarily by the employer | — |
Taxes withheld – NSSF + NHIF + PAYE | $695 | $100 |
Net payout | $1305 | $1900 (approx.) |
Total employer cost | $2155 | $2000 |
Note: Figures vary depending on local tax laws and statutory requirements.
While not a common practice in many places, Kenya requires employers to withhold a part of their contractor payments as Withholding Tax (WHT) to be given to the tax authorities.
How Multiplier can help
Use our free employee cost calculator to estimate the total cost of hiring in Kenya, including salary, PAYE, NSSF, and NHIF.
Employees vs contractors in Kenya: Benefits and protections
Kenya’s Employment Act 2007, along with other statutory acts, strictly enforces entitlements and protections for employees to have a safe and ethical working environment. These benefits range from working hours limit to contribution funds to termination protection.
On the other hand, since contractors are not governed by Kenya’s employment laws, they are rarely entitled to any benefits or protections unless agreed upon in their contracts. This does allow them to charge higher rates, have no defined income ceiling, and freely set their working relationships.
Benefit/Protection | Employee | Contractor |
Paid leave | ✅ | ❌ |
National Social Security Fund | ✅ | ❌ |
National Hospital Insurance Fund | ✅ | ❌ |
Redundancy pay | ✅ | ❌ |
Unfair dismissal protection | ✅ | ❌ |
Pre-adoptive Leave | ✅ | ❌ |
Maternity and Paternity Leave | ✅ | ❌ |
When to hire a contractor vs an employee in Kenya
Understanding when to hire which worker type is the best precaution you can take for misclassification. It is definitely better to avoid legal troubles later and hire employees and contractors according to the nature of the work, regularity, required supervision, etc.
Hire an employee for:
- Long-term or permanent roles
- Core business operations
- Work that requires complete control
Hire a contractor for:
- Short-term or project-based work
- Flexible pay models based on deliverables
- Professional or specialized services
Situation | Recommended hire |
Full-time Accounts Manager | Employee |
Cybersecurity audit project | Contractor |
Product Developer | Employee |
Chance compliance advice | Contractor |
Legal risks of misclassification in Kenya
Worker misclassification – treating an employee as a contractor or vice versa- can put your business in serious legal trouble with the legal authorities of Kenya. The country has strict laws regarding classification, with continuous reforms that aim to remove the ambiguity in employment and contract laws. The possible repercussions for the employer in a case of misclassification can include:
- Reclassification of the worker in focus to their actual status
- Tax liabilities to be paid to the Kenya Revenue Authority (KRA) for backdated tax and contributions
- Penalties and interest on tax withholding miscalculations
- Compensation for the benefits not provided to the worker
- Unfair dismissal claims of past workers in similar situations
How the misclassification test helped Kenya Pipelines avoid $40,000 in damages
In 2023, Kenya Pipelines faced a lawsuit over property damage caused by an independent contractor. Initially, the company was ordered to cover the damages. However, upon appeal, the court recognized that the contractor was not an employee but an independent party, applying misclassification tests to reach its decision.
Consequences:
- Confirmation that the contractor was not an employee of Kenya Pipelines
- The company was cleared of liability for trial and appeal costs
- Avoided nearly $40,000 in damages
How Multiplier helps you hire compliantly in Kenya
Hiring in Kenya is an attractive endeavor that comes with its own compliance issues. It is in a business’s best interest to follow and stay updated with local regulations and avoid the severe risks that come with misclassification of workers.
Multiplier helps you:
- Create locally compliant contracts that are aligned with Kenya’s legal employment terms.
- Automate and manage payroll in Kenya while accommodating local tax laws.
- Stay on trend with compliance regulations in Kenya with our local legal experts.
- Hire quickly in Kenya without setting up a local entity using our Employer of Record (EOR) service.
- Manage workers, benefits, and multicurrency payments on a single platform.
- Check compliance risks and navigate global hiring with our plethora of resources.
Capitalize on Kenya’s booming gig economy and hire the best talent with Multiplier. Stay fully compliant, avoid misclassification costs, and build a great network of workers in Kenya.
FAQs
Which authority oversees tax deduction at source in Kenya?
Kenya Revenue Authority (KRA) oversees the tax and contributions deduction - namely PAYE, NSSF, and NHIF - remitted by the employer. Contractors, in some cases, are also liable to tax withholding and thus refer to KRA for their tax adjustments.
Are contractors in Kenya entitled to statutory benefits like paid leave or severance?
No. Contractors do not qualify for any statutory benefits in Kenya, as they are governed by contract law instead of Kenya's employment law, which covers labor rights and statutory benefits.
Do employers have to withhold tax from contractors in Kenya?
Yes. Kenyan law dictates a basis amount of tax withholding from the contractor to be payable to the Kenya Revenue Authority (KRA), which can be claimed by them later.
What is the definition of an employee in Kenya?
In Kenya, an employee is a worker hired for a long or indefinite term as part of the main business functions, to be assigned work and compensation in regular cycles. They are also supposed to be controlled and supervised by the employer.
Do employees in Kenya contribute to NSSF and NHIF?
Yes. Employees, just like employers, contribute to NSSF and NHIF with at-source deductions from their salaries. Employers match NHIF and scale NSSF on top of the gross salaries to be payable to the tax authorities.
