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Employers beware of that consultancy contract

By William Maema

In his classic play, Romeo and Juliet, the famous English playwright, William Shakespeare posed the intriguing question: “What's in a name?” His answer was equally ingenious: “That which we call a rose by any other name would smell as sweet.”

For a multitude of reasons, among them the increasingly litigious nature of Kenyan employees fueled by the highly complicated process of terminating employment, many employers are opting for the model of independent contractors, also known as consultants, to avoid the shackles of an employment relationship.

In one case, a group financial controller was hired as an independent contractor despite enjoying a hefty regular salary paid monthly plus benefits such as medical cover and holidays for self and family.

While the contracts of such workers provide that they are independent contractors and not employees, the workers are totally indistinguishable from the regular staff in terms of hours of work, supervision, discipline and remuneration. They are fully integrated into the workforce except for the small print in their contracts which describes them as independent contractors.

Since according to their contracts such workers are not employees, they do not receive the usual employment benefits required by law such as annual leave, sick leave, housing allowance, medical cover, pension or severance pay upon redundancy. Their remuneration is also not subjected to the usual taxes and statutory deductions such as PAYE, NSSF and NHIF.

The challenge arises when the contract is terminated without reasons or due process and the worker sues for unfair termination. They also claim that despite what their contract states, they were, in fact, employees and the hirer should, therefore, be held liable for circumventing the requirements of the Employment Act by not offering them the statutory benefits enjoyed by other employees which is discriminatory.

Faced with this situation, Kenyan courts are of the view that a rose is a rose, whatever else we might want to call it. If the manner in which a so-called consultancy/independent contractor relationship is implemented demonstrates substantial elements of employment, the court will find that an employment relationship did exist despite any contrary wording in the contract. The courts have established the principle that they look at the substance rather than the form of the contract.

In determining whether an employment relationship arises from a contractual arrangement described as a consultancy or an independent contractor engagement, the court considers a number of factors.

In an employment relationship, the worker is engaged under a contract of service which means that she is employed to render a range of agreed services based on her experience and capabilities. On the other hand, an independent contractor is engaged under a contract for services, meaning that she is hired to perform a specific scope of work or project for an agreed fee. The relationship ends automatically once the agreed scope of work has been performed. An independent contractor arrangement is therefore based on tasks rather than duration.

An employee would generally have a range of duties assigned to him based on the job description contained in the contract. On the other hand, a consultant will typically be required to perform only the specific task or project stipulated in the contract. Any extra task outside the agreed scope is considered a variation and a separate payment agreed.

An employee works under the direct supervision and control of the employer while an independent contractor performs her assignment under limited or no supervision so long as she delivers the required result.

In an employment relationship, the employer dictates the employee’s hours of work whereas an independent contractor enjoys flexibility on the hours of work provided the job gets done.

An independent contractor is not obligated to perform any task outside the agreed scope whereas an employee must perform all assigned duties falling within her job description or risk disciplinary sanction for insubordination.

Generally, an employer would invest in the training of his employees while an independent contractor is presumed to possess the requisite training and skills to perform the agreed scope of work.

An employee normally receives a fixed salary at periodic intervals together with other benefits such as housing allowance, medical cover, annual leave, sick leave and pension contributions irrespective of whether she has performed or completed her assigned duties. An employer cannot lawfully deduct or withhold salary on grounds that the employee did not complete the assigned tasks during the month. On the other hand, an independent contractor is not entitled to payment until he has performed the agreed tasks to the satisfaction of the hirer.

Employees typically work exclusively for one employer for the duration of the contract while a consultant may work for several clients simultaneously.

Employees are subject to the employer’s disciplinary processes while an independent contractor is not.

A consultant is responsible for payment of own taxes while in the case of employment, the employer is the agent of the Government for purposes of deducting and remitting employment taxes and statutory deductions.  

Finally, termination of an employment contract is highly regulated by law and the employer must have valid reasons and follow due process before terminating it. No reasons or due process is required for the termination of a consultancy agreement.

Based on the above parameters, the court may find that a purported consultancy/independent contractor arrangement was, in essence, an employment relationship. Accordingly, where such a contract has been terminated unprocedurally, the hirer will be held liable for unfair termination and ordered to pay the worker damages as well as all the statutory employment benefits previously withheld including housing, medical, pension and annual leave backdated to the date of the contract. Similarly, the hirer is liable for all applicable taxes and statutory deductions together with penalties and interest accrued from the commencement of the contract.

In the end, therefore, an employment contract by any other name is still an employment contract.

The article was featured in the Business Daily and can be accessed here