The Differences Between a Contract for Services and a Contract of Service 

Why Misclassifying Consultants Could Cost Your Business Millions

By William Karoki Advocates (WKA Advocates)
🔗 Website: wakilihub.co.ke/

In Kenyan employment law, the difference between a Contract for Services and a Contract of Service may appear small—just one word. However, that single word determines whether a person is classified as an employee or an independent contractor, and whether an organisation must pay PAYE, NSSF, SHIF, Housing Levy, provide overtime, grant annual leave, issue severance, and uphold protections against unfair termination.

Between 2024 and 2025, the Employment and Labour Relations Court (ELRC), the Kenya Revenue Authority (KRA), and the Tax Appeals Tribunal (TAT) intensified investigations into what they now describe as “Disguised Employment.”
As enforcement grows stricter, employers relying on outdated consultant agreements face increasing legal and tax exposure.

At WKA Advocates, our employment compliance audits show that many organisations continue using template consultancy agreements drafted years ago—agreements that no longer withstand today’s legal scrutiny. Many employers only realise the risk when a dispute arises or when KRA issues a tax demand for backdated liabilities.

This updated 2025 guide simplifies the distinction, highlights key ELRC and TAT rulings, and shows how organisations can avoid misclassification risks.

1. Understanding the Legal Distinction

Kenyan courts examine the substance of the working relationship, not what the contract is called. This means the courts will look at what actually happens in day-to-day operations.

Contract of Service (Employee Relationship)

A contract of service creates an employer–employee relationship, regulated by the Employment Act, 2007. Under this relationship, the employer:

• controls how and when the work is performed

• provides tools and resources

• supervises the worker

• integrates the worker into internal structures

• bears statutory obligations such as PAYE, NSSF, SHIF

• must comply with termination procedures

This classification triggers full employee rights under Kenyan labour law.

Contract for Services (Independent Contractor Relationship)

A contract for services creates a client–contractor relationship, common for consultants, project-based workers, and specialised service providers. A genuine contractor:

• works independently

• uses their own equipment

• sets their own schedule

• invoices per deliverable

• bears their own tax responsibility

• can work for multiple clients

Learn more about compliant consultancy agreements on our website:
🔗 Consultant Agreements – WKA Advocates

2. How Courts Decide Whether Someone Is a Consultant or an Employee

Courts, KRA, and regulators apply three major legal tests. If an individual fails these tests, they are legally an employee—even if the contract calls them a consultant.

A. The Control Test (Most Critical)

The more control the organisation exercises, the stronger the presumption of employment.

Indicators of employee status include:

• fixed working hours

• mandatory attendance

• biometric log-ins

• performance reviews

• leave approvals

• supervision through digital monitoring tools

Important 2025 Decision

In Dig Deep (Africa) v Claimant (2025), the ELRC ruled that digital surveillance—including email tracking and remote activity monitoring—creates a strong presumption of an employment relationship.

Learn about ELRC jurisprudence here:
🔗 Kenya Law – ELRC Decisions

B. The Integration Test

This test evaluates how deeply the individual is embedded in the organisation.

They are likely an employee if they:

• appear on the organizational chart

• use a company email address

• perform the organisation’s core business activities

• represent the company in meetings or external functions

At WKA Advocates, we frequently identify this risk where “consultants” perform full-time operational tasks identical to employees.

C. The Economic Reality Test

This test looks at the person’s financial independence.

A true contractor:

• has multiple clients

• invoices per project

• bears entrepreneurial risk

• uses their own tools and resources

Someone financially dependent on one organisation is typically an employee.

3. New 2025 Case Law Employers Must Understand

Recent rulings have reshaped how organisations must structure consultancy and contract work.

Gichuki v Kenya Power (2025) — Crackdown on Misclassification

The court held that repeated short-term contracts for core duties amounted to unfair casualisation, converting the individuals into permanent employees with:

• full employment benefits

• unfair termination compensation

• constitutional damages

👉 Key Lesson:
Changing the title from “employee” to “consultant” does not change the legal reality.

Qhala Limited v Commissioner (2025) — Proper Contractor Structure

The Tax Appeals Tribunal rejected KRA’s attempt to reclassify Qhala’s consultants. Qhala prevailed because:

• contractors worked on deliverables, not hours

• contractors used their own tools

• they worked for multiple clients

• they invoiced per project

• they bore financial risk

This decision provides a strong model for compliant consultancy structures.

Read TAT rulings here:
🔗 Tax Appeals Tribunal Kenya

4. Financial & Legal Consequences of Misclassification

Misclassification is a high-risk compliance area in 2025. KRA and ELRC penalties can cripple an organisation.

A. Tax Exposure (KRA)

KRA may demand 5–7 years of backdated:

• PAYE

• NSSF

• SHIF

• Housing Levy

Plus:

• penalties

• fines

• compound interest

Misclassification audits now form a major part of KRA’s enforcement strategy.

Learn more:
🔗 Kenya Revenue Authority – Compliance

B. Labour Exposure (ELRC)

A misclassified “consultant” may sue for:

• unfair termination (up to 12 months’ salary)

• unpaid leave

• overtime

• gratuity

• compensation under Article 41 (fair labour practices)

These cases often result in multimillion-shilling awards.

C. Statutory Compliance Risks

Employers also face liability under:

• OSHA (occupational safety obligations)

• WIBA (injury compensation)

• Data Protection Act (handling of personal data)

5. How to Structure Consultancy Arrangements Safely (2025 Best Practice)

Many organisations legitimately use contractors. The risk arises only when the relationship is structured incorrectly.

At WKA Advocates, we support employers through three critical steps:

A. Workforce Misclassification Audit

A detailed review of:

• all consultant agreements

• internal reporting structures

• tax exposure

• supervisory systems

• operational integration

This audit identifies roles that can remain consultancy-based and roles that require conversion to employment.

Schedule a compliance audit:
🔗 Book an Audit – WKA Advocates

B. Drafting Qhala-Compliant Consultancy Agreements

Modern, legally defensible agreements must:

• define deliverables rather than hours

• protect contractor autonomy

• allow subcontracting or substitution

• transfer tax obligations to the contractor

• exclude employment benefits

• limit organisational control

We draft agreements designed to survive KRA and ELRC scrutiny.

C. Lawful Conversion to Employment

Where conversion is necessary, it must be managed carefully to avoid:

• constructive dismissal

• breach of contract

• procedural unfairness

We guide employers through:

• consultations

• drafting new contracts

• onboarding

• documentation

• compliance frameworks

Conclusion: In 2025, Courts Care About Reality—Not Labels

Calling someone a consultant does not make them one.
Paying per invoice does not automatically create independence.
Using an old consultancy template does not shield an employer from legal or tax liability.

Courts and regulators now focus entirely on how the work is done, not what the paperwork says. As a result, workforce classification in 2025 is a legal, financial, and operational necessity for every organisation.

Kenya’s tax and labour enforcement environment is tightening. A proactive consultant classification audit can save businesses millions in liability.

For a Confidential Consultant Classification Audit

William Karoki Advocates (WKA Advocates)
📞 +254 798 035 580
📧 info@wka.co.ke
📍 Valley View Business Park, 6th Floor, Suite 35, City Park Drive, Parklands, Nairobi
🌐 wakilihub.co.ke/