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As enforcement grows stricter, employers relying on outdated consultant agreements face increasing legal and tax exposure.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/