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Contract for Service

The evolving nature of work arrangements has blurred the lines between employment and independent contracting. In the Employment and Labour Relations Court, individuals claiming employment often bear the burden of proving their status as employees rather than independent contractors.

A contract for service is an agreement where one party provides services to another in exchange for consideration. The service provider, typically self-employed, is referred to as an independent contractor. Black’s Law Dictionary defines an independent contractor as someone entrusted with specific work, operating by their own methods, and subject to the employer’s control only regarding the final outcome. Unlike an employee, an independent contractor is free to determine how they perform their tasks, with no employer oversight beyond the contractual terms. Such an arrangement does not create an employer-employee relationship.

Distinguishing Between Employment and Independent Contracting

The case of Ready Mixed Concrete (South East) Limited v Minister of Pensions and National Insurance [1968] 2 QB 497 outlined key factors in determining employment status:

1. Personal Service: The individual provides their own skill and labor in return for wages or remuneration.
2. Control: The employer dictates the tasks, methods, tools, and workplace.
3. Compliance with Employment Law: The relationship adheres to employment laws, including statutory benefits and tax obligations.

In Leonard Musitsa Endoli v Odds and Ends Limited [2022] eKLR, the court emphasized that a true independent contractor is a registered taxpayer, determines their own work schedule, operates a separate business, invoices for services, and is not subject to employment-related deductions like PAYE or benefits such as leave and sick pay.

Key Factors in Classification

1. Control
   The most critical factor. An employer controls an employee’s work schedule, location, and methods, while an independent contractor operates autonomously, determining their own hours, worksite, and approach.
2. Integration into the Employer’s Business
   Employees are integral to the business and rely on the employer for tools and resources. They must adhere to workplace policies. Independent contractors, however, function separately, with performance dictated only by contractual terms and industry standards.
3. Payment Structure
   Employees receive regular wages per employment agreements and labor laws. Independent contractors negotiate payment terms, often based on project milestones or task completion.
4. Benefits and Taxation
   Employers must remit statutory deductions for employees, including NHIF, NSSF, and PAYE. Independent contractors, as self-employed individuals, handle their own tax obligations, such as withholding tax (for consultants) or corporate tax (30% for local companies, 37.5% for foreign companies).
5. Liability for Wrongful Acts
   Employers are vicariously liable for employees’ wrongful acts committed in the course of employment. Independent contractors bear personal liability for their actions.

Conclusion

Before entering a service agreement, parties must clarify the nature of their relationship. Employment relationships fall under the Employment Act, while independent contracting is governed by contract law. Proper classification minimizes disputes and ensures compliance with legal obligations.