Consultancy contracts vs Employment contracts: a comparative analysis

1. Introduction

In the world of business and employment, there are two distinct types of contractual agreements that play pivotal roles in shaping the nature of engagements between individuals and organizations. These are; consultancy contracts and employment contracts. Understanding the nuances of these two types of contracts is essential for both parties involved. This article explores the key features and differences between consultancy contracts and employment contracts, shedding light on their various aspects.

2. Comparative analysis

Below is a comparative analysis between consultancy contracts and employment contracts.

  1. Nature of Engagement

Consultancy Contract: A consultancy contract is a formal agreement established between an individual consultant or a consultancy firm and a client. The contract is usually for service. The main purpose of this agreement is to secure expert advice, specialized services, and innovative solutions tailored to the consultant’s specific area of expertise. Typically, consultancy engagements revolve around project-based assignments that aim to address specific challenges or goals of an organization within a predetermined time frame. Consultants often provide their own tools unless specified otherwise in the contract.

Employment Contract: On the other hand, an employment contract is a binding agreement that connects an employer with an employee. It encompasses a broader scope of responsibilities and often entails a long-term commitment to the organization. The Employer provides the tools and determines the place and hours of work for the employee.

Under Section 2 of the Employment Act, an “employee” means a person employed for wages or a salary and includes an apprentice and indentured learner. Similarly, the Black’s Law Dictionary 8th Ed at page 564 defines an employee as a person who comes in the service of another (the employer) under an express or implied contract of hire, under which the employer has a right to control the details of work performance.

Under the same section, an “employer” is defined as any person, public body, firm, corporation, or company who or which has entered a contract of service to employ any individual and includes the agent, foreman, manager, or factor of such person, public body, firm, corporation, or company.

  1. Control and Autonomy

Consultancy Contract: One of the distinguishing features of consultancy contracts is the level of autonomy and independence they afford consultants in how they manage their tasks, allocate resources, and execute strategies. They are only accountable for delivering project goals and outcomes. Consultants work without direct supervision from the client organization.

Employment Contract: In contrast, employees are subject to direct control and management of the employer and must work within a structured framework often set out in the company policy and procedures. Employers exercise significant control over the tasks assigned to employees, their work hours, and the overall work environment. In Lolengode Venkatachala Lalsi Mintayan -vs Intex Construction Ltd (2020) eKLR the court held that the greater the direct control of the employee by the employer, the stronger the ground of holding it to be a contract of service. See Simmons -vs- Health Laundry Company (1990) IKB 543 and Okelly -Vs Trust House Forte (1983) eKLR 456. This test is however not conclusive. Halsbury Laws of England vol 1, 26 4th Edition Paragraph 3 states that. “There is no single test for determining whether a person is an employee, the control test can no longer be considered sufficient especially in the case of employment of highly showed individuals and is only one of the particular factors which may assist court or tribunal in deciding the point.”

  1. Integration

Consultancy Contract: Consultants are involved on an external level, based on their unique expertise and their ability to provide specialized insights and solutions. They are not an integral part of an organization’s core business.

Employment Contract: Employees on the other hand are integral components of the employer’s business and are deeply integrated into the organization’s operations. The level of integration is determined by various factors such as roles and responsibilities, reporting structures, and communication within the company.

  1. Remuneration

Consultancy Contract: Consultants’ remuneration is typically tied to the services they provide. Payment structures vary depending on the type of engagement and can include fixed fees, hourly rates, project-based compensation, or a combination of these methods.

Employment Contract: Conversely, employees receive regular salaries or wages based on their designated positions, level of experience, company policy and the terms outlined in their employment contracts.

  1. Taxes

Consultancy Contract: Consultants are responsible for managing their own taxes, insurance, and other business-related expenses. Consultancy fees are often subject to withholding taxes.

Employment Contract: on the other hand, employers handle statutory deductions and benefits such as Pay as You Earn (PAYE), National Social Security Fund (NSSF), National Hospital Insurance Fund (NHIF) contributions, and Housing Levy directly from employees’ salary.

  1. Benefits and Legal Protections

Consultancy Contract: Consultants generally do not receive the comprehensive benefits commonly extended to employees, such as health insurance, retirement plans, or paid time off. They are responsible for securing their own benefits and protections.

Employment Contract: Employees are entitled to a range of benefits, including various forms of leave (such as annual leave, sick leave, maternity leave, paternity leave, pre-adoptive leave etc.), housing or housing allowance, medical coverage, retirement plans, and other perks. Legal protections provided by labor laws, including anti-discrimination measures and workplace safety regulations, further safeguard employees.

The High Court in the case of Peter Adams Ludaava v Bonito Hotels Limited [2022] eKLR in its decision found that the Claimant was an employee and not a consultant held that, “…. The contract through title “Consultancy Agreement” provides for housing, cleaning services and laundry, fuel allowance of kshs. 6000/- per week for use of his car for company business, provision of meals and reasonable allowances for beverages, that as a General Manager the Claimant was entitled to a normal day off every week and a leave of 30 days in every year. Finally, the Contract provided should there be need of termination of the consultancy, either party is entitled to give 3 months’ notice for the termination or payment in lieu of such notice. The contract did not have defined period of service. The requirement of payment in lieu of notice is a statutory requirement under the Employment Act, Section 35; leave is a statutory benefit of employees under Section 28 of the Employment Act.”

  1. Duration and Termination

Consultancy Contract: Consultancy contracts are often specific to projects and have predetermined durations. Once a project concludes, the contract can be renewed, renegotiated, or terminated.

Employment Contract: Employment contracts can either be of indefinite duration or fixed-term contracts. Employers must adhere to specific legal procedures when terminating employees as stated under the Employment Act, 2007.

  1. Chance of Profit/Risk of Loss

Consultancy Contract: Consultants assume responsibility for any profits or losses incurred during the contract, which may be shared with the client based on circumstances. Consultants also take out their own insurance to cater for risks.

Employment Contract: Employers solely bear the responsibility for the financial gains and losses the business experiences.

  1. Where to Seek Remedies Upon Breach

Consultancy Contract: In the case of a breach, parties typically pursue remedies through a civil court, focusing on contract law.

Employment Contract: Parties seek remedies through the employment and labor relations court (ELRC), which specifically deals with employment-related disputes.

3. Tests to determine whether one is an employee or consultant

  1. In the case of Everret Aviation Limited v Kenya Revenue Authority (Through the Commissioner of Domestic Taxes) [2013] eKLR it was held:

There are also various tests to be employed when there is doubt whether a person is an employee. One of those tests is whether the person’s duties are an integral part of the employer’s business. See Beloff vs Preddram Limited [1973] ALL ER 241. The greater the direct control of the employee by the employer, the stronger the ground for holding it to be a contract of service. See Simmons Vs Heath Laudry Company [1910] 1 KB 543, O’ Kelly Vs Trusthouse Forte [1983] 3 ALL ER 456. That test is however not conclusive. The passage cited by the appellant in Halsbury’s Laws of England Vol I 26, 4th edition paragraph 3 is instructive

There is no single test for determining whether a person is an employee, the test that used to be considered sufficient, that is to say the control test, can no longer be considered sufficient, especially in the case of the employment of highly skilled individuals, and is now only one of the particular factors which may assist a court or tribunal in deciding the point. The question whether the person was integrated into the enterprise or remained apart from and independent of it has been suggested as an appropriate test, but is likewise only one of the relevant factors, for the modern approach is to balance all of those factors in deciding on the overall classification of the individual. The factors relevant in a particular case may include, in addition to control and integration: the method of payment; any obligation to work only for that employer, stipulations as to hours; overtime, holidays etc.; arrangements for payment of income tax and national insurance contribution; how the contract may be terminated; whether the individual may delegate work; who provides tools and equipment; and who, ultimately, bears the risk of loss and the chance of profit. In some cases the nature of the work itself may be an important consideration.”

  1. In the case of Kollengode Venkatachala Laksminarayan v Intex Construction Limited [2020] eKLR, the High Court held that:

The fact that the Respondent paid withholding tax as opposed to PAYE alone does not automatically make the Claimant an independent Contractor. Neither does the fact that at Clause 8 of the contract it is provided – “The parties agree that this agreement creates an independent contractor relationship, not an employment relationship. Neither party is, nor shall claim to be, a legal agent, representative, partner or employee of the other, and neither shall have the right or authority to contract in the name of the other, nor shall the right or authority to contract in the name of the other, nor shall it assume or create any obligations, debts, accounts or liabilities for the other. “The contract further provided for the number of hours at Clause 6 as follows – “Timings; 8.30 am to 5. pm Monday to Friday 8.30 am to 1 pm Saturdays Sunday’s holiday. “It provided an office within the Respondent’s premises, provided for payment of accommodation and transport while on official duty and for airtime with a cap of Kshs.5,000 per month. Further, the contract provided for medical cover for the claimant and his wife “as per company policy” and for notice of termination of 2 months. All these are characteristics of an employment contract and not a contract with an independent contractor.

For the foregoing reasons, I find that there was an employment contract between the claimant and the Respondent.

4. Conclusion

In summary, consultancy contracts and employment contracts serve distinct purposes within the professional landscape. Consultants provide specialized expertise and advice on a project basis, enjoying autonomy and flexibility. In contrast, employees contribute to the core operations of the organization, benefiting from stability, comprehensive benefits, and legal protections. The choice between these two contract types hinges on factors such as the nature of work, level of control desired, and the goals of both parties involved. Understanding the differences and tests as outlined in this article empowers individuals and organizations to make informed decisions that suit their unique needs and objectives.

At HRFleek, we are here to offer guidance regarding the suitable type of engagement you can enter according to your specific business needs and assist you in drafting and negotiating precisely tailored contracts.

For any enquiries on this or any other matter do not hesitate to contact us via email through info@hrfleek.com.

Contact Person & Contributor

Faith Khaemba – Associate Advocate

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