Employee vs Independent Contractor: Key Differences Every Kenyan SME Must Know


Updated on July 31, 2025, 4:11 p.m.
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Should you hire a full-time employee or engage an Independent Contractor? This is a common question for small and medium-sized enterprises (SMEs) in Kenya, and the answer is largely dependent on business needs, the nature of the work, and the legal obligations that come with each option. Here is a brief overview of the key legal differences between employees and independent contractors.
Legal Framework
In Kenya, the Employment Act, 2007 is the principal legislation governing labour relations. It defines what constitutes a contract of service (i.e. employment), outlines the rights and responsibilities of both employers and employees, and sets minimum standards for employment terms.
Per the Act, a contract of service is defined as "an agreement, whether oral or in writing, and whether expressed or implied, to employ or to serve as an employee for a period of time". Any engagement that falls within the definition of a contract of service must adhere to the requirements of this Act. On the other hand, independent contractor arrangements are generally governed by the principles of contract law and do not carry the same obligations. They are also known as contracts for services.
Key Differences
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Employment Relationship
An employee is hired under a contract of service. This person typically works on the instruction of and under the control of their employer, and is integrated into the organisation’s structure. Their role is usually ongoing, with structured hours like a nine-to-five and a fixed salary.
Under the provisions of the Employment Act, employees are also be entitled to benefits such as leave, medical insurance, and pension contributions. Employees are entitled to at least one rest day in every period of seven days. For example, if your staff works from Monday to Saturday, by law, they must be given Sunday off as a day of rest. Failure to comply with this condition would be a breach of the employees’ rights and your duties. The Employment Act also stipulates the following minimum leave requirements:
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Annual Leave - 21 days per annum;
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Maternity Leave - 3 months;
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Paternity Leave - 2 weeks;
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Pre-adoptive leave - 1 month;
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Sick Leave - 14 days in each period of twelve consecutive months of employment Specifically, 7 days at full pay, once exhausted 7 days at half pay.
Similarly, an independent contractor, often referred too as a freelancer or consultant, is also engaged under a contract for services. However, they are self-employed individuals who provide specific services, often for a set period or project. Unlike an employee, contractors retain a degree of autonomy over how and when the work is completed, and are usually not entitled to employment benefits such as leave. Get your employment agreement here.
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Taxation and Statutory Deductions
For employees, their employers are legally responsible for deducting and remitting Pay-As-You-Earn (PAYE) tax, National Social Security Fund (NSSF), and Social Health Insurance Fund (SHIF) contributions. This creates administrative obligations and may present additional costs for the employer. Comparatively, independent contractors are responsible for managing their own tax affairs. They are typically paid a gross amount and must file and pay taxes directly to the Kenya Revenue Authority (KRA), often under the income tax regimes applicable to self-employed individuals.
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Termination
One of the most critical distinctions between employees and independent contractors lies in how their engagement ends. Employees are granted statutory protections under the Employment Act, and terminating an employee without following due process may render an employer liable for unfair dismissal. Below is a table of the various kinds of termination and their corresponding legal obligations.
Termination type |
Employee (Contract of Service) |
Independent Contractor (Contract for Services) |
Contract Expiry |
Employer must issue a certificate of service, reimburse unused leave days, and pay outstanding salaries. |
Term ends per agreement. Contractor paid as per milestones or timeline. Employer should include termination clauses in the contract. |
Termination on Notice |
Either party may give notice (or payment in lieu). Employer must state a valid reason for termination and provide notice per contract or law. |
Notice terms should be clearly outlined in the contract. No legal obligation to give reasons unless agreed contractually. |
Summary Dismissal |
Allowed in cases of gross misconduct. Employer must show just cause, conduct a hearing, and issue a notice of dismissal. |
Not typically applicable unless breach of contract. Remedies for breach handled through contract terms or legal action. |
Redundancy |
Requires procedural compliance under the Employment Act. Includes severance pay (15 days’ salary per year worked), notice, and notification to labour office. |
Not applicable. Project or service ends naturally or by agreed contract termination. No severance obligations unless contractually set. |
Constructive Dismissal |
If employee resigns due to a hostile or intolerable environment, it may be treated as a forced termination. Employer may be liable for compensation. |
Not applicable. Contractors can walk away from a toxic client, but claims depend on breach of contract, not statutory employment law. |
Conclusion
While independent contractor arrangements offer flexibility and reduced statutory obligations, they still require well-drafted agreements to avoid disputes and ensure smooth engagements. Unlike employment relationships governed by the Employment Act, contractor agreements are based on contract law, meaning termination terms must be clearly outlined in advance. To protect your business and the contractor, always include clear provisions on termination notice, dispute resolution, and settlement of outstanding dues. For a customisable Consultancy agreement that incorporates these essential provisions, visit here.
How CM SME Club Can Support You
At CM SME Club, we specialise in supporting SMEs in Kenya with employment matters. Contact us at law@cmsmeclub.com to learn more about how we can help.
Contributor: Cherono Barno (cbarno@cmadvocates.com)
Published on July 31, 2025, 3:49 p.m.