Employment Of Casual Workers In Kenya: Risks And Tax Exposures

INTRODUCTION

Casual employment plays a crucial role in Kenya’s labour market, providing businesses with a flexible workforce while offering job opportunities to many workers. However, hiring casual workers comes with various risks and legal implications, particularly concerning tax compliance and labour rights, especially when engagements extend beyond the legally defined limits. A recent case, Okello &4 others v University of Nairobi (Civil Appeal E185 of 2022), highlights the dangers of misclassifying casual workers. This article explores the nature of casual employment in Kenya, the associated exposures, and the potential tax obligations for employers.

Definition of Casual Employment

According to the Employment Act 2007, a casual worker is a person whose terms of engagement provide for their payment at the end of each day and who is not engaged for a longer period than twenty four hours at a time.

However, if a casual worker works continuously for not less than one month, or performs tasks expected to last three months or more, then their contract automatically converts to a term contract, entitling them to statutory benefits like leave, notice pay, and termination protections.

Case Study: Legal Risks of Misclassifying Casual Workers

A major risk is misclassifying casual workers when they should be considered term employees. This issue was central in Okello &4 others v University of Nairobi, where the claimants had worked between 1 and 12 years but were still classified as casual workers. Their employment was terminated leading them to file a claim.

The court found that the workers had exceeded the statutory casual employment period and should have been recognized as term employees. Further, the court found that their termination was unfair and unlawful as no valid reasons were issued and they were not given the requisite notice. They were thus awarded compensation for unlawful and unfair termination as well as payment in lieu of notice.

Impact of Employment Conversion from Casual to Term Contracts

As highlighted in Okello &4 others v University of Nairobi, the conversion of casual employment to term employment has significant legal and financial consequences for employers as discussed below:

1. Legal Implications

a) Termination-The contract can no longer be terminated at the close of any day without notice. Employers must provide a valid reason for the termination and such termination must follow due process, ensuring it is both procedurally and substantively fair. Procedural fairness requires that the employee is given prior notice, a chance to be heard, and a reason for the termination. Substantive fairness on the other hand means the employer must have a genuine and justifiable reason for such termination.

b) Statutory benefits: Once casual employment converts to term employment, the employee becomes entitled to mandatory statutory benefits, which employers must comply with which include leave entitlements, severance pay in cases of redundancy, issuance of a pay statement showing deductions such as PAYE, SHIF, NHIF and Housing Levy. Employers must comply with laws governing leave entitlements, severance pay, issuance of a statement of pay and workplace protections.

2. Financial Consequences

The conversion of casual workers to term employees can result in significant financial obligations, including:

a) Unpaid statutory benefits-Employers may be liable for backdated statutory benefits, which were previously not provided. They may include accrued leave pay, house allowance, gratuity etc.

b) Severance and redundancy costs-If a business seeks to reduce its workforce after casual workers have been converted to term employees, it must comply with the law on redundancy, including notice and severance pay.

c) Tax compliance costs- Under Section 37 of the Income Tax Act, employers are required to deduct tax from their employees' pay. If an employer fails to do so, the KRA can impose a penalty. The penalty is either 25% of the unpaid tax amount or 10,000 shillings, whichever is higher. Although PAYE should have been deducted directly from the employee's salary, the employer will be responsible for paying the tax if it was not deducted as required.

This was confirmed by the court in in Co-operazione Internazionale vs Commissioner of Domestic Taxes where the court held that it is the responsibility of the employer to ensure that all deductions, statutory or otherwise, are made without undue delay and submitted to the relevant bodies or authorities. The Tribunal quoted Bernard & Shaw Ltd v Shaw (Rubin Third Party) [1951] 2 All E.R 267 K.B.D, which held as follows:

"In respect of the collection of tax a statutory duty is, therefore, imposed on the employer, and if it fails to deduct tax, it is in breach of that duty and is liable to pay the tax to the revenue authorities whether it has deducted it or not."

Conclusion

The Okello case serves as a warning to employers about the risks of prolonged casual employment. It reinforces the importance of reviewing employment contracts regularly to ensure compliance with the provisions of the Employment Act, limiting casual work period to prevent automatic conversion and ensuring statutory deductions such as PAYE, NSSF, SHIF and Housing Levy, are properly deducted and remitted to avoid tax liabilities. Additionally, it highlights the need for employers to adopt fair termination procedures to avoid wrongful dismissal claims and potential legal consequences.

How we can help

The Employment and Labour Solutions Unit at CM Advocates LLP specializes in offering strategic guidance on a wide range of employment and labour related matters across diverse industries. Our expertise ensures businesses develop clear and fair policies that foster productivity, maintain compliance, and protect both employer and employee rights. Our services extend from legal and tax advisory and compliance services, drafting and review of employment contracts, dispute resolution to facilitating specialized training and workshops

For any clarifications regarding the foregoing or any other offering please contact the contributors: Emily Gitau on egitau@cmadvocates.com or Tabitha Muchiri on tmuchiri@cmadvocates.com.