In an increasingly global and environment, many companies are exploring how best to engage workers across borders. For foreign companies looking to employ Kenyan residents, the legal and regulatory framework may seem both complex and far fetched. This article explores whether foreign entities can directly employ Kenyan residents, the legal compliance requirements of such arrangements, and the legal risks associated with bypassing local registration of the foreign entity.

Can Foreign Entities Employ Kenyan Residents?

Yes, but with qualifications. The Employment Act (Cap. 226) Laws of Kenya (the Employment Act) does not expressly require an employer to be a Kenyan-registered entity. Any person or company that enters a contract of service with person in Kenya qualifies as an employer under the law, regardless of where they are based or registered. This means a foreign company may legally employ a Kenyan resident, even without a physical presence such as a branch office, or subsidiary in the country. However, such employers must comply with all Kenyan laws on employment and labour, tax, social security and other regulatory obligations.

The Hidden Compliance Burden

While Kenyan law does not preclude a foreign entity from employing persons who are resident in Kenya, there are several obligations bestowed upon an employer under Kenyan law. These include: Remitting Pay-As-You-Earn (PAYE) taxes and other statutory deductions to the Kenya Revenue Authority (KRA).

• Contributing to the National Social Security Fund (NSSF) as required under the National Social Security Fund Act, Cap. 258.
• Contributing to the Social Health Insurance Fund (SHIF) as required under the Social Health Insurance Act, Act No. 16 of 2023 and the Social Health Insurance Regulations.
• Remitting the Affordable Housing Levy (Housing Levy), and matching employee contributions at one point five percent (1.5%) of gross salary as provided under the Affordable Housing Act, 2024.
• Ensuring the employment contracts are compliant with the Employment Act.
• Meeting obligations under the Industrial Training Act (Cap. 237) Laws of Kenya, including registering as a training levy payer and submitting contributions.

Without a local legal presence, most foreign companies face substantial logistical barriers to fulfilling these legal obligations, particularly where local presence is a prerequisite of registration with KRA and other regulatory bodies to enable the remittance of tax and other statutory deductions. It should be noted that, even inadvertent failures to comply can result in penalties, reputational damage, or potential employee disputes. For this reason, proper structuring and access to reliable local support are essential when employing individuals based in Kenya.

The Role of an Employer on Record

To bridge this gap, many foreign companies who do not wish to have a local presence in Kenya often opt to appoint a local Employer on Record (EOR). An EOR is a third-party company that acts as the legal employer for a company’s workforce in a specific location or country. An EOR arrangement can take the following two (2)models:

• Agent Model – The employment contract is between the foreign company and the employee, but the EOR manages compliance on behalf of the employer.
• Legal Employer Model – The EOR becomes the formal employer on record, contracting directly with the employee and managing all legal responsibilities.

A foreign entity can enter into a services agreement with an EOR, under which the EOR assists with employer obligations such as payroll processing, tax remittances (PAYE), statutory contributions (NSSF, SHIF, Housing Levy), and overall employment law compliance. However, the foreign entity remains the legal employer, with the EOR acting solely as an agent rather than assuming full employer responsibilities.

It is important to note that even if a foreign entity decides to have an EOR arrangement, the employer obligations will still apply to the former as they will be deemed to be the employer. In the case of Samuel Wambugu Ndirangu vs 2NK Sacco Society Limited [2019] eKLR, the Court had this to say in regard to the ingredients that are necessary to determine the existence of an employer-employee relationship:

“A review of the elements above reveals that in order for a positive determination of the existence of the employer-employee relationship there must be the selection and engagement of the employee (the hire after either a restricted or open interview process), proof of payment of wages, the power of dismissal and finally, the power to control the employee’s conduct (this is what gives the test the nom de guerre – control test).”

Further, the Court in the case of Christine Adot Lopeyio vs Wycliffe Mwathi Pere [2013] eKLR, spelt out various tests to determine the nature of an employer-employee relationship in a contract of service as follows:

“In most cited authorities in this regard from various jurisdictions, several tests have been applied to distinguish between what comprise ‘employment’ as against what constitutes ‘service’ in case of contracts of service as contrasted with contracts for service. They include the following:

1. The control test whereby a servant is a person who is subject to the command of the master as to the manner in which he or she shall do the work.
2. The integration test in which the worker is subjected to the rules and procedures of the employer rather than personal command. The employee is part of the business and his or her work is primarily part of the business.
3. The test of economic or business reality which takes into account whether the worker is in business on his or her own account, as an entrepreneur, or works for another person, the employer, who takes the ultimate risk of loss or chance of profit.
4. Mutuality of obligation in which the parties make commitments to maintain the employment relationship over a period of time. That a contract of service entails service in return for wages, and, secondly, mutual promises for future performance. The arrangement creates a sense of stability between the parties. The challenge is that where there is absence of mutual promises for stable future performance, the worker thereby ceases to be classified as an employee as may be the case for casual workers.”

It is therefore evident the determination of the existence of an employer- employee relationship is primarily guided by the manner in which the work is performed and the remuneration of the employee, and not necessarily the EOR. In this regard, the employer would still be held responsible for the employer obligations if the EOR fails to comply with such obligations.

The Risk of Creating a Permanent Establishment

In addition to employment compliance, engaging an EOR may have broader implications. When foreign companies engage Kenyan residents to provide services locally, particularly over extended periods, they risk inadvertently creating a permanent establishment (PE) in Kenya.

The definition of a PE has largely been borrowed from the Organization for Economic Co-operation and Development (OECD) guidelines. Kenyan law sets out broad parameters for determining a PE. For instance, a fixed place of business in Kenya through which business is wholly or partly carried out, including a place of management, a branch, an office, a factory, a workshop, or a place of extraction of natural resources for a period of six (6) months or more, would constitute a PE. In addition, the provision of services, including consultancy services, by a person through employees or other personnel engaged for that purpose, for a period exceeding the aggregate of ninety-one (91) days in any twelve-month period, or the presence of a dependent agent who acts on behalf of the non-resident person in respect of that person’s activities in Kenya, would constitute a PE.

Where a non-resident person is deemed to have created a PE in Kenya, the non-resident person would be considered to have created a taxable presence in Kenya and would therefore be subject to tax on the proportionate income that will be accrued in or derived from the business activities carried on in Kenya. Such tax implications would include payment of corporate income tax for the income derived or accrued in Kenya. A PE may also give rise to transfer pricing implications.

Mitigating Risk

To mitigate the risk of creating a PE in Kenya, foreign entities may consider establishing a Kenyan presence for employment purposes. It may do so by:

• Registering a subsidiary in Kenya – incorporating a wholly owned Kenyan company to directly employ individuals and comply with all statutory obligations locally.
• Registering a branch in Kenya – registering as a foreign company under the Kenyan Companies Act, which can hire employees and comply with local employment regulations.

Notably, a subsidiary or a branch will be required to comply with all the applicable Kenyan laws relating to the operation of its activities in Kenya, including corporate governance, regulatory and tax laws.

Final Word

While foreign entities can employ individuals residing in Kenya without the necessity of registering a Kenyan entity, the operational hurdles, from registration as a taxpayer to enable remittance of PAYE and other statutory deductions to compliance which other obligations of an employer under Kenyan law require careful navigation. Failure to comply could result in penalties, labour disputes, or unintended tax liabilities. For most foreign companies seeking to engage Kenyan residents, having an EOR arrangement or in the alternative establishing a Kenyan presence for employment purposes may be necessary. In either case, seeking legal and tax advice is necessary to avoid any unintended legal consequences.