Is a Director an Employee? Office vs Employment in Kenya

A director holds an office. An employee holds a job under a contract. In Kenya the two are often confused, and the confusion costs companies money when a director is removed, when payroll deductions are missed, or when a regulator asks whether a board member is truly independent. This article explains how Kenyan law separates the office of director from employment, and what to put in writing so the position is clear.

A director is an office-holder first

The Companies Act, 2015 governs how a person becomes and stops being a director. Nothing in it turns a director into an employee. The Employment Act, 2007 asks a different question. An “employee” is a person employed for wages or a salary, and a “contract of service” is an agreement, oral or written, express or implied, to employ or to serve as an employee for a period of time (section 2).

So the test is whether there is an agreement under which the person serves as an employee for wages or a salary. Being appointed to the board, and receiving fees approved by the company for sitting on it, does not by that fact alone create a contract of service. In practice the label on the document does not settle the matter. The terms do: a fixed salary, set hours, benefits and leave point towards employment, while fees for board attendance point towards office-holding.

When a director is also an employee

Many executive directors wear two hats. A managing director has a seat on the board and a contract of service as the senior executive of the company. These are two legal relationships that happen to sit in the same person.

The Companies Act has its own concept that overlaps with this. A “director’s service contract” under section 190 is any contract under which a director undertakes personally to perform services, as director or otherwise, for the company. The provisions on directors’ service contracts also apply to the terms of a person’s appointment as a director, not only to work outside the ordinary duties of a director. A non-executive director’s letter of appointment is therefore a director’s service contract for Companies Act purposes, even though it is not necessarily a contract of service for Employment Act purposes. Keep those two ideas apart when you draft.

What follows if the director is an employee

Once there is a contract of service, the Employment Act applies in full. Section 3(6) provides that the terms in the Act are minimum terms and conditions of employment, and that any agreement to relinquish, vary or amend them is null and void. A company cannot avoid notice, leave, statutory deductions or termination procedure by describing the arrangement differently or by asking the director to waive them.

The company also takes on the payroll side: PAYE, and the statutory contributions that attach to employment. Those obligations come from other statutes and should be confirmed with a tax adviser for the particular arrangement.

Removal from the board does not end the job

Section 139 of the Companies Act allows a company to remove a director by ordinary resolution at a meeting, before the end of the director’s period of office, despite anything to the contrary in any agreement between the company and the director. Special notice is required for the resolution. A contract cannot buy a director a guaranteed seat.

That power removes the board seat. It does not by itself terminate a separate contract of service. If the director is also an employee, the company must still end the employment lawfully, with the notice and process the Employment Act and the contract require. Boards that treat removal as the end of everything often find that the employment claim follows.

Long guaranteed terms need members’ approval

Section 157 of the Companies Act deals with long-term service contracts. Where a contract guarantees a person’s employment as a director for a period that exceeds, or could exceed, two years, the company may not enter into it unless the members have approved it by resolution. Check any fixed-term executive contract against this before signing.

Which structure fits

There are three workable structures, and the right one depends on the role.

• Letter of appointment only. Suited to a non-executive director who attends the board, sits on committees and is paid fees. Keep it to board duties, fees, expenses, confidentiality, conflicts and exit.
• Employment contract plus appointment. Suited to an executive director. The employment contract carries salary, leave and notice. The appointment carries the board role. State that removal as director does not terminate employment, and say what happens to the board seat if the employment ends.
• Services agreement. Suited where the person genuinely runs an independent practice and is engaged to provide director services. This carries reclassification risk if the facts look like employment, so the working arrangements must match the paper.

Whichever is chosen, say in the document which relationship it creates, who approves remuneration under the company’s Articles, and how either side exits. For regulated businesses, the structure can also affect independence. Our article on resident, nominee and work permit directors covers staffing a board, and our guide to a director’s legal duties sets out what any director owes the company.

Frequently asked questions

This article is general information on Kenyan law as at its publication date, not legal advice. Reading it does not create an advocate and client relationship.