Labour outsourcing in Kenya has undergone a significant transformation over the last two decades. Traditional employer-employee relationships, where organisations directly recruited, managed, and retained their workforce, are increasingly being complemented by more flexible labour models designed to meet changing business, regulatory, and economic realities. As organisations strive to remain competitive while managing compliance obligations and operational efficiency, alternative workforce arrangements have become an integral part of modern business.

The rise of the gig economy, remote working, the COVID-19 pandemic, increased compliance scrutiny, the ever-increasing cost of labour, and a workforce that is more aware of its rights are some of the factors that accelerated this shift. At the same time, many firms struggled to keep pace with the speed at which these changes were happening.

How Labour Outsourcing in Kenya Evolved

These pressures led some organisations to move away from directly employing individuals and to seek assistance from specialist providers. Non-core operations such as cleaning and guarding were the first to be outsourced. Over time, this extended to core services like packaging, tellers, cabin crew, and customer care.

In service outsourcing, the client has no control over how the work is done, only that it gets done. In a cleaning contract, for example, the contracting company does not determine who does the work or what they are paid. The outsourcing firm retains full HR and operational control.

Labour outsourcing in Kenya developed differently. Here, organisations wanted to retain control of their operations and have input into HR decisions, but needed someone else to handle the compliance, recruitment, and HR administration of their workforce. For a long time, particularly organisations with large numbers of entry-level workers were not fully compliant with statutory requirements. Increased scrutiny from bodies such as the NSSF, labour unions, and the Ministry of Labour changed that. Organisations needed help to comply, and that is where Third-Party Labour Suppliers came in.

Labour outsourcing in Kenya is not about giving up control. It is about managing compliance without losing operational focus.

The Role of Third-Party Labour Suppliers and Employer of Record

Third-Party Labour Suppliers, commonly referred to as 3-PLs, provide headcount to client organisations while having minimal control over day-to-day operations at the client’s workplace. The client dictates the pay package. The 3-PL’s role is to administer it.

Organisations setting up in Kenya also use this model while establishing their local presence. A firm that sends one person to start local operations does not need a full HR department behind that individual. Reaching out to a 3-PL is the practical solution.

In this arrangement, Third-Party Labour Suppliers function as the Employer of Record. They assist clients with compliance and risk management under local law, but have no operational control over the individuals placed with the client.

The VAT Problem That Labour Outsourcing in Kenya Created

This evolution in labour outsourcing in Kenya also exposed gaps in legislation and tax administration. Different labour engagement models were often treated the same way by regulators, despite serving fundamentally different purposes. This created significant uncertainty for businesses, the Kenya Revenue Authority, and tax authorities.

The core issue was how invoices from 3-PLs were treated for VAT purposes. Amounts such as salaries, NSSF contributions, and NITA levies were classified as income rather than being separated from the management fees charged by the 3-PL. This meant that the entire amount billed to the client attracted VAT, not just the management fee portion.

Staff outsourcing firms took the position, correctly in our view, that these salary-related amounts are reimbursable expenses and not income in the traditional sense of an employer-employee relationship as defined in the Employment Act 2007. The 3-PL is administering the wishes of the ultimate employer. The only amount that should be treated as income, and therefore attract VAT, is the management or administration fee.

This disagreement put labour outsourcing firms at loggerheads with the Kenya Revenue Authority for years, with cases going through the courts and the Tax Appeal Tribunal.

The question was never whether 3-PLs were providing a service. It was whether salary disbursements on behalf of a client constitute income to the 3-PL. They do not.

What the Finance Act 2026 Means for Labour Outsourcing in Kenya

The Finance Act 2026 represents a significant step forward. After years of operating in a grey area, the amendments introduced through this Act recognise the unique nature of Third-Party Labour Suppliers and employer of record providers, and clarify the tax treatment applicable to their operations.

Specifically, the Act allows items that form part of payroll, including salaries, NSSF, NITA, SHIF contributions, and any other payments made on behalf of clients, to be treated as disbursements rather than as income of the 3-PL. This is a significant relief for labour outsourcing firms operating in Kenya.

The Act recognises that staff outsourcing is a distinct industry with its own treatment of outsourced labour and salary payments for tax purposes. It clarifies how VAT applies to outsourcing contracts and reinforces the position that the Tax Appeal Tribunal had been ruling on, even where those rulings were overturned by the High Court.

There are two important qualifications to note. First, the Act cannot be applied retrospectively. Firms currently in dispute with the KRA over prior periods will still need to go through the full judicial process. Second, service contracts, as distinct from labour outsourcing contracts, will continue to attract VAT on the entire invoice. The contracts must be explicit about the nature of salary payments to remove any ambiguity.

The Finance Act 2026 does not change everything overnight. But it gives labour outsourcing in Kenya the legislative clarity it has needed for years.

 

This Is the Right Time to Have the Conversation

The clarity provided by the Finance Act 2026 is an important development for any organisation currently using, or considering, third-party labour support in Kenya. If you have been operating without a compliant labour outsourcing arrangement, or if you are establishing a presence in Kenya and need employer of record support, now is a good time to get that structure right.

I am happy to talk through what this means for your specific situation, whether you are a local firm navigating compliance or an international business entering the Kenyan market for the first time.

Reach out directly or contact the Dananda Global Talent team in Kenya. We would be glad to hear from you.

 

Antony Lunalo

General Manager, Kenya

antony.lunalo@dananda.net  |  africa@dananda.net

 

Is your organisation’s labour outsourcing arrangement in Kenya structured to take full advantage of the clarity the Finance Act 2026 now provides?