Tied-up insurance agents are not employees and therefore not subject to PAYE

Sometime in 2022, the Commissioner of Legal Services and Board Coordination (the Commissioner) at the Kenya Revenue Authority conducted a desktop audit on C.I.C Life Insurance Limited’s (C.I.C) operations for the 2016 to 2020 years of income, and by letter dated 24 February 2022 demanded from C.I.C additional tax of KES 115,736,234 consisting of Pay As You Earn (PAYE), Value Added Tax (VAT) and Withholding Tax (WHT). The parties resolved the issues relating to VAT and WHT but did not resolve the issue of PAYE relating to remuneration to tied up agents.

A tied up agent is an insurance agent who represents and sells policies from one specific insurer. In the present case, the unresolved issue of PAYE revolved around the Commissioner claiming that C.I.C’s tied up agents were employees hence subject to payment of PAYE, and C.I.C refuting the Commissioner’s claim while maintaining the position that its tied up agents were not employees and therefore not subject to PAYE.

C.I.C filed a notice of objection challenging the assessment on the PAYE by a letter dated 22 March 2022. The Commissioner then issued its decision on the objection through a letter dated 8 August 2022 confirming the PAYE tax assessment and proceeded to demand tax of KES 82,968,775. Dissatisfied by the Commissioner’s decision, C.I.C appealed to the Tax Appeals Tribunal (the Tribunal).

The Tribunal allowed C.I.C’s appeal and held that tied up agents are not liable to PAYE and that the PAYE assessment by the Commissioner was not justified.

Proceedings at the High Court

Aggrieved by the decision of the Tribunal, the Commissioner appealed to the High Court, setting out some of the grounds of appeal as that the Tribunal erred in fact and in law: in allowing C.I.C’s appeal; by failing to interrogate the true character of the contract between C.I.C and its insurance agents on the employment status of the contracts as per the Employment Act; in prioritizing the provisions of the Insurance Act as opposed to the Employment Act on the status of the insurance agents who were the subject of PAYE assessment; the Tribunal misdirected itself, misapprehended and misconstrued the legal principles in the case before it and thus arrived at a wrong conclusion; and that the judgment is erroneous and based on wrong principles.

The Commissioner raised the issues for determination as; whether the Tribunal erred in failing to consider that the issue of taxation of employment emoluments is governed and regulated primarily by tax legislation and any definition assigned to the term “employee” must be derived from such legislation; whether the Tribunal erred in holding that C.I.C’s  tied up insurance agents were not employees and therefore not subject to PAYE; and whether the Tribunal erred by failing to consider the legal and factual tests that determine whether the relationship between the C.I.C and its tied up agents is that of employment or that of independent contractor. 

On whether C.I.C’s tied up agents were employees for purposes of taxation, the Commissioner submitted that the relationship between the tied up agents and C.I.C took the nature of an employer-employee relationship as there existed an element of performance of services under certain conditions in return for remuneration in the form of commission income derived from sales, together with benefits stipulated in their contracts of service. The Commissioner referenced the definitions of an "agent" under the Insurance Act and an "employee" under the Employment Act and further submitted that C.I.C’s agents are restricted from conducting any other business with other insurance companies unless they obtain express permission, as evidenced by their contracts of engagement. The Commissioner argued that the benefits enjoyed by the agents, such as pension, mirror those of ordinary employees. The Commissioner also argued the agents were bound by C.I.C’s policies and are subject to its control, despite their contracts describing them as independent contractors. The Commissioner also submitted that the existence of an employer-employee relationship necessitated that the emoluments payable to the agents be subjected to taxation and that the requirements imposed on the agents were those typically applicable to employees. Consequently, the Commissioner argued that the Tribunal erred in holding that the tied-up agents were not employees.

C.I.C made its submissions on two issues: whether the Tribunal erred in failing to interrogate the true character of the contracts and relationship between C.I.C and the tied up agents, and whether the demand of income tax PAYE from C.I.C is warranted in law. 

On the first issue, C.I.C submitted that the tied-up agents were not employees as alleged by the Commissioner and maintained that an analysis of the relevant contracts demonstrates that the parties clearly intended to establish a relationship in which the tied up agents would operate as independent contractors. C.I.C also submitted that the agents were permitted to work flexible hours and were solely responsible for all expenses incurred in the performance of their duties under the contract. C.I.C further submitted that the tied-up agents were remunerated solely through commissions, and even in cases where a retainer was applicable, the retainer was neither guaranteed nor fixed. Hence, remuneration through commissions or a conditional retainer based on performance targets was a clear indicator that the agents were not employees. C.I.C also pointed out that the tied up agents were not entitled to annual leave or any other statutory leave as provided under the Employment Act and argued that the express exclusion of annual and other forms of leave clearly demonstrated the intention of the parties to enter into a contract for services, and not a contract of employment. C.I.C submitted that it did not allocate work to the tied up agents, who were instead required to independently exercise their initiative to source clients and secure business on behalf of C.I.C. C.I.C also submitted that although the tied agents had taken out pension and life insurance policies from C.I.C, there was no restriction or discrimination against such agents obtaining similar cover from C.I.C, and that doing so did not amount to employment.

On the second issue, C.I.C submitted that the demand for PAYE was unlawful, as PAYE was only applicable where an employer-employee relationship existed. C.I.C stated that it had duly withheld and remitted to the Commissioner the WHT payable on the commissions paid to the tied-up agents, and that subjecting the same commissions to PAYE would amount to double taxation on the income of the tied-up agents.

Determination of the High Court

The High Court stated that the main issue for determination was whether the Tribunal arrived at the proper decision in holding that the tied-up insurance agents licensed under the Insurance Act are not subject to PAYE. The High Court established that the definition of an agent under the Insurance Act explicitly excludes agents from being considered employees of the insurer and therefore, agents operating within the insurer’s business cannot, by definition, be employees. The Court stated that for purposes of taxation, the commissions earned by the agents are subject to WHT and not to PAYE, and that any request for PAYE would amount to double taxation. The High Court upheld the Tribunal’s judgment and found that the Employment Act, 2007, governs employment relationships, whereas the Insurance Act explicitly defines agents as individuals who are not salaried employees. Consequently, it held that tied up insurance agents are independent contractors and not subject to PAYE.

Why is this decision important?

The decision is important as it clearly distinguishes between employees and independent contractors. It reaffirms the position of Kenyan jurisprudence that tied up insurance agents are not employees, but are independent contractors. It also clearly establishes that as a result of being independent contractors, tied up insurance agents are only subject to PAYE and hence cannot be doubly taxed by being subjected to WHT, which is payable by employees. 

Commissioner of Legal Services and Board Coordination v C.I.C Life Insurance Limited (Income Tax Appeal E218 of 2023) [2025] KEHC 5197 (KLR) (Commercial and Tax) (25 April 2025) (Judgment)