Tuesday, 18 December 2018 05:29

Consultancy Agreement vis-à-vis Employment Relationships under Ethiopian Law

In the realm of service exchange, there are different forms of engaging a service provider for the undertaking of a particular work. Hiring a consultant and employing a worker are the commonest ones. Under Ethiopian law, a Consultant (referred to as contract of work and labour) is defined as ‘a person who performs an act or provides a service at her own business or professional responsibility for a consideration’. This means that the Consultant carries out the services, under minimal or no control from the hirer, to produce a given result. On the other hand, an employment relationship is deemed to be formed ‘when an employee directly or indirectly, agrees to perform work, of a physical or intellectual nature, for and under the authority of an employer in return for wage’. Control and direction from the employer side are one of the defining elements of an employment relationship.  

Adding up on the different defining elements that make up each relationship, the applicable rules which regulate them are also different. Employment relations are governed by the Labour Proclamation No. 377/2003 (as amended) and the Ethiopian Civil Code under a Chapter on ‘Contract of Employment’ within Title XVI (Contracts for the Performance of Services). It is important to note that the former attempts to strictly regulate the working conditions of non-managerial employees by stipulating minimum standards. On the other hand, independent consultants are subjected to Title XVI of the Civil Code Chaptered ‘Contract of Work and Labor’ with most of the contractual terms being left to party autonomy. These distinctions, of the two engagements, in nature and framework give rise to unparalleled legal consequences some of which are described below.      

The first one is the requirement of licensing for the provision of services. As opposed to an employee, a consultant is expected to undertake the service at her own business/professional responsibility, and this fact presupposes the existence of an authorizing license to provide the said services. This assertion is also supported by the Commercial Registration and Licensing Proclamation No. 980/2016. This Proclamation states ‘any supply of service for commercial purposes, apart from those done in exchange for salary or wage, is to be done only upon obtaining a valid license’. In contrast, if the service is to be provided by an employee, generally, the employee need not have a practicing license.

The second related difference is the manner of transferring the tax due on the income obtained in exchange for undertaking the agreed upon work and the corresponding obligation of the service provider, under Income Proclamation No. 979/2016. In an employment relationship, the employer has the obligation to withhold income tax payable on the monthly wage. The employee will receive a sum due after employment income tax and other statutory deductions are made. Hence, generally speaking, the worker has no obligation to file a tax return on the employment income.

Whereas, for a licensed consultant (for a service agreement with a contract price of more than 3,000 ETB), the client or the hirer will have to first withhold 2% (non-final tax) of the agreed upon price at the time of payment and the consultant is then required to declare the final income tax. The Proclamation further states that ‘where the supplier fails to provide its Tax Identification Number (TIN) at the time of payment, the client has to withhold 30% of the contract price.’ This TIN requirement, however, would make sense if it is to be understood as ‘practicing license’ as anyone can get TIN, and hence, in the absence of license, the client should withhold 30% of the price. It is to be noted that license plays an important role here. As the Ethiopian tax collection system exists at present, in the absence of a registered practicing license from government authorities, there is no way for unlicensed consultants to pay the final tax on their income.

On the ground, not a few people, who have no authorization to provide consultancy services, avail themselves to work as consultants. This unlicensed engagement is a clear violation of the Commercial Registration Proclamation. It may also amount to tax evasion because, without a license, the consultant will not pay the final tax on the income earned besides the 2% withheld by the hirer, unless the later withheld 30%. Organizations and businesses are normally recommended not to engage a consultant who does not have a license.

Third notable implication of their different nature is the manner of terminating the contractual engagement. In case of a consultancy agreement, the Civil Code allows the client/hirer to unilaterally terminate the contract at any time. However, the consultant would be entitled to the contract price agreed between the parties, to compensate her for any loss she may sustain in consequence of the termination, less any expense saved due to the termination or any consideration she have gained by engaging her service elsewhere. In contrast, terminating an employment is more or less seriously regulated. For labour relationships, the law provides for instances where an employer may lawfully end an employment both by notice and through summary dismissal. In the event of unlawful termination, i.e. any violation of these provisions, the employer would be required to either reinstate the employee or pay compensation, up to six months wage of the employee. In addition, there would be severance and other payments as the case may be. Similarly, to terminate a managerial employee, the employer needs to have a good cause. Otherwise, the employer would be required to pay compensation which would be fixed by giving regard to the circumstance of the case.          

Despite the above discussed differences in characteristics and legal implications, it is not always easy to squarely identify whether a certain engagement is one of a client-consultant agreement or an employer-employee relationship. It is, however, recommended to thoroughly understand the varying natures of these relationships, and assess the merits of each against the situation at hand to arrive at the suitable choice for a particular instance.  

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