Early startups hire contractors for good reasons, since the arrangement is flexible and there is no need to set up payroll for a short project. The difficulty comes when the arrangement changes over time without anyone revisiting it. I regularly see a designer engaged for a three‑month project who is still with the company two years later, keeping fixed hours and reporting to a manager in the same way as everyone else, so that the contract still describes a contractor while the working relationship looks much more like employment.
What decides the question is how the relationship actually works, whatever the contract calls it. The company should therefore look at the position today and at how it developed, and if the person is in reality an employee, it needs to correct the arrangement and deal with anything it owes for the earlier period.
Look at how the person actually works
The main questions are about control and independence. If the company decides how and when the work is done, and the person has no other clients and carries no business risk of their own, the relationship looks like employment. Someone who delivers a defined result through their own business is in a different position from someone who works inside the team under daily direction.
Many contracts say the contractor may send a substitute to do the work, and it is worth checking whether that is real. If the company would never accept anyone else doing the work, the clause carries very little weight.
Equipment and the way payment is made also count, as does the length of the arrangement. A contractor who uses their own laptop and invoices for each project looks independent, while someone on a monthly retainer, using a company laptop and email address, with no end date, looks much more like a member of staff. The company should keep the contract and evidence of how the work is actually done, because both will matter if the classification is ever challenged.
Which employment protections apply
Nigeria's Labour Act protects "workers", and that definition excludes people in administrative, executive, technical or professional roles. Many startup employees therefore fall outside the Act, but that does not leave them without rights, because their employment contract governs the relationship and the pension and employee compensation laws apply whatever the role. The National Minimum Wage Act 2024 also set the national minimum wage at ₦70,000 a month.
An employment contract should cover the role, pay, probation, notice and leave. For workers covered by the Labour Act, the employer must provide written particulars of employment within three months of the start date, and I advise companies to do the same for everyone. Any later change to duties or pay should also be recorded in writing.
The contract should also deal with working hours and location, as well as leave and remote work. Any exclusivity or restriction on outside work needs a genuine business reason and a reasonable scope if the company wants to be able to enforce it.
Payroll and statutory obligations
Employees bring payroll duties with them. The employer deducts PAYE under the tax laws in force since January 2026 and pays it to the tax authority of the state where the employee lives, and under the new rules the first ₦800,000 of annual income is taxed at 0% while the top rate is 25%. Employers with three or more employees must operate a pension scheme under the Pension Reform Act, with contributions of at least 10% from the employer and 8% from the employee. The Employee Compensation Act requires a contribution of 1% of payroll to the NSITF, and the ITF levy and National Housing Fund contributions apply where their thresholds are met.
Contractors are paid differently. The company usually deducts withholding tax from their invoices, and the contractor deals with their own tax, so finance should treat each person according to the legal position, whatever label the HR system uses.
For someone working from another country, the company should take local advice. That country may require the company to register as an employer or to use a local employer of record, and its mandatory employment protections will usually apply whatever the Nigerian contract says.
Protect the work under either arrangement
Whether the person is an employee or a contractor, the company needs confidentiality terms and a written assignment of the intellectual property the person creates. Contractors in particular usually keep the copyright in their work unless they sign it over, and anything they bring with them from earlier work should be listed and licensed if the company uses it. I explain the documents involved in making sure the company has the rights to its software.
If a contractor uses their own assistants or subcontractors, the rights have to pass from each of those people to the contractor and then on to the company, so the company should ask to see the paperwork.
Access to company systems should match the person's role, and the rules for using those systems should be explained. When the work ends, business records should be collected and a handover arranged, with personal information dealt with properly.
Correct a relationship that has changed
If the review shows that the person is really an employee, the company should move them onto an employment contract with an accurate start date and clear terms going forward. It then needs to look back at the earlier period, since there may be unpaid pension contributions, PAYE that was never deducted, leave entitlements or other amounts owed, and each of these needs to be dealt with properly.
The documents should not be rewritten to suggest a different history. If the person disputes their classification or the terms offered, the company should keep its records and follow a fair process, continue to pay whatever is clearly owed while the disagreement is resolved, and take advice on any settlement and the claims it is intended to cover.
If the company uses an employer of record, the agreement should say who employs the person and who pays them, as well as who handles claims and what happens when the arrangement ends. It also needs to pass the intellectual property rights to the startup, and the company should remember that if its own managers direct the person's daily work, that forms part of the picture as well.
End the relationship the right way
Notice and final payments depend on the contract and the law, and redundancy procedures apply where relevant. The company should work out the figures and explain the process to the person, and plan the handover and the removal of system access around that process.
If the person holds options, the company should check the grant and the plan for the date vesting stops and the deadline for exercise. I explain the decision the person faces when they leave in what your employee option grant means.
The final calculations and the handover record should be kept on file. It would also be sensible, at the same time, to review other long‑running contractor roles against the same tests and to give someone responsibility for correcting any that need it.
This article is general information and not legal advice. For guidance on your specific circumstances, speak with us directly.