What Is Severance Pay In Kenya According To The Law? All The Details

Severance pay is a crucial aspect of employment law in Kenya, providing financial protection for employees who have lost their jobs through no fault of their own. The Employment Act of 2007 outlines the legal framework surrounding severance pay, ensuring employers fulfil their employees' obligations. But what is severance pay in Kenya, and how does it apply?

Severance pay in Kenya is a form of compensation provided to employees upon termination of their employment, as mandated by the Employment Act of 2007. The payment is applicable when an employee is terminated due to redundancy, reorganisation, or the liquidation of the employer's business.

What is the law on severance pay in Kenya?

The Employment Act 2007 is Kenya's primary legal document governing severance pay. According to Section 40 of the Act, employees continuously employed for at least 12 months are entitled to severance pay.

This is upon termination of their employment due to redundancy, reorganisation of the employer's business, or liquidation of the employer's business. The entitlement extends to situations where an employer cannot continue operations, leading to job losses.

Severance pay is a financial cushion for employees transitioning to new employment opportunities, helping alleviate the economic impact of job loss. It holds employers accountable, ensuring they provide fair compensation to employees who lose their jobs through no fault.

Eligibility for severance pay

It is important to note that employees dismissed for misconduct or who voluntarily resign are not entitled to severance pay. To qualify for severance pay, an employee must meet the following criteria:

Length of service

The employee must have been employed for a minimum of 12 months.

Reason for termination

Severance pay is typically granted in redundancy, reorganisation, or business closure cases. Employees terminated due to misconduct, such as theft, fraud, or gross insubordination, are not eligible for severance pay.

Additionally, employees who have resigned from their positions are not entitled to severance pay unless the resignation is due to a constructive dismissal, which occurs when the employer has made the work environment intolerable for the employee.

How do you calculate your severance pay?

The calculation of severance pay is explicitly outlined in the Employment Act. The formula is based on the employee's service length and last drawn salary. The law stipulates that an employee is entitled to:

15 days' pay for each completed year of service

Therefore, it means that if an employee has worked for a company for, say, ten years, their severance pay would be calculated as follows:

• Determine the daily wage by dividing the monthly salary by 30.
• Multiply the daily wage by 15 to find the severance pay for one year.
• Multiply this amount by the number of years of service.

For example, if an employee earns KES 60,000 per month and has worked for ten years:

• Daily wage = KES 60,000 / 30 = KES 2,000
• Severance pay for one year = KES 2,000 x 15 = KES 30,000
• Total severance pay = KES 30,000 x 10 = KES 300,000

It is important to note that if the employee's employment contract provided a higher severance pay than the one stipulated in the Act, the employer must pay the higher amount. If the contract provided a lower pay, the employer must pay the amount stipulated in the Act.

Additional considerations

Employers are also mandated to provide a certificate of service upon termination detailing the employee's length of service and the severance pay due. Furthermore, employers must give notice of termination, with the notice period varying from one week to four weeks, based on the employee's length of service.

What is the difference between service pay and severance pay?

In Kenya, service and severance pay are distinct forms of compensation related to employment termination, each governed by specific legal frameworks and conditions.

Severance pay

Severance pay is a legal requirement under the Employment Act 2007, specifically outlined in Section 40. It is payable to employees whose contracts are terminated due to redundancy, which occurs when an employer declares that certain positions are no longer necessary.

The law mandates that severance pay be calculated at a rate of 15 days' basic wages for each completed year of service. The calculation ensures that employees who have served longer receive a more substantial payout, providing them with financial support during their transition to new employment.

Severance pay is a safety net for employees who may find themselves unexpectedly unemployed due to circumstances beyond their control, such as company downsizing or closure. However, employees terminated for misconduct, such as theft or gross insubordination, are not entitled to severance pay.

Additionally, employees who resign voluntarily are ineligible unless the resignation is due to constructive dismissal, where the work environment has become intolerable.

Service pay

Service pay is not explicitly defined in the Employment Act as a mandatory payment. Instead, it is often included in employment contracts, collective bargaining agreements, or internal policies.

It is typically paid to employees upon termination of their contract and is intended as compensation for their service to the employer. Unlike severance pay triggered by redundancy, service pay can be offered at the end of employment for various reasons, including voluntary resignation or retirement.

The key distinction is that service pay is discretionary and not legally mandated unless specified in an employment agreement. Employers are not required to provide service pay if they contribute to a recognised pension scheme, such as the National Social Security Fund (NSSF), which often exempts them from this obligation.

Is severance pay taxable in Kenya?

In Kenya, severance pay is subject to taxation under the Income Tax Act. Like other forms of terminal dues, Severance pay is considered taxable income. That means when an employee receives severance pay upon termination of their employment, the amount is included in their taxable income for the year.

Taxable income

Severance pay is part of the employee's income and, therefore, is liable for Pay As You Earn (PAYE) tax deductions. Employers are responsible for withholding the appropriate tax amount before disbursing the severance payment to the employee.

Calculation of tax

The tax on severance pay is calculated based on the employee's marginal tax rate. That means the severance payment is added to the employee's annual income, and the applicable tax rate is applied accordingly.

The KRA provides guidelines on reporting these payments in monthly payroll returns, ensuring that all taxable final dues are accounted for.

Exemptions

While severance pay is generally taxable, specific exemptions or reliefs may be available depending on the circumstances of the termination and the employee's overall income. However, these exemptions are not commonly applied to severance payments, as they are typically treated as regular income.

Final dues reporting

Employers must report severance pay and other terminal dues in their monthly payroll submissions to the KRA. It includes providing the departing employee with a tax deduction card (Form P9A) detailing all taxable payments made up to the termination date.

Wrapping up

Severance pay is a crucial safeguard for employees in Kenya, providing financial support during a difficult transition period. Employees and employers can ensure their rights and obligations are met by understanding the law surrounding severance pay in Kenya. Employees should familiarise themselves with their rights and be prepared to assert them if necessary.

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