SEVERANCE PAY: WHAT YOU NEED TO KNOW

Introduction

For various reasons, layoffs commonly happen. Downsizing too. Mergers and acquisitions occur and whenever they do, they create overlap problems, and employees are cut. “Must we offer compensation to employees who are terminated involuntarily?” That is a question that employers frequently ask.

Kenya’s Employment Act recognizes that such situations, which lead to what in legal parlance is termed redundancy, do arise. For that reason the law seeks to cushion affected employees from the immediate loss of income. The Act does so by providing for severance pay – an amount of money to be paid to an employee whose employment has been terminated following a redundancy exercise. In this brief article, we share our thoughts about severance pay under Kenyan law.

Option or Obligation?

Under Section 40 of the Act, an employer can only terminate a contract of service on account of redundancy after having paid to the affected employee declared redundant severance pay.  

It is thus not for the employer to choose whether or not to pay severance pay; each employee declared redundant is entitled to severance pay as a matter of right.This position has been affirmed in our Courts, which have demonstrated that they frown upon employers who use their bargaining power to shortchange employees during redundancies. Simply put: the employee does not have to demand severance pay from the employer; the obligation is on the employer to pay the employee at the rate set under the Employment Act or the contract of employment.

Computation of Severance Pay

Under the Act an employee who has been declared redundant should be paid fifteen (15) days’ worth of pay for every complete year of service. To compute the severance pay due, courts divide the employee’s monthly pay by thirty (30) days to get the pay for per day. The pay per day is then multiplied first by fifteen days and finally by the total number years of service.

If, however, the contract of employment provided for higher severance pay than the one under the Act, the employer must pay that higher amount. If the contract did not provide for such pay at all or provided for a lower one, the employer must pay at the rate stipulated under the Act.

So, should the rate under the Act be applied on gross salary (i.e. basic salary and allowances) or on basic salary? Kenyan courts have been confronted with this question and have determined that it is the latter. Allowances are therefore not factored in. Where an employee has been receiving varying amounts as monthly pay during his term of employment, the amount paid as the last monthly salary is the one to be used in calculating severance pay.

Illustration

Mr. Chapa Kazi was employed as an office messenger with a basic salary of Kshs. 25,000/= per month and worked for eight years without a variation in his basic salary.  The total severance payable to him in the event of redundancy shall be as follows (15/30 x 25,000) x 8 = 100,000.

Conclusion

In sum: severance pay is not optional; it is an obligation which every employer must fulfill if they declare a redundancy. The rate to apply is fifteen days’ pay for every complete year of service unless a higher pay is provided under the contract of employment. The basic salary is the one used to calculate the pay and allowances are not included. Anything short of these may lead to legal action by the employee resulting in additional costs for the employer.

Article by CG Mbugua & Makau Kithuka

Disclaimer

This article is intended for general knowledge only. For substantive legal advice on this, please contact the authors through cgmbugua@lexgroupafrica.com or pmakau@lexgroupafrica.com

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