Should employers make statutory deductions like affordable housing levy, Social Health Insurance Fund (SHIF) and PAYE from court awards for terminal dues? Picture a scenario that has become all too familiar: an employee is awarded compensation for unfair termination by the Employment and Labour Relations Court.
Keen to comply with the law, the employer deducts PAYE, NSSF, SHIF contribution and the Affordable Housing Levy, remits those sums to the relevant statutory bodies, and pays the balance to the former employee.
It is then promptly hauled back to court for further recovery on the claim that the decree has been underpaid. Had it paid the award without statutory deductions, the taxman would certainly have come calling, armed with penalties and interest.
For the better part of a decade, the law appeared settled. On the face of it, Section 49(2) of the Employment Act contemplates that remedies for unfair termination are subject to all applicable statutory deductions. Sections 3 and 5(2) of the Income Tax Act go further by classifying any amount received as compensation for the termination of a contract of employment as gains or profits from employment, taxable whether the contract itself provided for such payment, or not.
The Court of Appeal appeared to place the matter beyond controversy in Directline Assurance Co. Ltd v Jeremiah Wachira Ichaura [2016] KECA 118 (KLR), holding that it is trite law that lump-sum terminal dues are subject to statutory deductions and that damages fall to be computed on net, rather than gross, salary.
The Employment Court itself embraced that position in a long and consistent line of authorities from William Kilonzi v Bamburi Cement Limited [2016] KEELRC 690 (KLR), through Ndungu v Safaricom PLC [2025] KEELRC 2234 (KLR), to Njuguna v Sybrin Kenya [2026] KEELRC 92 (KLR), where the court reaffirmed an employer’s obligation under Section 37 of the Income Tax Act to deduct the appropriate tax from any lump-sum payment before releasing the balance. Employers, advocates and the revenue authorities alike arranged their affairs on that understanding.
Then came the rupture: in Stubbs v Fourt Generation Capital Limited [2025] KEELRC 3305 (KLR), the Employment Court held that although PAYE was properly deductible from an unfair termination award, contributions to the SHIF, the Affordable Housing Levy and the National Social Security Fund were not.
The court reasoned that those statutory levies are inextricably linked to a subsisting employment relationship: they are deducted through payroll, complemented by employer contributions, and confer benefits associated with active service.
To impose them upon a post-employment compensatory award, the court held, would amount to an impermissible double burden that would be inconsistent with the constitutional guarantee of fair labour practices.
Another decision of the same court has travelled even further, holding that not even PAYE is deductible from such compensation. The result is a jurisprudence in disarray. In one court the award is taxed in full; in another, only in part; and in a third, not at all.
It should be acknowledged that the reasoning in Stubbs is not without intuitive appeal. There is something inherently strange about deducting a housing levy or health insurance contribution from a person whose employment, and with it any corresponding entitlement, has already come to an end.
However, intuitive appeal is not the governing principle; judicial precedent is.
The Directline case is a decision of the Court of Appeal, and the doctrine of precedent does not permit the Employment Court, however well-intentioned, to chart an independent course in the face of a binding appellate authority.
A court of first instance that considers a Court of Appeal decision that should be ripe for reconsideration has one lawful course: to apply it while expressing, with appropriate restraint, the reasons why such reconsideration may be warranted.
It would have no mandate to legislate through judicial decision-making.
The consequences of the present uncertainty are neither theoretical nor remote. Employers cannot calculate settlement sums with confidence, and every shilling deducted or omitted becomes the seed that bears fruit to further litigation. Employees whose claims are otherwise identical now risk receiving materially different awards dependent on the adjudicating court.
Settlement negotiations risk becoming compromised because the parties are unable to agree on the correct net figure, and this increases case backlog. NSSF, SHIF and the Affordable Housing Fund are left uncertain as to the scope of their own statutory entitlements. The uncertainty of this magnitude is a cost that is unduly imposed upon the smooth administration of justice.
To resolve this confusion, the Court of Appeal should, at the earliest opportunity, confront the divergence directly and pronounce with finality which statutory deductions, if any, should be properly applied towards compensation for unfair termination and the statutory basis upon which such application should be made.
If the court concludes that the newer statutory levies introduced long after the Directline case should stand on a different legal footing from PAYE or NSSF, then it should say so in clear and unequivocal terms.
Should Parliament consider that outcome undesirable, the appropriate remedy lies in legislative amendment to the Affordable Housing Act, the Social Health Insurance Act and the Employment Act, rather than in judicial improvisation.
Until then, should a dispute arise on the applicable deductions to be applied towards compensatory awards, prudence may now require employers to seek judicial interpretation on the applicable deductions rather than deducting at source, remitting and allowing for such disputes to be resolved through recovery proceedings.
The conflicting judicial positions call for authoritative resolution, and the courts, especially the Court of Appeal, should bring clarity to the law and end this uncertainty.