In the wake of tough economic times, many employers have been forced to restructure their businesses, reduce their workforce, or shut down entire operations.
For many people, appearance of a redundancy notice can truly turn their world upside down as it suddenly takes away your job.
While a severance cheque may come with short-term financial relief, redundancy often signals a major career disruption and financial uncertainty. The Employment Act, 2007 defines redundancy as a situation where an employee loses a job involuntarily, typically due to the employee’s role or services becoming unnecessary, often as a result of structural, technological, or other changes within the organisation.
Understanding the legal and tax obligations involved in the redundancy is crucial for both employers and employees.
Compliance with the law ensures that rights and responsibilities of parties involved are upheld and help mitigate potential intervention from the courts or other authorities, if due process is not observed.
Before an employer can lawfully declare redundancy, they must follow a specific procedure outlined in the Employment Act.
Failing to observe any of the specified steps could render the entire process illegal and expose the company to lawsuits or compensation claims.
First, if the employee is a member of a trade union, the employer must inform both the union and the labour officer in charge of the area of the reasons for, and the extent of, the intended redundancy at least one month before termination.
If the employee is not in a union, the employer must notify the employee directly in writing and also inform the labour officer.
When deciding which employees will be affected by the redundancy, the employer must use fair and objective criteria. These include the employees’ tenure, their skills, their performance, and their reliability. Courts require employers to document and justify the selection criteria used. Importantly, employees must not be treated unfairly because of their union membership status. Whether or not an employee belongs to a union should not affect the terms of separation.
The employer must pay for pending leave days, give at least one month’s notice or one month’s salary in lieu, and severance pay of at least 15 days’ wages for every full year worked. More generous packages may be offered under contracts or internal policies.
While the Employment Act does not explicitly require consultation, Kenyan courts have emphasised the importance of genuine consultation with affected employees or their representatives. Failure to consult may render the redundancy process procedurally unfair.
While severance pay is intended to alleviate the impact of the sudden loss of income and provide a financial buffer while the employee seeks new employment opportunities or undergoes retraining, the compensation is not tax-exempt in Kenya.
Under the current tax laws, pay received by an employee upon termination is taxable, unless the individual qualifies for specific tax privileges granted by applicable laws.
The methodology for calculating tax on severance pay is determined based on the provisions of the employment contract and follows the procedures set forth in the Income Tax Act.
Employers are required by law to withhold the appropriate taxes and deductions from severance pay prior to issuing the final cheque to the employee.
Inaccurate or incomplete compliance with these requirements may result in penalties from the authorities and potential legal action from employees or their unions.
In a period of rising job losses and corporate restructuring, it is essential for employers and employees to have a clear understanding of the legal and tax consequences associated with redundancy.
For employers, strict adherence to the law is not only a statutory requirement but also fundamental to maintaining trust and fairness during transitions.
Employees should also familiarise themselves with the provisions of the law and consult with qualified legal or tax professionals as appropriate.
So, don’t wait until the cheque clears to ask questions. Whether you’re an HR professional or an employee, understanding your rights and responsibilities is paramount.