Guide

How to calculate redundancy pay in Kenya

Section 40 of the Employment Act 2007 sets the minimum redundancy entitlement — but most employees and many HR managers don't know the exact formula. Here's the calculation, the PAYE treatment, and what to do if the employer disputes the figure.

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Redundancy under Kenya law means the employer is eliminating the position — not disciplining the employee. It is distinct from summary dismissal (for misconduct), constructive dismissal (where conditions become intolerable), and voluntary resignation. The procedural requirements for lawful redundancy under Section 40 include: one month's written notice to the employee and a recognised trade union (where applicable), notification to the Labour Officer, and payment of all terminal dues.

The severance pay formula: 15 days' basic pay per completed year of service. Daily rate = monthly basic salary ÷ 26 working days. Severance = daily rate × 15 × completed years. Only completed years count — a period of 5 years and 9 months gives 5 completed years. Severance is calculated on basic salary only, not on housing allowance, transport allowance, or other benefits.

In addition to severance, the employee is entitled to: notice pay (if notice was not actually served — employer pays the equivalent of the notice period in salary); accrued annual leave pay (21 days per year entitlement, pro-rated for the current year, at the gross daily rate); and any contractual service gratuity if the employment contract includes one. The total of these is the terminal dues package.

Tax treatment matters. Statutory severance (the Section 40 amount) is exempt from PAYE under Section 8(4) of the Income Tax Act — it should not appear on the employee's P9 form. Notice pay and accrued leave pay are taxable as normal employment income. If an employer pays an enhanced severance above the statutory minimum, the excess is taxable. Get the terminal dues computation in writing before signing any settlement agreement.

Frequently asked questions

What is the severance pay formula under Kenya's Employment Act?

Under Section 40 of the Employment Act 2007: Severance pay = 15 days' basic salary × number of completed years of service. The daily rate is: monthly basic salary ÷ 26 working days. Example: employee on KES 60,000 basic with 5 completed years — daily rate = KES 2,308; severance = KES 2,308 × 15 × 5 = KES 173,077. Only basic salary is used — allowances are excluded. Only completed years count — partial years are not included in the severance calculation (though they are included in leave pay pro-ration).

What is the difference between severance pay and notice pay?

Severance pay compensates for the loss of the job itself — it is based on years of service and is only payable on redundancy (not resignation or dismissal for cause). Notice pay is compensation for the contractual or statutory notice period that the employer failed to give. If the employer makes the employee work their notice period, no notice pay is owed. If they terminate immediately ('garden leave' or payment in lieu of notice), the employee receives the equivalent salary for the notice period — typically one month for monthly-paid employees. Both are separate entitlements that can be owed simultaneously.

Is redundancy pay taxable in Kenya?

Statutory severance pay is exempt from PAYE under Section 8(4) of the Kenya Income Tax Act — the employer should not deduct tax from the Section 40 severance amount. However, notice pay (payment in lieu of notice) is taxable as ordinary employment income in the month received. Accrued leave pay is also taxable. Any severance paid above the statutory minimum is taxable on the excess. Employees should confirm the tax treatment before signing any settlement agreement, as incorrect tax deductions reduce the net payout.

What documents should I request when being made redundant?

Request in writing: (1) a formal letter of redundancy stating the reason (Section 40 requires the employer to demonstrate the position is genuinely redundant); (2) a terminal dues computation showing severance, notice pay, leave pay and any other amounts itemised; (3) your final payslip; (4) a certificate of service (mandatory under Section 51 of the Employment Act — must state employment period, position and reason for leaving); (5) confirmation of NSSF, SHIF and pension contributions made on your behalf. Do not sign any document waiving your rights before reviewing the full computation.

What if the employer refuses to pay or underpays redundancy?

You have two main avenues. First, file a complaint with a Labour Officer at the nearest Directorate of Labour office — this is free and can result in mediated settlement relatively quickly. Second, file a claim at the Employment and Labour Relations Court (ELRC) — the process takes longer (typically 6–18 months) but the court can award the full statutory amount plus interest. The limitation period is 3 years from the date the dues were owed. Document everything: employment contract, payslips, the letter of redundancy, and any correspondence about the terminal dues.

Can a probationary employee claim redundancy pay?

Generally no. Section 40(3) of the Employment Act provides that severance pay applies to employees with at least one year of continuous employment. Employees terminated during probation (typically 3–6 months) are not entitled to the Section 40 severance. However, they are still entitled to notice pay (the contract notice period or statutory minimum, whichever is greater) and any accrued leave pay. An employee on fixed-term probation should also receive the remainder of the fixed term if terminated early without cause.

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