Payment of Service Pay or Gratuity in Kenya: Law, Recent Cases and Practical Guidance
- Muhoro & Gitonga Associates
- Apr 22, 2024
- 5 min read
Updated: Nov 11, 2025
Table of Contents
Legal Foundations of Service Pay and Gratuity
Who Qualifies for Service Pay or Gratuity
How to Calculate Gratuity in Kenya
Employer Obligations and Timing of Payment
Common Disputes and Employer Defences
Key Recent Case Law and Judicial Trends
Tax Treatment and Recent Changes
Remedies Available to Employees
Litigation and Evidence Considerations
1. Introduction and Scope
This article provides a practical overview of the law on service pay and gratuity in Kenya. It explains the difference between statutory service pay and contractual or policy based gratuity, outlines eligibility criteria, and examines how Kenyan courts have recently interpreted employer obligations.
Employers often confuse gratuity with redundancy or termination dues, yet each has distinct legal bases. With recent judicial scrutiny under the Employment Act and evolving tax treatment, understanding the nuances of service pay and gratuity is essential for compliance and cost management.
2. Legal Foundations of Service Pay and Gratuity
Under Section 35(5) and (6) of the Employment Act, service pay is payable to employees whose contracts are terminated but who are not covered by a pension, provident fund, or gratuity scheme. This statutory service pay acts as a safety net for employees ineligible for other retirement benefits.
Gratuity, on the other hand, is primarily a contractual or policy based benefit. It arises from express terms in employment contracts, collective bargaining agreements (CBAs), or established company practice. Where an employer has consistently paid gratuity or has a written policy committing to it, courts will enforce it even if it is not expressly required by statute.
3. Who Qualifies for Service Pay or Gratuity
Not every employee is entitled to gratuity or service pay. Employees who are members of pension or provident funds, the National Social Security Fund (NSSF), or any similar scheme do not qualify for statutory service pay under Section 35(6) of the Employment Act.
However, such employees may still receive gratuity if the contract or CBA expressly provides for it. The Public Service Commission Human Resource Policies (2023 Edition) outline clear gratuity provisions for public officers under fixed-term contracts, payable at the end of service.
4. How to Calculate Gratuity in Kenya
There is no universal formula for gratuity calculation. The applicable formula depends on the terms of the contract, policy, or CBA. A common standard, however, is 15 days’ basic pay for every completed year of service, as recognized in multiple employment contracts and industrial awards.
When a contract is silent, courts may adopt a reasonable rate by analogy to industry standards or CBAs within the same sector. It is important that gratuity is computed based on basic salary only, unless expressly stated otherwise.
5. Employer Obligations and Timing of Payment
Employers must pay gratuity or service pay promptly upon termination or expiry of a fixed-term contract. Failure to do so constitutes a breach of the Employment Act and the employment contract.
Section 18(4) of the Employment Act requires payment of all terminal dues within seven days after termination. Any delay beyond this period can attract interest or penalties, as courts often award interest from the date of separation.
Employers should also ensure that gratuity or service pay obligations are properly reflected in payroll and contracts to avoid disputes over interpretation.
6. Common Disputes and Employer Defences
Most disputes arise where employers fail to define whether a particular payment qualifies as service pay or gratuity. Conflicts also occur where employees belong to pension or NSSF schemes yet still claim service pay.
Employers often rely on Section 35(6) as a defence, arguing that payment of NSSF or pension contributions exempts them from statutory service pay. Courts have upheld this defence where proof of contributions exists.
7. Key Recent Case Law and Judicial Trends
Kenyan courts continue to refine the boundaries of service pay and gratuity entitlement.
Mugambi v Kenya Pipeline Company Limited (Employment and Labour Relations Cause E296 of 2022) [2024] KEELRC 2260 (KLR) (20 September 2024) (Judgment): The court held that Gratuity was not payable as the pension was also paid.
Kennedy Nyanguncha Omanga v Bob Morgan Services Limited [2013] eKLR: The court declined to award service pay since the employee was a registered member of NSSF. The court held that NSSF membership excluded him from the service pay benefit provided for under Section 35 (5) of the Act.
Martin Ireri Ndwiga v Olerai Management Company [2017] eKLR: The Judge held that service pay is due to an employee who has not enjoyed the benefit of statutory deductions and thus covered under section 35 (5) and (6) of the Employment Act, 2007.
The overall trend shows courts are favouring contractual clarity and consistency over technical defences.
8. Tax Treatment and Recent Changes
Gratuity payments are considered emoluments under the Income Tax Act and are subject to PAYE unless specifically exempt.
Employers must deduct and remit PAYE on taxable gratuity amounts through the iTax system. The Kenya Revenue Authority (KRA) has stepped up audits on gratuity tax compliance, especially for organizations with large numbers of fixed-term staff.
Employers should seek tax advice before structuring or revising gratuity policies to align with the 2025 payroll tax regime.
9. Remedies Available to Employees
Where an employer unlawfully withholds gratuity or service pay, employees can file a claim before the Employment and Labour Relations Court within three years of termination under Section 90 of the Employment Act.
Remedies include payment of the gratuity due, interest from the date of termination, and costs of the suit. In aggravated cases involving bad faith or discrimination, the court may also award compensatory damages under Section 49.
10. Compliance Tips for Employers
Review all employment contracts to specify whether gratuity or service pay applies
Maintain clear payroll records showing NSSF or pension contributions.
Ensure consistency between company policy, contracts, and CBAs.
Settle all terminal dues within seven days after separation.
Align gratuity policy with tax laws and ensure PAYE compliance.
Train HR staff and managers on distinguishing service pay from redundancy pay or severance.
11. Litigation and Evidence Considerations
In gratuity disputes, documentary evidence is decisive. Courts rely heavily on employment contracts, payslips, HR policies, and CBAs. Employers must demonstrate proof of pension or NSSF contributions to successfully invoke Section 35(6).
Employees, on the other hand, should produce appointment letters, internal circulars, or previous gratuity payment slips to prove legitimate expectation. Inconsistent payroll practices often weaken the employer’s case.
12. Conclusion
Payment of Service Pay or Gratuity in Kenya: Law, Recent Cases and Practical Guidance. Gratuity and service pay remain sensitive components of terminal benefits in Kenya. While the Employment Act provides the statutory foundation, most entitlements arise from contractual arrangements or CBAs.
Employers should therefore prioritise clear drafting, timely payment, and consistent record-keeping. Courts have consistently upheld employee rights where ambiguity or inconsistent practice exists. The most prudent approach is compliance through clarity and fairness.
13. Frequently Asked Questions
1. Is service pay the same as gratuity in Kenya?
No. Service pay is a statutory payment under Section 35 of the Employment Act, while gratuity is contractual or policy-based.
2. Who qualifies for service pay?
Employees not covered by NSSF, pension, or provident funds qualify for statutory service pay upon termination.
3. How is gratuity taxed?
Gratuity is taxable under the Income Tax Act.
4. Can an employee claim both pension and gratuity?
No. Courts have ruled that claiming both for the same period amounts to double compensation.
5. Within what period should gratuity be paid?
Within seven days of termination or contract expiry, as required under Section 18 of the Employment Act.
6. What happens if the employer delays payment?
The employee may file a claim before the Employment and Labour Relations Court for the gratuity plus interest.
7. Are expatriates entitled to gratuity?
Yes, if their contracts expressly provide for it or if the employer has a policy applicable to all staff.
To learn more, see the Employment Act (Cap 226, Laws of Kenya).
