Payment of Service Pay or Gratuity in Kenya: A Guide with Relevant Case Law

Payment of Service Pay or Gratuity in Kenya is a significant aspect of the employment landscape in Kenya. It serves as a financial reward provided by employers to employees at the end of their service. It acts as a form of financial security and recognition for employees’ dedication and loyalty to an organization.

This article aims to provide a detailed understanding of the gratuity payment process in Kenya, including its calculation, eligibility, governing laws, and relevant case law.

Legal Framework

The relationship between an employer and an employee in Kenya is primarily governed by the employment contract and the Employment Act (Cap 226, Laws of Kenya). Section 35 sub-section (5) and (6) of the Employment Act provides the following in relation to gratuity or service pay in Kenya:

• Subsection (5): An employee whose contract of service has been terminated under subsection (1)(c) shall be entitled to service pay for every year worked, the terms of which shall be fixed.
  

• Subsection (6): This section shall not apply where an employee is a member of a registered pension or provident fund scheme under the Retirement Benefits Act (No. 3 of 1997), a gratuity or service pay scheme established under a collective agreement, any other scheme established and operated by an employer whose terms are more favourable than those of the service pay scheme established under this section, and the National Social Security Fund.
  

Eligibility for Gratuity

Under the Employment Act, an employee who is or was a member of the National Social Security Fund (NSSF), any pension or provident fund, or a gratuity pay scheme is not entitled to service pay or gratuity. Kenyan courts have recognized membership to NSSF as sufficient social security for an employee.

Relevant Case Law

Two significant cases shed light on the interpretation of the law regarding service pay and gratuity in Kenya:

1. 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.
   

2. 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 Claimant had no written contract, no written statement of payments is submitted and in essence, the Respondent does not make any effort to demonstrate that as the employer they complied with statutory requirements and regulations to deduct and remit the applicable statutory dues to Kenya Revenue Authority, the National Social Security Fund and to the National Hospital Insurance Fund as required by law.

Calculation of Service Pay/Gratuity

The calculation of gratuity in Kenya follows a specific formula that takes into account the employee’s basic salary and years of service. The formula for gratuity calculation is as follows:

Service Pay/Gratuity = (Basic Salary × Years of Service) ÷ 26

In this formula, the basic salary represents the employee’s fixed monthly salary without any additional allowances or overtime pay. The years of service are calculated by considering the total number of years the employee has worked for the employer.

Practical Considerations for Employers

Employers should ensure that they are compliant with the statutory requirements regarding service pay. This includes:

• Maintaining accurate records: Employers should keep detailed records of employment contracts, salary payments, and statutory deductions.

  
  

• Understanding exemptions: Employers should be aware of the exemptions provided under Section 35(6) of the Employment Act to avoid unnecessary liabilities.

  
  

• Consulting legal experts: It is advisable for employers to consult with legal experts to ensure compliance with the law and to handle any disputes that may arise.

Conclusion

Understanding service pay or gratuity is essential for both employers and employees in Kenya. By familiarizing yourself with the legal framework, eligibility criteria, and case law, you can ensure compliance and avoid disputes.

Whether you are an employer seeking to manage gratuity payments effectively or an employee looking to understand your rights, this guide provides the information you need to navigate service pay in Kenya successfully.

For further advice or assistance with employment law matters, contact our expert team. Our experienced lawyers are here to help you with all your employment-related legal needs.

To learn more, see the Employment Act (Cap 226, Laws of Kenya).

Payment of Service Pay or Gratuity in Kenya