Whether you are an employer or employee, understanding labor laws is vital.
If you are laid off from work, you should know what you are entitled to.
On the other hand, if you are an employer, you ought to be acquainted with what is expected of you when you fire a worker.
Severance pay, service, and gratuity are three types of termination payments common in Kenya labor laws.
Most people are confused about their meanings and how they operate.
That’s why you find many Kenyans asking: what is the difference between severance pay and service pay? or what is the difference between gratuity and severance pay?
I have put together this guide to explain each one succinctly.
When employment comes to a stop, the affected party needs some kind of a cushion before they land another job or get back up.
Severance is the compensation an employer gives an employee when they stop working for an organization.
This is mostly during a lay-off or retirement but it can also apply to resignations and firing situations.
Each company has its set of rules surrounding severance pay.
Some strictly provide compensation after a lay-off or when downsizing their staff.
Others offer the payment even after firing employees based on their performance.
The pay isn’t only monetary. It can also be in form of insurance (life, disability, and health) and/or outplacement assistance.
In Kenya, severance pay is equivalent to one month’s wage for every year of employment for up to 12 months.
The Employee Act (Section 40) stipulates that employers are only allowed to terminate a contract in the event that the latter doesn’t make an impact in the organization anymore.
Following this, wrongful termination is illegal.
Please note that the termination of an employee based on disciplinary issues doesn’t call for any payment on the part of the employer.
It is also worth mentioning that if you are a member of the pension fund or your employer contributes to a private pension fund or the NSSF as part of your salary, you are not eligible for severance pay.
Service pay is given to an employee whose statutory deductions weren’t submitted during the term of employment.
It is governed by section 35 of the 2007 Employment Act.
The deductions include things like pension (NSSF), national health insurance (NHIF), and income tax.
If the employee has worked in the company for more than three years, they are entitled to a service pay at 15 days’ wage for each year of service.
As the word insinuates, gratuity pay is an amount paid by an employer to an employee for services rendered to the company.
There’s no law governing gratuity for the simple fact that it is a gift.
This means that no employer is required by law to give gratuities to its employees.
However, some do it out of a good heart.
In most cases, a gratuity is given after five years of working for an organization.
Still, some companies have different terms for it.
A few waive this time limit in case of the death or disability of the employee.
Non-governmental organizations are widely known for giving gratuities to their employees but some private and public sectors offer them as well.
Those that give gratuities often stipulate it in the contract but some don’t.
The actual amount is as the contract states.
In case of no such clause in the contract, the employee will receive an unspecified and discretional amount as gratuity pay.
Is severance pay taxable in Kenya? What about gratuity and service pay?
Severance pay is taxed if it is in excess of the relevant taxation exemption.
That means that if you receive an amount that is outside KRA’s income tax and the USC brackets, you will walk away with the full amount.
Else, the amount in excess will be taxed.
The same applies to gratuity and service pay. Both are taxed as employment incomes.
Also check: Taxation of Gratuity in Kenya