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Termination Benefits – Severance Pay And Service Pay

This article is provided by Mohamed Madhani & Co 


 

SEVERANCE PAY

 Did you know that Kenya ranks third in the list of highest redundancy in Africa after Nigeria and the Central African Republic? We also hold the top ranks in the “longest period of redundancy” category. This high cost of sacking employees and the lengthy notice periods are linked to the strong trade unions that increased employee awareness of their rights, including the terms of redundancy.

 

What then is redundancy?

 In a nutshell this is loss of employment by involuntary means. This normally occurs at the initiative of the employer for the following reasons:

 

  • bankruptcy or insolvency of the employer;

 

  • job closure due to the falling demand of the goods or services of the business;

 

  • relocates to other counties or even overseas;

 

  • Mergers and acquisitions which involve the transfer of the business and assets or sale of shares of a company to a third party;

 

  • downsizing and restructuring of a business; or

 

  • reduction in staffing requirements due to efficiency gains.

 

Good policy dictates that the employer should give adequate notice of the redundancy, provide information and discuss the expected changes so as to minimize negative effects on the employees.

 

What should an employer do when he finds his employee(s) redundant?

 The Law provides for quite elaborate redundancy procedures and outlines the manner in which an employee may undertake to terminate the services of an employee he deems redundant.

 

Where the employee is a member of a trade union, the employer should give the union and labour officer in charge of the area where the employee is employed at least one (1) month notice prior to the date of the intended date of termination on account of redundancy of the reasons for, and the extent of the intended redundancy.

 

Where an employee is not a member of a trade union, the employer should notify the employee personally in writing and the labour officer.

 

Is the redundant employee supposed to be compensated for loss of employment?

 Yes. This form of compensation is termed as “severance pay”. It is granted to an employee who has been deemed redundant by his employer.

 The law provides for the following payments:

 

  • Cash payment for the accrued leave days due to an employee who is declared redundant.

 

  • Not less than one (1) month’s notice or one month’s wages in lieu of notice.

 

  • Payment of severance pay at the rate of not less than fifteen (15) days pay for each completed year of service. 

 

How does an employer determine how to issue out severance pay?

 An employer should consider the terms and conditions of the contract of employment (if any). He should take into account past services and accumulated benefits of the employee also consider the skill, ability seniority and reliability of each employee affected by the redundancy and further negotiate on the same with the employee. Where the Employee has a representative from the union, the terms and conditions are subject to negotiation between the employer and the union representative.

 

Who is not entitled to severance pay?

 There are employees who are not entitled to such compensation due to the nature of their work. They are workers whose services are not permanently or constantly needed in the business.  These are:

 

  • Workers under a probationary contract. This contract should not be more than six months;

 

  • Workers engaged under a contract of employment for a specified period of time or for specified work; and

 

  • Workers engaged on a casual basis.

 

How is severance pay calculated?

 The Law specifies severance pay at the rate of not less than 15 days pay for each completed year of service with the same employer. Therefore it is calculated by multiplying half monthly salary by the number of years that an employee has rendered services to his/her employer.

 

Are there any Laws that govern redundancy severance pay in Kenya?

 Yes.

 These Laws have chaperoned a systematic manner in which employment practices are carried out and have further outlined substantial rules that regulate procedures and protocol in the business industry.

 The Constitution of Kenya (2010) – determines the rights of workers, employers and trade unions, in particular the right to fair remuneration, the right to reasonable working conditions, the right to join a trade union or employer’s organization, the right to strike and the right to engage in collective bargaining.

 The Employment Act (2007) - declares and defines the fundamental rights of employees, to provide basic conditions of employment of employees, termination and dismissal procedures and to regulate employment of children.

  

What happens in the event a dispute arises concerning termination benefits?

 There are unfortunate cases where employees who are entitled are not compensated while at the same time workers who are not entitled to severance pay still claim for the same compensation.

 In other cases, negotiations on terms and conditions may go sour when the employer fails to consider the employees skills, ability and seniority, thereby awarding severance pay unfairly.

 In such instances, such disputes are presented to the labour officer and with the set up of an Industrial Court in 1964; a basic cornerstone was laid for the development of amicable conflict resolution in Kenya.

 

SERVICE PAY

A lot of us are aware of all the benefits that come along with termination but get confused when trying to establish under what circumstances these benefits are actually meted out. Other times we simply confuse their basic definitions and purpose.

 

What is service pay?

This is a monetary gift paid out at the end of employment by an employer to his employee for services rendered throughout the employment period.

 

Who is entitled to service pay?

 The Law provides that this payment is only made to those employees whose contracts provide for remuneration periodically at intervals of or exceeding one (1) month and who are not members of:

 

  • a registered pension or provident fund scheme;

 

  • a service pay or gratuity scheme under a collective agreement;

 

  • the National Social Security Fund; or

 

  • any other scheme established and operated by the employer and is much more favourable than the service pay scheme provided by the Law.

 

A lack of understanding that this form of monetary benefit is attached to conditions normally causes conflict when employees claim their dues.

 

Upon termination are both service pay and severance pay issued to an employee?

 No.

 We must carefully note that each pay is granted under very different circumstances albeit both are paid out upon termination of employment. We have already outlined when severance pay is granted.

 Service pay is issued when:

 

  • the employee resigns;

 

  • the employee dies;

 

  • the duration of the contract of employment expires; or

 

  • in the event of disability due to an accident.

 

What is the difference between service pay and gratuity?

 Gratuity is very similar to service pay. It is a monetary gift from employer to employee only it is payable as the employer pleases. He may pay at the end of every year worked, or quarterly or monthly.

Once you are paid gratuity you cannot claim service pay upon termination of employment.

 

IN CONCLUSION

Many employers, due to ignorance of the law, have found themselves in the corridors of justice due to breaking the employment law when terminating employees. It is therefore advisable to approach a qualified lawyer for detailed information and guidance on how to terminate employees to avert embarrassment and incurring further costs in form of costs imposed by the court.  

Copyright © 2016 Mohamed Madhani & Co . All Rights Reserved.

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