Pay Deductions Cross Two Thirds Causing Panic for Employers

Recent months have seen an increase in salaried workers whose take-home pay has decreased above the legally advised amount after statutory and tax deductions, causing a compliance challenge for employers and financial institutions.

According to the Employment Act of 2007, employers are not allowed to take more than two-thirds of an employee’s basic salary in order to protect their legal employment benefits.

Salaried workers’ take-home pay has decreased due to an increase in NSSF contributions from Sh200 to up to Sh1,080 and the beginning of a 1.5 percent housing levy deduction from gross pay.

Employers claim that rising interest rates and new statutory deductions have dramatically increased the monthly deductions shown on employee payslips, reducing take-home pay for workers in a high cost of living environment and putting businesses in legal hot water.

“There has been quite an increase in the level of breach with what the Employment Act requires. It is a big problem and we have had engagements with the government. Other than the statutory deductions, people have their commitments like loans, mortgages, and fees,” Jacqueline Mugo, the executive director and CEO of the Federation of Kenya Employers (FKE), said.

“There is a need for the government to harmonise these deduction laws. What do we obey? Do we obey the Employment Act or others like for housing levy and pension? At the end of the day, all these are laws and none supersedes the other except the Constitution.”

The increase in State deductions has made it more difficult for employees who accessed loans based only on their paystubs. In July, the weighted average interest rate for banks reached 13.5 percent, which is the highest level since March 2018.

Many businesses have violated the Employment Act of 2007, which states that deductions from an employee’s pay, whether statutory or voluntary, should not exceed two-thirds of their entire income, as a result of the additional deductions.

“The total amount of all deductions which may be made by an employer from the wages of his employee at any one time shall not exceed two-thirds of such wages or such additional or other amount as may be prescribed by the Minister,” states the Act.

As a result of this trend, some banks have decided to restructure loans in an effort to lessen the burden on the affected employees, while some employees are reducing their voluntary savings, such as those in saccos and banks, in order to live.

“There is going to be a transition challenge and then there will be a reset sooner than later. Our intention as a bank is to ensure people can pay loans so we have been accommodating cases where we can extend loan tenors,” said Kariuk Ngari, the Standard Chartered Bank Kenya CEO, in a phone interview.