Severance Pay Calculation in Kenya

Kenyan redundancy severance is at least 15 days' pay for each completed year of service. Calculate it as the approved daily pay rate multiplied by the applicable severance days per year and completed years served. Section 40 of the Employment Act does not prescribe a monthly-salary divisor or expressly say 'basic salary', so confirm the calculation basis before approving payment.

The Statutory Severance Formula

Severance = daily pay rate × severance days per completed year × completed years of service.

The statutory minimum is 15 days per completed year. Use a more favourable contractual or collective bargaining agreement (CBA) entitlement where applicable: section 26 permits better terms, but not terms below the statutory minimum.

Severance under section 40 applies to redundancy. The Act describes redundancy as involuntary loss of employment through no fault of the employee because the role or services become superfluous, including through operational requirements. It is not a universal exit payment.

For HR, the calculation therefore begins with the reason for the exit, not the salary figure. Keep the operational justification alongside the calculation so payroll is not asked to classify an unexplained 'termination payment'.

Set the Pay Basis Before Calculating

Basic Salary, Gross Salary and the Divisor

The Act defines basic salary as gross salary excluding allowances and other benefits. However, the severance provision uses 'days' pay', rather than 'basic salary'. That distinction matters when an employee receives allowances, commission or other variable earnings.

Do not treat monthly basic salary divided by 30 as a formula expressly prescribed by section 40. The section specifies neither that base nor that divisor.

Before signing off, review the employment contract, applicable CBA, any applicable wage order and the established payroll basis. Record which earnings are included, the divisor selected and the supporting provision or interpretation. If the documents conflict or leave the answer unclear, obtain a case-specific review rather than silently choosing the cheapest method.

Completed Service and Pay Changes

Use verified employment commencement and redundancy dates to establish completed years. The statutory wording does not require proportional payment for an incomplete year, although more favourable terms may do so.

Section 40 does not state a separate 12-month qualifying period. Nevertheless, a formula based on completed years produces no statutory severance amount where no year has been completed. Do not confuse that calculation outcome with the employee's other redundancy entitlements.

For promotions, renewed contracts, secondments or unpaid leave, flag any uncertainty about service continuity or the relevant pay basis. Record the decision and its supporting documents; do not automatically reset service at a promotion or deduct periods of absence without review.

Build an Auditable Calculation Sheet

A useful worksheet lets another reviewer reproduce the result without asking the preparer what they meant.

Record:

• Employee identity, role and reason for redundancy.
• Employment start date, effective redundancy date and completed service.
• Contract, CBA and payroll records used.
• Pay components included and excluded, with reasons.
• Monthly-to-daily conversion basis, where used.
• Applicable severance days per completed year.
• Gross severance, separately from all other final dues.
• Preparer, reviewer and approval record.

Where contractual terms improve the entitlement, show the statutory benchmark and the applicable enhanced calculation. This makes the uplift visible and helps prevent payroll from substituting the minimum for an agreed benefit.

Use your employee management records to reconcile dates and leave evidence before passing the approved schedule to payroll. Label unresolved inputs as unresolved rather than presenting a provisional estimate as the final entitlement.

Keep Other Final Dues Separate

Severance is only part of a redundancy settlement. Section 40 also addresses cash payment for leave due and at least one month's notice or one month's wages in lieu.

Use separate schedule lines for:

• Salary earned up to the exit date, reconciled to payroll.
• Redundancy severance and its calculation basis.
• Notice pay, where payable, with the notice arrangement recorded.
• Cash for leave due, supported by the leave balance.
• Any contractual gratuity or enhanced CBA benefit, supported by its governing terms.
• Tax deductions, net payment and payment date.

Service pay is different from redundancy severance. Section 35 provides for service pay after certain notice-based terminations, subject to exclusions including NSSF membership, registered pension or provident fund membership and other specified schemes. Those service-pay exclusions should not be imported into the section 40 severance calculation.

Do not relabel severance as gratuity or assume an earlier ex gratia payment automatically offsets it. Identify what each payment covers and review the basis for any proposed adjustment. Likewise, do not insert a generic unfair-termination compensation amount into the severance formula.

Meet the Redundancy Requirements Separately

A correct calculation does not replace the redundancy process.

Notify the Correct Recipients

For a union member, notify the union and local labour officer in writing of the reasons for, and extent of, the intended redundancy at least one month before the redundancy date.

For a non-union employee, notify the employee personally in writing and the labour officer of the reasons and extent, at least one month before the redundancy date.

Keep dated copies and delivery evidence. These written notifications should not be confused with the notice-or-wages condition in section 40(1)(f).

In Cargill Kenya Limited v Mwaka & 3 others, the Court of Appeal held that a separate termination notice before declaring redundancy is not a condition under section 40(1)(f). That clarification does not remove the statutory redundancy notifications or the notice-or-wages requirement. See the redundancy process guide for the wider workflow.

Document Selection and Close-Out

Selection must have due regard to seniority in time, skill, ability and reliability within the affected employee class. An employer must not disadvantage an employee because of union membership or non-membership. Keep the selection assessment with the operational justification, not just the final list of names.

Issue a certificate of service on termination unless employment lasted less than four consecutive weeks. Treat this as a separate close-out item, not part of the financial calculation. Retain the approved schedule, supporting records, payment evidence and acknowledgement together.

Apply PAYE to the Correct Components

KRA states that termination lump sums, including severance, are taxable and that the employer must recover the appropriate tax before paying the balance. Its guidance distinguishes the timing treatment of severance/service gratuity, notice pay and leave pay.

Consequently, do not combine every final-dues line and automatically treat the total as ordinary salary for the payment month. Have payroll document the tax treatment and relevant periods for each component using KRA's lump-sum guidance. File the PAYE return and remit PAYE by the 9th day of the following month.

The Kenya PAYE calculator can help explain ordinary salary deductions, but it does not replace the component-specific review of a termination lump sum.

Kenya PAYE calculatorWork out net pay and every deduction for any salary.

Frequently Asked Questions

Is Severance Based on Basic or Gross Salary?

Section 40 says '15 days' pay', not 'basic salary', and specifies no monthly divisor. Review the governing terms and document the selected basis rather than assuming all payroll structures produce the same answer.

Do Partial Years Count?

The statutory minimum uses completed years, without requiring proportional credit for an incomplete year. Apply partial-year credit if more favourable governing terms provide it.

Is Severance Due on Resignation or Dismissal?

Not merely because employment ends: section 40 severance is a redundancy entitlement. Review service pay and contractual benefits separately for other exits.

Does NSSF Membership Cancel Severance?

No, the NSSF exclusion in section 35 concerns service pay. It does not remove redundancy severance under section 40.

Is Severance Taxable?

Yes, KRA includes severance among taxable termination lump sums. Calculate the appropriate tax before payment, keeping severance, notice and leave components separate for their respective timing treatment.

Sources

Kenya Law - Employment Act - Redundancy definition, minimum terms, severance, service pay, notifications, selection, leave, notice and certificates of service.

Kenya Revenue Authority - Taxation of Lump Sum Payments - Taxability of termination payments and component-specific timing treatment.

Kenya Revenue Authority - PAYE - Employment-income taxation and PAYE filing and remittance deadline.

Kenya Law - Cargill Kenya Limited v Mwaka & 3 others - Court of Appeal clarification on a separate termination notice under section 40(1)(f).

Frequently asked questions

Is severance calculated on basic or gross salary?+

Section 40 says '15 days’ pay', not '15 days’ basic salary', and does not prescribe a monthly-salary divisor. Review the contract, CBA, applicable wage order and established payroll basis before approving the daily rate. Do not assume that excluding allowances or using a particular divisor is automatically correct.

Do partial years count towards severance?+

The statutory formula uses completed years of service, so it does not require proportional credit for an incomplete year. A more favourable contract or CBA may provide that credit. Section 40 does not state a separate 12-month qualifying period, although its completed-year formula produces no statutory amount before a year is completed.

Must I pay severance when an employee resigns or is dismissed?+

Statutory severance under section 40 is a redundancy entitlement, not a general payment for every exit. Resignation or termination for poor performance does not itself trigger redundancy severance. Assess service pay and contractual gratuity separately rather than assuming the severance formula applies.

Does NSSF membership remove the right to severance?+

No. The NSSF exclusion in section 35 concerns service pay, which is distinct from redundancy severance under section 40. Do not use an employee's NSSF membership to remove severance from a redundancy calculation.

Is severance pay taxable in Kenya?+

Yes. KRA identifies severance among taxable termination lump sums and requires the employer to recover the appropriate tax before paying the balance. Its guidance treats severance/service gratuity, notice pay and leave pay differently for timing purposes, so calculate PAYE by component rather than assuming one ordinary monthly salary treatment.