Pay deductions have reached two thirds, giving employers headaches.
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 a noticeable rise in the number of violations of the Employment Act’s requirements. There is a significant issue, and we have discussions with the government. People have obligations outside of the statutory deductions, such as loans, mortgages, and fees, according to Jacqueline Mugo, executive director and CEO of the Federation of Kenya Employers (FKE).
The government must harmonise these deduction laws, says the author. Which do we follow? Do we abide by the Employment Act or other laws, such as those pertaining to the housing levy and pension? All of them are laws, and only the Constitution surpasses the others at the end of the day.
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 Act specifies that the total of all deductions from an employee’s earnings that may be made by an employer at one time “shall not exceed two-thirds of such wages or such additional or other amount as may be prescribed by the Minister.”
The new housing charge and the increased NSSF contributions, according to bankers, are significant and have even had an impact on many workers’ financial planning.
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 will be a problem in the transition, and then there will be a reset sooner rather than later. In order to accommodate circumstances when we can prolong loan tenors, we have been meeting people’s needs as a bank, according to Kariuk Ngari, CEO of Standard Chartered Bank Kenya.
According to a poll conducted jointly by the Central Bank of Kenya, Financial Sector Deepening Kenya, and the Kenya National Bureau of Statistics, 73.6 percent of Kenyan households’ standard of living declined from 2019 to 2021.
A little under 43.3% of households reported using their savings, while 40.6 % decreased non-food spending, 38.9 % reduced food consumption, 22.1 % sold assets, and 29.6 % turned to debt.
Approximately 54.2% of people reported having to postpone purchasing medication or going to the hospital, compared to 35.7 % of people in this category in 2019.
As people attempt to acclimatise to the abrupt decrease in take-home earnings, such cases, including hunting for side jobs, may rise. Currently, the State deducts around Sh10,200, or 20.5 percent, from those making Sh50,000 in gross salary, and Sh26,300, or 26.3 percent, from those making Sh100,000. For a worker making Sh200,000, the deduction increases to Sh57,800, or 28.9 percent.
Should the government follow through on its proposal to withdraw 2.75 percent of gross wages to fund social healthcare, workers will notice an increase in the percentage of mandatory deductions from their gross income.
Ms. Mugo cautioned against such a change, saying it would reduce the amount of room left for deductions for workers’ obligations like loans and cause more people to take home less than one-third of their gross earnings.
“It will exacerbate an already dire situation, and we are going to add more people to the working poor poverty net, where people don’t have enough to live on even though they are employed,” said Ms. Mugo.