Gratuity pay is mandatory and widely applied in some jurisdictions. Does it apply in Kenya? Learn the history, benefits, and calculation of gratuity pay in Kenya.
Similar to various relationships in business and life, your connections with employees will inevitably come to a close. At times, challenging market or economic circumstances may necessitate the premature termination of loyal employees.
Other times, employees voluntarily end their service through early retirement. Employees who still feel healthy and fit enough to work may also be forced to retire when they reach retirement age.
While involuntary terminations are unavoidable and sometimes necessary, if the business is healthy and doing well, you want to keep your best employees.
Gratuity pay is one tool you use to reward and encourage employee loyalty. This article examines the application and regulation of gratuity pay in Kenya. We will explain what it is, how it's applied, and whether you must pay it.
What is gratuity pay?
Gratuity pay is money paid to employees by their employer in recognition and appreciation for their service. It can be awarded during or after an employee's employment contract is terminated.
Traditionally, gratuities were 'service tips' paid to waiters and other service sector workers by customers for excellent performance. Paying these tips soon became a social custom and etiquette that guaranteed improved and faster service in the future.
As gratuities evolved, the scope of their application widened. Just as their customers used them to appreciate good service and guarantee improved future service, employers reasoned that paying gratuities to long-serving employees would build morale and reduce staff turnover.
When is a gratuity paid to an employee?
Gratuity pay is usually paid to employees who have completed several years of continuous service. Hence, it is commonly expressed as a reward for long service.
Therefore, gratuity pay isn't only paid when an employment relationship ends. Most companies award gratuity pay to individual employees after every five years of continuous service, meaning the same employee can receive it several times during the term of their employment.
What are the labour laws for gratuity in Kenya?
Gratuity pay is not mandatory in Kenya. Unlike severance pay, unless an employment contract expressly provides for it, employers are not obligated to pay departing employees gratuity pay.
Therefore, the payment of gratuity is solely at the employer's discretion. Employees are not entitled to gratuity pay unless the employer decides to provide it.
Gratuity pay is discretionary, just as tips are not mandatory when eating out at restaurants. However, in some countries, like India, gratuity pay is required. Employers there must pay gratuities to employees who leave after at least five years of continuous service.
How is gratuity pay calculated in Kenya?
There is no established formula for calculating gratuity pay in Kenya because the law does not provide for it. Employers are free to prescribe their own formulas.
Professionals whose skills and experience are highly sought after can also have the leverage to negotiate gratuity pay terms for their employment contracts.
Some employers may offer more favourable gratuity pay terms to attract and retain people with specific skills and experience. If the right incentives exist, people will choose some employers over others and stay with them longer.
Gratuity pay is usually calculated by multiplying the last salary an employee draws by the number of years of continuous service.
This formula rewards loyal service, effectively encouraging current employees to stay longer. A more loyal workforce means a lower staff turnover and reduced training costs since you retain your best, most experienced staff.
What is the difference between severance and gratuity pay in Kenya?
The main difference between severance and gratuity pay is that the latter is mandatory, while the former is discretionary. Severance or redundancy pay, which is paid to an employee upon the early termination of their contract, is a requirement of the law in Kenya, while gratuity pay is not.
The second significant difference between severance and gratuity pay is that the former can be paid at any point during the term of an employment contract. In contrast, the latter is only paid at the contract's termination.
Is gratuity taxed in Kenya?
In Kenya, gratuity pay is taxed like any other salary payment. It is taxed like employment income unless the gratuity pay is converted to a registered pension or provident fund. In such a scenario, the converted gratuity benefit will be exempt from tax.
The Kenya Revenue Authority treats gratuity and severance packages the same. They are all lump sum payments given to an employee. The KRA requires all employers to 'recover' appropriate tax from the service gratuity and 'release the balance to the employee'.
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While paying service gratuity is not mandatory in Kenya, it is one tool you can use to incentivize employees to give their best years to your company. It demonstrates to employees that you value their contributions and are willing to invest in tangible expressions of appreciation, unlike other employers who may only offer verbal acknowledgments.
You can also maximise the benefits of your gratuity payments by ensuring that recipients access them promptly using the payment methods that are most convenient for them.
Intasend is your solution for efficient, timely, and cost-effective disbursement of salaries, gratuity pay, and other lump sum employment benefits in Kenya. We simplify salary disbursements so you and your employees can focus on more productive activities.
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