Termination and Severance Pay in Kenya: What Is Actually Owed

When employment ends in Kenya, “severance pay” is often used to describe every amount paid at exit. Under the Employment Act, however, severance is a specific statutory payment connected to redundancy. An employee who resigns, completes a fixed-term contract, is dismissed for misconduct, or is terminated for another reason may still be owed final salary, notice pay, accrued leave, contractual gratuity, or other dues—but not automatically statutory severance.

This distinction matters. A KES 90,000 monthly-paid employee whose role is made redundant after four completed years may have a statutory severance entitlement of at least KES 180,000, alongside notice pay and accrued annual leave. The same employee leaving after resignation would not ordinarily receive that redundancy severance payment merely because they worked for four years.

Kenya’s Employment Act, Cap. 226, applies to employees under contracts of service and sets minimum employment conditions. Section 3 states that the Act generally applies to employees employed by any employer under a contract of service, while section 3(6) makes contractual terms that reduce the Act’s minimum protections null and void.

What “termination” means in Kenya

Termination is the ending of a contract of service. It can happen in several ways:

• Resignation by the employee.
• Notice-based termination by either party.
• Termination after disciplinary, performance, incapacity, or operational processes.
• Summary dismissal for lawful cause.
• Redundancy.
• Expiry of a genuine fixed-term contract.
• Mutual separation under a written agreement.

The money due at the end depends on why the employment ended, the employment contract, the employee’s pay structure, accrued leave records, any collective bargaining agreement (CBA), and the statutory minimums in the Employment Act.

A useful starting point is section 18(5) of the Employment Act. On termination by expiry of time, the employer is to ensure payment of wages and allowances earned but unpaid. For lawful summary dismissal, section 18(4) still requires payment of money, allowances, and benefits due up to the date of dismissal.

In practical payroll terms, an exit computation may contain several separate lines. Calling the total “severance” can hide whether each item is legally due.

The key difference: severance, service pay and gratuity

These terms are not interchangeable in Kenyan employment law.

Severance pay: a redundancy entitlement

Section 2 of the Employment Act defines redundancy as an involuntary loss of employment through no fault of the employee, at the employer’s initiative, where the employee’s services are superfluous. The definition includes circumstances commonly described as abolition of office, job loss, restructuring, reorganisation, or closure of a department.

Section 40(1)(g) provides that an employer effecting redundancy must pay severance at a rate of not less than 15 days’ pay for each completed year of service. This is a statutory floor, not a ceiling. An employment contract or CBA can provide a more favourable amount.

Importantly, National Social Security Fund membership may affect a statutory service pay claim under section 35(6), but it does not remove the separate statutory redundancy severance obligation under section 40. The two payments arise from different legal provisions and different circumstances.

Service pay: not the same as redundancy severance

Section 35(5) provides service pay to an employee whose monthly-paid or longer-interval contract is terminated under section 35(1)(c), with the terms to be fixed. But section 35(6) excludes employees who are members of:

• A registered pension or provident fund under the Retirement Benefits Act.
• A gratuity or service-pay scheme created under a CBA.
• An employer scheme with terms more favourable than statutory service pay.
• The National Social Security Fund (NSSF). kenyalaw

Therefore, it is inaccurate to assume that every employee gets “15 days for every year worked” whenever employment ends. That 15-day formula is expressly stated for redundancy severance in section 40(1)(g), not as a universal termination payment.

Gratuity: primarily contractual

Gratuity is generally payable where an employment contract, HR policy, CBA, or employer scheme expressly creates it. Its formula can vary—for example, 15, 21, or 30 days’ basic pay per completed year, or a specified percentage of basic salary.

An employee reviewing terminal dues can check:

1. The signed employment contract.
2. Written amendments and salary-review letters.
3. The applicable CBA, if any.
4. The employer’s documented gratuity or retirement scheme rules.
5. Payslips and NSSF or pension records.

The Finance Act 2025 amended the Income Tax Act to exempt gratuity from income tax where it is earned after July 1, 2025. This tax treatment is distinct from the employment-law question of whether a worker is entitled to gratuity in the first place.

When is severance pay legally due?

Statutory severance under section 40 arises when the termination is genuinely a redundancy and the statutory process is followed.

Before terminating employment on redundancy, section 40(1) requires the employer to meet several conditions:

These requirements are cumulative. In other words, severance is not the only item in a redundancy package; notice pay and accrued leave may be payable in addition to severance. Section 40(1)(a)–(g) sets out this framework.

What counts as a completed year?

The statutory wording is “each completed year of service.” A simple educational calculation normally uses whole completed years, rather than automatically rounding up an unfinished year.

For example:

• Started work: 1 March 2021
• Redundancy effective date: 28 February 2026
• Completed service: 4 years and 364 days
• Statutory severance calculation: ordinarily based on 4 completed years, subject to the contract, CBA, settlement terms, and applicable interpretation.

A contract or CBA may give a more generous formula by recognising part-years, using months of service, or applying a higher number of days per year.

How to calculate severance pay in Kenya

For a monthly-paid employee, a common educational method is:

[ \text{Daily pay} = \frac{\text{Monthly pay used for the calculation}}{30} ]

[ \text{Minimum severance} = \text{Daily pay} \times 15 \times \text{completed years of service} ]

The Employment Act says “fifteen days’ pay,” but it does not set a single universal arithmetic convention for every pay arrangement in this provision. The applicable contract, CBA, payroll policy, and wage structure can affect the calculation base. Records should therefore show whether the figure uses basic salary, gross pay, or another defined contractual rate.

Example: KES 90,000 monthly pay and four completed years

Assume an employee earns KES 90,000 per month and is declared redundant after four completed years of service.

That KES 180,000 is the statutory minimum severance component in this illustration. It excludes:

• Salary earned up to the final working date.
• Cash for unused accrued annual leave.
• One month’s notice pay, if notice is not worked.
• Any higher contractual or CBA redundancy benefit.
• Approved expense reimbursements or other outstanding contractual amounts.

A quick way to test different salaries and service periods is the Kenya Severance Pay Calculator. Enter the monthly pay, completed years, notice period, and unused leave days separately so that the output does not incorrectly treat every terminal payment as severance.

Notice pay and termination notice

Section 35 establishes default notice rules for contracts that do not concern specific work or a journey:

• Daily-paid contracts: terminable at the close of a day without notice.
• Contracts paid at intervals of less than one month: written notice ending on the next pay period.
• Contracts paid at intervals of one month or more: written notice ending after 28 days.

Section 36 permits either party to terminate without working the notice period by paying the other the remuneration that would have been earned during that notice period. A contract may provide a longer notice period than the statutory minimum, and that contractual term can be relevant to the exit calculation.

For the KES 90,000 monthly-paid redundancy example, where the employee does not work the statutory or contractual notice period and no higher contractual period applies:

[ \text{Notice pay} = \text{KES 90,000} ]

Notice pay is separate from the KES 180,000 severance computation.

Termination for misconduct, poor performance or incapacity

Not every termination is redundancy. For misconduct, poor performance, or physical incapacity, section 41 requires the employer, before termination, to explain the reason in a language the employee understands. The employee is entitled to have another employee or shop-floor union representative of their choice present. The employer must hear and consider the employee’s representations before termination or summary dismissal.

Section 43 requires an employer, in a claim arising from termination, to prove the reason or reasons for termination. Section 45 states that no employer may terminate employment unfairly; the employer must show that the reason was valid and fair, related to the employee’s conduct, capacity, compatibility, or based on operational requirements, and that the termination was carried out according to fair procedure.

Where termination is found unjustified or unfair, section 49 allows potential remedies that can include notice wages, salary for work completed, compensation equivalent to up to 12 months’ gross monthly wage or salary, reinstatement, or re-engagement. These are remedies that may be recommended or ordered based on the facts and legal process; they are not automatic severance payments.

Accrued leave, final salary and certificate of service

A properly itemised exit calculation commonly addresses the following:

For redundancy, section 40(1)(e) specifically requires payment in cash for leave due. The employment contract and leave records are critical because they establish annual entitlement, leave taken, carry-forward rules, and the remaining balance.

Section 51 also requires an employer to issue a certificate of service to an employee upon termination, unless the employment lasted less than four consecutive weeks. The certificate is not a recommendation letter; it records employment particulars such as the employer’s name, the employee’s name, dates of employment, nature of work, and other statutory details.

ToolBase’s Kenya Leave Pay Calculator can help separate accrued leave from severance and notice pay when preparing an educational exit-payroll estimate.

Tax treatment of termination payments

The gross amount calculated is not always the net amount received. Kenya Revenue Authority states that compensation for termination of employment or services is taxable. Where a specified-term contract ends early, the compensation is treated as earned evenly over the unexpired contractual period. For an unspecified-term contract that provides terminal payment, the amount is spread forward and assessed at the rate of the employee’s annual gross pay immediately before termination. Where no contractual compensation provision exists, KRA explains that the compensation is treated as accruing evenly over the three years following termination.

PAYE is the mechanism through which employers deduct and remit income tax from employment income to KRA. The appropriate treatment of each line item—salary, notice pay, severance, compensation, leave pay, pension, or gratuity—depends on the nature of the payment and applicable tax law.

An exit statement can therefore show:

• Gross terminal dues.
• Statutory deductions, including PAYE where applicable.
• Other lawful deductions.
• Net amount payable.
• The date and method of payment.

A practical redundancy calculation checklist

Whether you are reviewing an exit package or preparing payroll documentation, the calculation can be organised in this order:

1. Identify the legal reason for exit: redundancy, resignation, expiry, dismissal, mutual separation, or ordinary termination.
2. Confirm the employee’s start date, final date, completed years, monthly pay, and pay frequency.
3. Review the contract and any CBA for a more favourable notice, severance, leave, or gratuity provision.
4. Calculate outstanding salary up to the final working day.
5. Calculate accrued annual leave from verifiable leave records.
6. Add notice pay where notice is not worked.
7. If it is redundancy, calculate at least 15 days’ pay for each completed year under section 40(1)(g).
8. Identify PAYE and other lawful deductions separately from gross dues.
9. Issue a clear itemised final-pay statement and certificate of service where section 51 applies.
10. Keep records supporting the calculation, including contract, payslips, leave ledger, notices, redundancy-selection documentation, and payment evidence.

Conclusion

In Kenya, statutory severance pay is not a universal reward for leaving employment. It is a minimum legal entitlement linked specifically to redundancy under section 40 of the Employment Act: at least 15 days’ pay for every completed year of service, plus other applicable redundancy dues such as notice pay and cash for accrued leave. Resignation, fixed-term expiry, ordinary termination, and dismissal may generate different terminal payments, but they do not automatically create a section 40 severance entitlement. The Employment Act also protects fair procedure, valid reasons for termination, final wages, and a certificate of service.

Last Updated: September 26, 2026

This article is for educational purposes only and does not constitute professional advice. Consult a qualified professional for your specific situation.