Kenya redundancy and severance: Employment Act 2007 in 2026

A Kenyan employer is laying off staff or paying out a senior executive's contract. Section 40 of the Employment Act sets the floor; Finance Act 2025 changed the tax math; and the KRA has its own lump-sum spreading rules that materially affect what the employee actually nets. This guide walks through the full picture — the 15-day formula, the KES 600,000 exemption cap, the gratuity rules that just expanded to private schemes, and how this differs from severance in Nigeria, Ghana, and South Africa.

The two layers — statute and contract

Kenyan termination pay sits in two layers:

Layer 1 — Statute. Section 40 of the Employment Act 2007 sets a hard minimum for redundancy: not less than 15 days' pay for each completed year of service. The Income Tax Act and Finance Act 2025 govern the tax treatment. KRA practice notes set spreading rules.

Layer 2 — Contract. Senior contracts almost always extend the statutory floor — three weeks' to one month's pay per year of service is common at the executive level, often paired with a contractual gratuity. Whatever the contract says, the statutory floor is the absolute minimum the NSSF and labour officer will accept.

There is no equivalent of Nigeria's loss-of-employment lump-sum exemption (₦50m under NTA 2025 — see our Nigeria severance guide). Kenya's exemption is structured differently: a cap on cumulative gratuity / loss-of-employment income, and a spreading mechanism that smooths large lump sums over prior years.

The 15-day formula in practice

For an employee with 8 completed years of service on a monthly basis salary of KES 240,000:

Daily pay = 240,000 ÷ 30 = KES 8,000 Statutory redundancy = 15 × 8 × 8,000 = KES 960,000

That is the minimum. Senior contracts often layer on:

• Contractual severance at one month per year of service (KES 1,920,000 in this example) — replaces or adds to the statutory minimum
• Service gratuity from a registered retirement benefits scheme — separately tax-exempt (more on this below)
• Pay in lieu of notice at the contract notice period (typically 1–3 months for senior staff)
• Cash for accrued leave days at the final daily rate

A common employer mistake is paying the contractual severance and forgetting that the statutory 15-day floor applies on top where the contract is silent. Per Andersen Kenya's redundancy compliance guide, Section 40 is treated by the Industrial Court as a non-derogable minimum — a contract that pays less than 15 days per year is void to that extent, even if the employee signed it.

The KES 600,000 exemption cap

Per Section 5(3) of the Income Tax Act, the first KES 600,000 of cumulative gratuity / loss-of-employment income is exempt from PAYE. The cap is cumulative across employments — an employee who has previously received KES 400,000 of exempt severance from a prior employer has only KES 200,000 of headroom remaining at the current one.

Beyond the cap, the lump sum is taxed as employment income at the employee's marginal rate. But — and this is where most Kenyan exit calculations go wrong — the KRA permits lump-sum spreading.

KRA lump-sum spreading — the under-used relief

Section 5(2)(c) of the Income Tax Act and KRA practice notes allow qualifying severance, gratuity, and leave-pay lump sums to be spread over up to 3 prior years of assessment for PAYE purposes. The lump sum is divided evenly, each year-portion is added to that year's prior-year income, and PAYE is recomputed at the bracket rates that applied in each of those earlier years.

For a long-tenured senior employee whose final-year salary pushes them into the 35% bracket, spreading can drop the effective rate on the severance portion meaningfully — often by 5–10 percentage points. The relief is automatic in well-implemented payroll engines, but is silently skipped in spreadsheet payroll setups, costing the employee real money.

Per Oraro & Company Advocates' Kenyan redundancy practice note, the spreading election is requested at the time of the lump sum payment via Form P9A and supporting payroll computation. Employers that pay the lump sum without applying for spreading leave the employee to chase the refund individually, which can take months.

Finance Act 2025 — gratuity exemption extended

The headline 2025 change: gratuity payments from private approved retirement benefit schemes are now fully tax-exempt, alongside the long-standing exemption for public-sector schemes. Per Grant Thornton Kenya's 2025 Finance Act analysis, this addresses a years-long imbalance where a civil servant's retirement gratuity exited tax-free while a private-sector executive's gratuity from a similar (but private) scheme was fully taxable.

The qualification: the scheme must be registered with the Retirement Benefits Authority and must be a recognised retirement vehicle, not a contractual ex-gratia disguised as gratuity. The RBA registration is the dividing line. A "gratuity" paid out of general operating cash, with no underlying scheme, is still taxed as ordinary employment income.

For senior exit packages, this changes the optimisation playbook: structuring a portion of the exit as a true RBA-registered gratuity is now genuinely tax-efficient for both employer and employee, where previously it only worked for the public sector.

Section 40 procedure — the four pillars

Procedurally, Section 40 imposes four obligations on a Kenyan employer planning a redundancy:

1. Notify the labour officer in writing, at least one month before the intended redundancy date, with reasons and the number of employees affected.
2. Notify the affected employees (or their union, where applicable) over the same period.
3. Apply selection criteria — the Act sets out skill, ability, reliability, and seniority (LIFO) as default. Deviations require objective, contemporaneously documented justification.
4. Pay the statutory minimums — 15 days' pay per completed year, plus accrued leave at gross rate, plus payment in lieu of notice if notice is not served.

Per DLA Piper's 2024 Africa employment FAQ, the Industrial Court has consistently treated the labour-officer notification as substantive: a redundancy without prior notification has been set aside as wrongful termination even where the financial settlement was generous. Process matters more than amount.

Worked example — KES 4.5m exit

A senior manager at a Kenyan SaaS company with 12 years' service exits via redundancy. Final monthly basic salary: KES 280,000.

Component	Amount	Treatment
Statutory redundancy (15 × 12 × KES 9,333/day)	KES 1,680,000	Lump-sum spreading over 3 years applied
Contractual top-up (1 month per year × 12)	KES 3,360,000	Within KES 600k exempt cap; balance spread
Service gratuity (RBA-approved scheme)	KES 1,200,000	Fully exempt (Finance Act 2025)
Payment in lieu of 3 months' notice	KES 840,000	Taxable as employment income, no spreading
Accrued leave (40 days × KES 9,333)	KES 373,320	Taxable as employment income, can spread
Total gross	KES 7,453,320
Tax-free	KES 1,800,000	KES 600k cap + RBA gratuity

The combination of the cap, the gratuity exemption, and 3-year spreading produces an effective tax rate on the lump sum that is considerably below the 35% top marginal rate. Without spreading, the same package would be taxed entirely at 32–35% on the non-exempt portion.

How Kenya compares — Pan-African view

Across the four largest African SME markets:

Country	Statutory formula	Tax-exempt cap	Spreading?
🇰🇪 Kenya	15 days/year (§ 40)	KES 600,000	Yes — 3 years (KRA)
🇳🇬 Nigeria	None statutory; contractual	NGN 50m (NTA 2025)	No
🇬🇭 Ghana	Negotiable (Labour Act § 65)	None specific	No
🇿🇦 South Africa	1 week/year (BCEA § 41)	R550,000 lifetime (SARS retirement table)	Yes — graduated 18/27/36% above

Kenya's structure is closer to South Africa's than to Nigeria's: a defined formula, a relatively low exemption cap, and a spreading or special-rate mechanism for the excess. Nigeria's model is unusual in having no statutory formula but a much larger exemption ceiling. Ghana sits at the negotiable end of the spectrum.

For Pan-African groups, the practical implication: an exit calculation that works for a Lagos executive will not work for a Nairobi or Cape Town one. Each country needs its own statutory floor, its own tax structure, and its own procedural compliance. A central HR system that ignores these differences either underpays the statutory minimum (legal exposure) or overpays the contractual top-up because no one tracked the country-specific cap.

See our companion guides for Nigeria's NTA 2025 framework and the upcoming Ghana and South Africa breakdowns in this series.

Building a defensible Kenyan exit process

The pieces that protect both sides at the Industrial Court:

• Labour-officer notice on file, dated at least one month before the redundancy, with reasons and headcount.
• Selection memos signed before announcement, documenting why each individual was selected and how LIFO was applied or deviated from.
• RBA-registered gratuity scheme, if you want the Finance Act 2025 exemption to apply — the RBA registration certificate is the proof.
• PAYE spreading election filed alongside the lump sum payment, not chased after the fact.
• Clean separation between PILON (taxable, no spreading) and the lump-sum components (spreading-eligible) on the payslip.
• Accrued leave cash-out at the gross rate — not basic only — and tracked in the same exit memo.

Kenyan exit disputes in 2024–2026 have followed a familiar pattern: the financial package is generous, but the labour-officer notice or RBA registration is missing, and the package is re-characterised as a wrongful termination settlement at a higher cost. The procedure is the variable that drives outcomes, not the gross figure.

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AnooreHR runs the full Kenyan exit workflow: 15-day statutory minimum auto-calculated against tenure, RBA-scheme gratuity flagged for the Finance Act 2025 exemption, KRA lump-sum spreading applied to qualifying components, and labour-officer notification templates ready to file. Pan-African groups get country-aware exit math out of the box — Nigeria, Kenya, Ghana, and South Africa all included. See a walkthrough or start your free trial.