A Nairobi court has clarified that deductions for housing levy and social health insurance cannot be applied to compensation paid after an employee is unfairly dismissed, calling such deductions an unfair labour practice.
The ruling sets an important precedent on how statutory contributions should be treated in post-employment awards.
The case involved Alexander John Frank Stubbs and his former employer, Fourth Generation Capital Ltd. Stubbs had previously won a court award of Sh2.8 million for unfair termination and payment in lieu of notice.
Before releasing the funds, the company withheld Sh1 million, citing statutory obligations including PAYE, NSSF, the Social Health Insurance Fund, and the Housing Levy.
This action sparked a new dispute, including contested execution steps and an attempt to attach company property to recover the deducted amounts.
At the heart of the disagreement was whether compensation granted by the court after the end of employment should be treated like regular salary for statutory deductions. Stubbs challenged the withholding, arguing that the funds awarded after termination cannot be classified as employment income.
He said that levies beyond PAYE unfairly penalized employees twice and pointed to precedents confirming that court-ordered awards are not subject to income tax. Stubbs further noted that Section 49(2) of the Employment Act applies only to Labour Officer awards, not court rulings.
The company, however, defended its actions, stating that compensation for employment-related disputes has historically been considered taxable. It referred to Section 37 of the Income Tax Act, which obliges employers to deduct and remit taxes on employment-linked payments.
The firm insisted all deductions were legal and aligned with statutory requirements.
The court examined the purpose and wording of Section 49(2), noting legal uncertainty surrounding its application. It emphasized that extending remedies from labour officers to courts did not change the fundamental nature of compensation.
Importantly, the court distinguished housing levy and social health insurance contributions, ruling that these cannot be applied to awards after employment ends.
The judge questioned the fairness of demanding housing levy payments post-employment, stating: “Would it therefore be fair labour practice to demand that the employee or employer pays the housing levy after separation?”
The ruling continued, “In this court’s view, that would amount to double payment of the housing levy on the part of the parties.”
The court also highlighted that the Social Health Insurance Act already provides mechanisms for contribution by individuals in active employment or self-employment. Forcing additional deductions from compensation would therefore be improper and constitute an unfair labour practice.
