The One-Third Payslip Rule in Kenya

Introduction

The one-third payslip rule in Kenya is a guideline used by financial institutions and employers when determining the maximum amount that can be deducted from an employee’s salary to service a loan. This rule is particularly relevant for check-off loans, where loan repayments are deducted directly from an employee’s salary by their employer.

The rule is designed to protect employees from over-indebtedness by ensuring that loan repayments do not consume an excessive portion of their income. It also helps employers and lenders comply with labour and financial regulations.

Key Points of the One-Third Payslip Rule

Maximum Deduction Limit

The rule states that the total deductions from an employee’s salary (including loan repayments, SACCO contributions, and other deductions) should not exceed one-third (1/3) of their gross salary.

This ensures that the employee retains at least two-thirds of their salary for personal use and other obligations.

The rule is designed to protect employees from over-indebtedness by ensuring that loan repayments do not consume an excessive portion of their income.

It also helps employers and lenders comply with labor and financial regulations.

Application to Check-Off Loans

For check-off loans, the employer deducts the loan repayment directly from the employee’s salary and remits it to the lender.

The employer must ensure that the total deductions, including the loan repayment, do not exceed the one-third threshold.

Exceptions

In some cases, lenders or employers may allow deductions slightly above the one-third limit, but this requires the employee’s written consent and must comply with labor laws.

Example

If an employee earns a gross salary of KES 60,000 per month:

• The maximum total deductions allowed under the one-third rule would be KES 20,000 (1/3 of 60,000).
• If the employee has other deductions (e.g., SACCO contributions, insurance), the loan repayment amount must be adjusted to ensure the total deductions do not exceed KES 20,000.

One-third rule Legal Framework

The one-third rule is based on Kenya’s Employment Act and guidelines from the Central Bank of Kenya (CBK) and the Retirement Benefits Authority (RBA). It is also enforced by employers and lenders to promote responsible lending and borrowing practices.

1. The Employment Act (Cap. 226)

The Employment Act is the primary legislation governing employment relationships in Kenya. It outlines the rights and obligations of employers and employees, including provisions related to employee pay.

Payment of Wages (Section 17-19)

Wages must be paid in Kenyan currency (KES) and directly to the employee, unless otherwise agreed in writing. Wages must be paid within a stipulated period (e.g., monthly) and not later than 10 days after the end of the pay period.

Minimum Wage (Section 48)

The Act provides for the setting of minimum wages by the Labour Cabinet Secretary through the Wages Council. Employers must pay employees at least the minimum wage as stipulated for their sector or job group.

Deductions from Wages (Section 19)

Employers are allowed to make deductions from an employee’s wages only under specific circumstances, such as statutory deductions (e.g., PAYE, NHIF, NSSF), deductions authorized by the employee in writing (e.g., loan repayments, SACCO contributions), deductions for damage or loss of the employer’s property caused by the employee’s negligence.

The total deductions (excluding statutory deductions) must not exceed two-thirds of the employee’s basic pay, ensuring the employee retains at least one-third of their salary. This is where the one-third rule arises from.

Overtime Pay (Section 28)

Employees who work beyond normal working hours (typically 45 hours per week) are entitled to overtime pay.

Overtime rates are:

1.5 times the hourly rate for work done on weekdays or Saturdays.

2 times the hourly rate for work done on Sundays or public holidays.

Leave and Pay

Employees are entitled to annual leave (at least 21 working days per year) with full pay.

Other types of leave (e.g., sick leave, maternity leave, paternity leave) are also provided for, with specific pay entitlements.

Termination and Final Pay

Upon termination of employment, the employer must pay the employee all outstanding wages, accrued leave, and any other dues (e.g., severance pay, if applicable).

2. The Retirement Benefits Authority (RBA)

The RBA is a statutory body established under the Retirement Benefits Act (No. 3 of 1997) to regulate and supervise the retirement benefits sector in Kenya. It ensures that employees’ retirement savings are managed prudently and that employees receive their benefits upon retirement.

Key Provisions Related to Employee Pay

1. Mandatory Contributions to Retirement Schemes:
   • Employers are required to register their employees with a retirement benefits scheme (e.g., NSSF or a private pension scheme).
   • Both the employer and employee must contribute to the scheme:
     • NSSF Contributions: Under the NSSF Act 2013, the employer and employee each contribute 6% of the employee’s pensionable earnings, up to a maximum of KES 1,080 each (total KES 2,160 per month).
     • Private Pension Schemes: Contributions vary depending on the scheme’s rules but must comply with RBA regulations.
2. Remittance of Contributions:
   • Employers must deduct the employee’s contribution from their salary and remit both the employer’s and employee’s contributions to the retirement scheme by the 9th day of the following month.
   • Failure to remit contributions on time attracts penalties.
3. Portability of Benefits:
   • Employees can transfer their retirement savings from one scheme to another when changing jobs, ensuring continuity of their retirement benefits.
4. Taxation of Retirement Benefits:
   • Contributions to retirement schemes are tax-deductible up to a maximum of KES 20,000 per month or 30% of the employee’s monthly income, whichever is lower.
   • Retirement benefits (e.g., lump-sum payments, annuities) are also subject to favorable tax treatment under the Income Tax Act.
5. Withdrawal of Benefits:
   • Employees can access their retirement benefits upon reaching the retirement age (typically 60 years) or in cases of early retirement, permanent disability, or emigration.
   • Partial withdrawals may be allowed for specific purposes (e.g., purchasing a home, medical expenses) under certain schemes.

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How the Employment Act and RBA Relate to Employee Pay

1. Statutory Deductions:
   • The Employment Act mandates that employers deduct statutory amounts (e.g., PAYE, NHIF, NSSF) from employees’ salaries.
   • The RBA ensures that retirement contributions (e.g., NSSF or private pension) are deducted and remitted as required.
2. Net Pay Calculation:
   • After deducting statutory and voluntary contributions (e.g., loans, SACCOs), the employee’s net pay must comply with the one-third rule (total deductions not exceeding two-thirds of basic pay).
3. Employee Protection:
   • Both frameworks protect employees from exploitation by ensuring timely payment of wages, fair deductions, and secure retirement savings.
4. Employer Compliance:
   • Employers must comply with both the Employment Act and RBA regulations to avoid penalties, legal disputes, or reputational damage.

Practical Implications for Employers and Employees

For Employers:

Ensure accurate calculation and timely payment of salaries, including statutory deductions and retirement contributions.

Maintain proper records of employee pay and deductions.

Educate employees on their rights and obligations under the Employment Act and RBA.

For Employees:

Understand your payslip, including gross pay, deductions, and net pay.

Verify that statutory and retirement contributions are being remitted correctly.

Plan for retirement by actively participating in a retirement benefits scheme.