What is Redundancy?

Redundancy is one of the most misunderstood yet common employment events in Kenya today. It refers to the lawful termination of employment that arises when an employer no longer requires an employee’s position to be filled. In essence, redundancy is not caused by employee misconduct or poor performance, but by business realties that render certain roles unnecessary.

Common triggers of redundancy include:

• Corporate restructuring or downsizing;
• Technological or process automation;
• Mergers, acquisitions, or takeovers;
• Financial distress leading to operational scale-down; or
• Permanent closure of a business.

While the conversation around redundancy often revolves around labour laws and employee welfare, it is also a payroll and tax event that demands precision and compliance in equal measure.

Regulatory Framework

Under Section 2 of the Employment Act, 2007, redundancy is defined as loss of employment, occupation, job or career by involuntary means through no fault of an employee, involving termination of employment at the initiative of the employer.

In simple terms, redundancy is not the employee’s doing, it is a business decision. Yet, its execution must follow strict legal procedures to safeguard employees and ensure employers remain compliant.

Section 40 of the Employment Act, 2007 sets out the mandatory conditions that an employer must comply with before terminating employment on account of redundancy. These include:

1. Notice of intention to declare redundancy: The employer must issue written notice explaining the reasons for and extent of the intended redundancy at least one month in advance:

• Where the affected employee is a member of a trade union, notice must be given to both the union and the Labour Officer in charge of the area; and
• Where the employee is not a member of a trade union, notice must be given directly to the employee and to the Labour Officer.

2. Fair selection criteria: In deciding which employees are to be declared redundant, the employer must have due regard to seniority in time, and to the skill, ability, and reliability of each employee in the affected category.
3. Equality of treatment: Where a collective bargaining agreement (CBA) exists, the employer must ensure that no employee is placed at a disadvantage for being or not being a member of a trade union in relation to redundancy benefits.
4. Payment of outstanding leave: Any accrued leave owed to the employee must be paid off in cash at the time of termination.
5. Notice pay: The employer must give not less than one month’s notice or pay one month’s wages in lieu of notice.
6. Severance pay: The employer must pay severance at a rate of not less than 15 days’ pay for each completed year of service.

Each of these legal obligations carries a corresponding payroll responsibility from calculating terminal benefits to ensuring correct tax treatment and statutory remittances.

Beyond Section 40, other provisions of the Employment Act, 2007 reinforce and complement the redundancy requirements, providing further clarity on how employers should handle termination and final payments.

Section 36 addresses payment in lieu of notice, allowing either party to terminate a contract without serving the notice period by paying the remuneration that would have been earned during that period. This directly supports Section 40, which requires payment of at least one month’s wages in lieu of notice. From a payroll perspective, this means the notice pay must be calculated based on the employee’s last gross salary and processed through payroll as part of the final dues.

Section 28 deals with annual leave entitlement and payout. Employees are entitled to not less than 21 working days of paid annual leave after every twelve consecutive months of service. In line with Section 40, any outstanding leave must be paid in cash upon redundancy. Practically, payroll officers must therefore compute and include any accrued but unused leave days in the employee’s final payslip, ensuring statutory deductions are accurately applied.

Further, Section 51 mandates that every employee whose employment has been terminated, except where service was for less than four consecutive weeks, must be issued with a certificate of service indicating the duration of employment and key employment particulars. Although issuing this certificate is primarily an HR function, it closely links with payroll because the details it contains must be consistent with payroll and statutory records. The employment dates stated must match the periods for which salaries were processed and statutory deductions such as PAYE, NSSF, NHIF, and housing levy were remitted.

Together, Sections 40, 36, 28 and 51 of the Employment Act, 2007 form a comprehensive regulatory framework for lawful redundancy in Kenya.

In addition, under Section 5(2)(c) of the Income Tax Act (ITA), compensation for loss of employment is deemed taxable income. Employers must therefore apply PAYE, reflect the payment in the monthly PAYE return, and issue accurate P9 forms showing the full breakdown.

For payroll and tax professionals, these provisions translate into tangible compliance actions such as accurate computation of final pay, correct tax treatment of each payment element, and proper documentation to support both internal audits and employee rights.

Breaking Down Final Dues

Payroll records provide the factual basis for confirming the employee’s service history, role changes, and final dues paid at termination. Redundancy is not a one-off lump sum payment. It involves multiple components, each with distinct tax implications.

The table below provides a summary of the components of final dues and the payroll and tax treatment of each.

In essence, the payroll function is the custodian of fairness and compliance, translating legal obligations and HR decisions into accurate financial outcomes. It ensures every redundancy payout is correctly computed, taxed, and remitted on time.

Redundancy in Business Transfers

When a business changes hands, employees often find themselves unsure of whether they have been transferred or terminated. Kenyan law currently lacks an automatic transfer of undertakings provision. This means that unless the acquiring entity explicitly takes over employees under new contracts, the outgoing employer must treat the separation as redundancy and fulfill all related obligations.

Recent high-profile cases involving industrial manufacturers have illustrated this reality vividly. When ownership changes lead to layoffs, redundancy rules still apply, and failure to comply exposes employers to claims and reputational risk. A good example is the Rivatex case.

In September 2025, Rivatex East Africa SEZ Limited, a state-owned textile manufacturer based in Eldoret announced a sweeping redundancy exercise as part of its restructuring and lease to Arise Integrated Industrial Platforms (Arise IIP) for a 21-year operational takeover. The move came after years of underperformance, with the company operating below 10% capacity and reporting losses exceeding KShs. 3 billion.

Through a memo dated 3^rd September 2025, Rivatex’s acting managing director cited Section 40 of the Employment Act, 2007 as the legal basis for the redundancy. Employees on fixed-term contracts whose terms expired in August 2025 were not renewed, while permanent and long-term contract staff were issued a three-month redundancy notice running to 30^th November 2025. The company indicated that only a fraction of staff, about 118 employees, would be rehired under the new management structure. The company also noted that all dues would be settled in line with the Employment Act.

This case illustrates adherence to the procedural requirements of Section 40 of the Employment Act on redundancy.

Conclusion

Redundancy signals the end of an employment relationship but it should not mark the beginning of compliance headaches. When handled correctly, it reflects an employer’s commitment to fairness, legality, and fiscal responsibility.

For payroll professionals, redundancy is not merely about finalizing pay, it’s about closing a chapter with integrity. Accuracy in calculations, compliance with tax laws, and empathy toward affected employees determine whether redundancy becomes a smooth transition or a legal and tax quagmire.

For employees, understanding the final payslip is equally important. Before moving on, they should review it carefully to confirm that all dues have been included, that PAYE and other deductions are correctly applied, that the severance exemption has been factored in, and that both the P9 form and certificate of service have been issued. This ensures a smooth personal tax filing process and helps prevent future disputes with KRA or the former employer.

In today’s fast-changing business environment, where restructuring and acquisitions are frequent, getting redundancy right is more than a statutory obligation. It is also a mark of good governance and a reflection of corporate integrity.

Written By:

Irene Masecko

Tax Associate

irene.masecko@ke.andersen.com