Terminating an employee's contract is never easy, but ensuring their final dues are calculated correctly according to the Kenyan Employment Act (2007) is critical to avoiding costly labor disputes and industrial court cases.

Here is a breakdown of what constitutes final dues and how to calculate them accurately.

Components of Final Dues

When an employee leaves a company—whether through resignation, termination, or redundancy—their final paycheck is a combination of several factors.

1. Salary for Days Worked

The employee must be paid for the exact number of days they worked in their final month. If they leave on the 12th of the month, their final pay must include their pro-rated basic salary and applicable allowances for those 12 days.

2. Pay In Lieu of Notice

If an employer terminates a contract without giving the legally or contractually required notice period (usually 1 month), the employer must pay the employee the equivalent of their salary for that period. Conversely, if an employee resigns and leaves immediately without serving notice, the employer is legally allowed to deduct this amount from their final dues.

3. Unused Leave Days (Accrued Leave)

By law, employees are entitled to a minimum of 21 annual leave days per year. Upon termination, any leave days the employee earned but did not take must be paid out in cash.

The Formula:
(Basic Salary ÷ 22 or 26 Working Days) × Remaining Leave Days = Leave Payout

Severance Pay vs. Service Pay

There is often confusion between these two terms in Kenya:

• Severance Pay: This is payable only when an employee is declared redundant (laid off due to company restructuring or closure). The law mandates a minimum of 15 days' basic wage for every completed year of service.
• Service Pay: This applies at the end of a contract for employees who are not registered with NSSF or an approved pension scheme. Since NSSF is mandatory for all formal employees in 2026, Service Pay rarely applies to modern businesses.

Note: If an employee resigns voluntarily or is fired for gross misconduct, they are generally not entitled to severance pay, only their earned salary and accrued leave.

Tax Implications on Final Dues

According to the Kenya Revenue Authority (KRA), final dues such as accrued leave payout and pay in lieu of notice are fully taxable and subject to normal PAYE deductions. However, Severance Pay (due to redundancy) often has specific tax exemptions up to a certain limit (currently KES 100,000 per year of service), making it crucial to classify these payments correctly on the final payslip.