Complete Guide to Payroll in Kenya: Regulations, Calculations & Compliance

Kenya’s location and young population make it a great place to expand businesses and enter the African market. It is the third-largest economy in Sub-Saharan Africa, having major industries in agriculture, mining, manufacturing, tourism, financial services, and energy. 

Employers who want to expand business operations in Kenya can consider hiring talents here. Undoubtedly, hiring globally and setting up payroll as per the country’s rules and regulations can be a daunting task. 

Further, in this write-up, we will share everything an employer needs to know about Kenya payroll in a simplified manner. 

How Is Payroll Calculated in Kenya?

To understand how to calculate payroll, employers should be aware of the Kenya’s payroll policies and procedures. Staying up to date with Labor Laws and Acts helps employers understand rules and regulations concerning Payroll in Kenya. Some of the important Labor Acts that employers must be aware of:

• Employment Act (Cap.226)
• Regulation of Wages and Conditions of Employment Act (Cap. 229)
• Industrial Training Act (Cap.237)
• Workmen’s Compensation Act (Cap. 236)
• Work Injury Benefits Act
• Pension Act (Cap. 189)
• Retirement Benefits Act (No. 3 of 1997)
• National Social Security Fund Act (Cap. 258)
• National Hospital Insurance Act (Cap. 255)
• Provident Fund Act (Cap. 191)
• Public Health Act (Cap. 242)

As per these Labor Laws, there are statutory minimum wages, statutory benefits, and other rules and regulations that employer needs to follow to calculate payroll compliantly.  

Not paying minimum wages is an offense and is punishable by fines and imprisonment. As of 2022, the minimum wage in Kenya is KES 13,572.90 per month. Some of the key considerations for calculating payroll correctly are:

• Employer type
• Payroll cycle
• Minimum wages
• Statutory benefits 
• Fringe benefits
• Tax deductions 
• Expense reimbursement
• Overtime
• Special payouts/ bonus, etc.

Important Elements of Salary Structure in Kenya

Essential elements of Kenya payroll include fixed and variable components, apart from the basic salary. 

Basic salary

Basic pay is the minimum wage that an employer needs to pay to the employee as per the employment agreement. The basic salary should be equivalent to or above the minimum wages set by the Government for the particular job profile.

Still, it can vary based on job location, job profile, and employee experience. 

Allowances 

There are two types of Allowances – Statutory and Voluntary.

Statutory allowances 

It includes all mandatory benefits that employers need to provide to employees. It Includes 

• Social Security
• Statutory leaves
• Housing Allowance/ Housing accommodation
• Clean water supply for housing accommodation
• Food if agreed during contract
• Medical help for illness
• Other statutory benefits

Voluntary allowances

Voluntary allowances are not mandatory as per rules but offered by employers to motivate employees and reduce employee turnover.

• Vehicle Loans
• Dental Insurance 
• Loan on low interest
• Life insurance, etc.

Overtime

Deductions

Employers must understand the payroll tax in Kenya – ‘PAYE system’ to make deductions lawfully. PAYE comes with the details of deductions employers can make from employees’ salaries. These deductions must be remitted to respective government authorities by employers. 

How to Set Up a Payroll in Kenya?

To set up a payroll in Kenya, employers must know payroll rules and regulations. The things involved in setting up payroll are: 

Personal Identification Number

As per Kenya Revenue Authority, businesses must get a Personal Identification Number (PIN) for business operations and payment. Employers can apply for the same at https://itax.kra.go.ke/KRA-Portal/

State registration 

Getting state registration for business is mandatory to run any business in Kenya. Employers have to follow all the payroll rules and regulations in Kenya and register themselves under the following:

• Income Tax Act
• Kenya Revenue Authority
• National Social Security Fund
• National Hospital Insurance Fund
• Directorate of Industrial training

Independent contractor vs. employee

Employers, when hiring talents, need to determine if the person is joining as an employee or independent contractor to file correct documents and withhold taxes accordingly. 

Payroll schedule

Employers should fix payroll schedules to pay employees. It can be weekly, biweekly, or monthly depending upon the company’s cash flow or contract between employer and employee.

Create Employee handbook

Create an employee handbook where an employee can get a clear understanding of the company’s policies. It should mention all the rules an employee needs to follow while working with the company. It should include paid time off, overtime, other leaves, and benefits. 

Choose Payroll system

To efficiently make payments without mistake or delay, employers can choose to take the help of payroll software like Multiplier or hire a payroll Service Firm. 

A Step-by-step Process of Payroll Processing in Kenya

Payroll processing is a procedure an employer follows to pay the salary to the employee. It is a long process that involves three stages.

Pre-payroll process

The pre-payroll process is the most crucial stage as it sets the foundation for the whole payroll process. During this stage, the employer set the payroll policy and collects and sorts the employees’ data to smooth the payroll processes.  

Step 1: Payroll policy

A payroll policy helps employers calculate the net pay to be paid after adjusting all the benefits, taxes, and deductions.

Gross Salary = Basic Salary + Allowances+ any other benefits

Net Pay = Gross Salary – All the deductions (Social security, tax, or any other deduction)

In the policy, the employer must define all the benefits such as pay policy, overtime policy, annual leave and other leave policies, bonus policy, mandatory benefits policy, voluntary benefits policy, social security funds deduction, tax deductions and any other terms and conditions that can affect employees’ salary. 

Step 2: Gather required data/ inputs

Once the employer defines the policy, the data required to process payroll must be collected. Any data that can directly affect the payroll process should be collected and analyzed adequately before the payroll process. Some of the data type employers must collect include: 

• Employee Attendance data
• Basic Pay
• Benefits
• Overtime pays
• Bonus
• Reimbursement 
• Leave status
• Deduction 
• Ad hoc payment
• Income tax deduction 
• Shift timing

In small-sized organizations, collecting this information is a manageable task, but in a larger organization, an employer must consider using payroll software to collect and analyze this information efficiently 

Step 3: Validate the collected data

An employer must sort and validate the collected data for processing payroll accurately. This part of the pre-payroll process takes the most time as a single error can cost big to the organization. 

Payroll process

Step 4: Calculate payroll

Once the validated data is gathered, the net payment is calculated by adjusting the benefits and deducted. Employers must follow payroll compliance checklist Kenya to calculate payroll for Kenyan employees. It can be done using a spreadsheet manually or by using payroll software. Payroll software automates the process and eliminates the chances of calculation errors once you feed all the data correctly.

Step 5: Pay salaries 

Once the calculation is done, businesses need to ensure that the bank account details of employees are correct and then disburse the salaries. 

Post-payroll process

Step 6: Fulfill Compliances 

All the statutory deductions like social security funds, TDS, Tax, etc., deducted by an employer from employee’s salary now need to remit to the concerned government authorities. Delays in processing compliances can also bring penalties for employers.

Step 7: Manage records

Employers should maintain the records of payroll. It is necessary to recheck all the salary and deduction data and feed it into the ERP system for the record.

Step 8: Distribute payslips 

Employers must distribute the payslips to employees, including the details of deductions and benefits. 

Step 9: Share report

Once payroll is completed, it is mandatory to share reports regarding it with the finance department or other departments to analyze these reports and understand department-wise employee cost or position/location-wise employee cost, etc. 

Payroll Contributions

Social welfare services offered by the government and employers are referred to as social security. Pension and Provident benefits, Health Insurance, occupational safety, and social protection come under social security. 

It is meant to provide economic assistance to old, disabled, vulnerable people, and children who cannot support themselves economically. 

For these social security benefits, both employer and employee have to contribute payroll contributions. 

Employer contribution

Kenya employer payroll taxes as per their contribution is as follow: 

Employee contribution

Payroll Cycle

The payroll cycle in Kenya is monthly, and the employer pays the salary at the end of the month or as agreed in the employment contract. 

13th month pay

There is no provision for paying the 13th-month pay in the Country. It solely depends upon employers if they wish to pay any bonus to employees.

Kenya Payroll Options for Companies

Every company has its own way of handling payroll. It also depends on the size of the company. Kenya payroll options available for companies include:

• In-house Payroll: Employers opting for In-house payroll should have their own team, and process to handle the payroll and manage the record. In-house payroll offers complete control over the payroll process where employers can easily make changes in the payroll, make quick payments, change payment intervals, etc.
• Outsourced Payroll: Employers can outsource payroll if they don’t want to hire a dedicated team for payroll handling. In this case, the payroll service provider takes care of the payroll process entirely, and employers have to give all the inputs required by the payroll partner.
• Global Employment Solution: Employers can simplify the payroll process by opting for global employment solutions such as Multiplier. Employers with no entity in Kenya must opt for Employer of Record to manage onboarding, payroll, benefits, and compliances. If employers already have an entity in Kenya, they must opt for a Professional Employer Organization that helps to handle all HR functions such as payroll, benefits, and compliances.

Entitlement and Termination Terms

Entitlements

Employees are entitled to the following benefits:

• Weekly rest day – 1 day
• Annual Leave-21 days
• Public Holiday -13 days or as per gazette 
• Sick Leave – 7 days with full pay + 7 days with half pay
• Maternity leave – 3 months
• Paternity Leave- 2 weeks
• Retirement benefits
• Health Insurance under NHIF 
• Social Security under NSSF
• Housing Allowance/ Housing accommodation
• Clean water supply for housing accommodation
• Food if agreed during contract
• Medical help for illness

 Termination Terms

There are four ways employee termination happens in Kenya:

Termination by agreement

In this case, the employment contract ends with the end of the employment agreement. Usually, fixed-term agreements come under this category. 

Resignation 

Employees can decide to resign from their employment because of their own reasons. In this case, an employee has to serve a notice period as mentioned in the agreement.

Automatic termination

An agreement automatically ends between employer and employee in case of employee death or loss of the business. 

Termination by employer

Fixed terms contract termination

If employers want to terminate the fixed-term contract, they have to give notice and a written explanation. 

• Before termination, in some cases like worker misconduct, an employer needs to give the employee a warning and a chance to explain their action.
• An employer must pay final wages to an employee as agreed. If the employment term has been more than one month, an employer should provide an employment certificate to an employee.

Unlimited term contract termination

• If employers hire employees for an indefinite period, then they have to follow the termination terms as per the contract.
• Usually, employers who terminate employees in their probation period have to give seven days’ notice.
• Employees paid on a monthly basis should be given 28 days’ notice or as mentioned in the agreement.

Severance Pay:

In case of redundancy, the employer has to pay severance pay at the rate of not less than 15 days’ pay for each year completed of service. Though, it also depends on the employee’s length of service.

How Can Multiplier Help with Global Payroll?

Employers who want to expand their businesses in Kenya must know the country’s rules and regulations to start the business and manage the employees and payroll. 

Handling payroll manually is a long and complex process that needs experts in hand. But our global employment solution businesses can make this process short and smooth. 

To onboard talents and manage payroll, benefits, and compliances, Multiplier does it all for businesses with its Employer of Record solution.

Employers who have already taken the first step and established the entity in Kenya can make Multiplier its Global HR solution partner in payroll, benefits, compliances, and insurance management with our Professional Employer Organization (PEO) product. 

To know more about Multiplier, book a demo now!