More salaried workers with pre-existing loan repayment obligations have in recent months seen their take-home pay shrink past the legally recommended level after statutory and tax deductions — presenting a compliance headache for employers and financial institutions.

The Employment Act, 2007 prohibits employers from deducting more than two-thirds of the basic pay of an employee to safeguard their rightful gains from employment.

Salaried workers have seen a jump in NSSF contributions from Sh200 to up to Sh1,080 and the start of a 1.5 percent housing levy deduction on gross pay, cutting their take-home pay.

Employers said new statutory deductions and the mounting interest rates have significantly raised the monthly deductions on employee payslips, cutting the workers’ take-home income in an economy where the cost of living remains high and placing companies at loggerheads with the law.

“There has been quite an increase in the level of breach with what the Employment Act requires. It is a big problem and we have had engagements with the government. Other than the statutory deductions, people have their commitments like loans, mortgages, and fees,” Jacqueline Mugo, the executive director and CEO of the Federation of Kenya Employers (FKE), said.

“There is a need for the government to harmonise these deduction laws. What do we obey? Do we obey the Employment Act or others like for housing levy and pension? At the end of the day, all these are laws and none supersedes the other except the Constitution.”

The rise in State deductions, added to an increase in banks’ weighted average interest rates to 13.5 percent in July— the highest since March 2018 when the figure was at 13.49 percent—has added to the pain of workers who had tapped loans on the strength of their payslips.

The new deductions have seen many employers breach the Employment Act 2007 which stipulates that deductions from an employee’s pay— whether statutory or voluntary— should not exceed two-thirds of their total salary.

“The total amount of all deductions which may be made by an employer from the wages of his employee at any one time shall not exceed two-thirds of such wages or such additional or other amount as may be prescribed by the Minister,” states the Act.

Bankers said that the enhanced contributions towards the National Social Security Fund (NSSF) and the new housing levy were substantial and have even affected the financial plans of many workers.

Faced with this development, some banks are now opting to restructure loans to ease the pain on affected employees while some workers are cutting down on voluntary savings such as those in saccos and banks to survive.

“There is going to be a transition challenge and then there will be a reset sooner than later. Our intention as a bank is to ensure people can pay loans so we have been accommodating cases where we can extend loan tenors,” said Kariuk Ngari, the Standard Chartered Bank Kenya CEO, in a phone interview.

A joint survey by the Central Bank of Kenya, Financial Sector Deepening Kenya, and Kenya National Bureau of Statistics showed livelihoods of 73.6 percent of Kenyan households worsened in 2021 compared to 2019.

Some 43.3 percent of households said they tapped into their savings, 40.6 percent cut the non-food budget, 38.9 percent cut food spending, 22.1 percent sold assets and 29.6 percent turned to debts.

About 54.2 percent said they had to forgo buying medicine or visiting a hospital compared to 35.7 percent that were in this category in 2019.

Such cases, including looking for side jobs, could increase as people try to adjust to the sudden drop in take-home pay. The State currently deducts about Sh10,200 or 20.5 percent from workers earning Sh50,000 and Sh26,300 or 26.3 percent from those with Sh100,000 gross pay. The deduction rises to Sh57,800 or 28.9 percent for a worker earning Sh200,000.

Workers will see an increased share of compulsory deductions on their gross pay should the government make good its proposal to deduct 2.75 percent of gross earnings towards funding social healthcare.

Such a move, Ms Mugo warned, will narrow the room left for deductions towards workers' commitments such as loans, making more of them take home less than a third of their gross pay.

“It will make an already bad situation worse and we are going to throw more people into a poverty net called the working poor, where people don’t have enough to live on even though they are employed,” said Ms Mugo.