Employers Must Deduct PAYE Tax From Unfair Dismissal Awards

Case Study: Sakam Enterprises Limited v Wando (Employment and Labour Relations Appeal E026 of 2025) [2025] KEELRC 2917 (KLR) (23 October 2025) (Judgment)

Background

• Tecla successfully sued SEL for unfair termination in a lower court. The parties recorded a consent judgment for Kshs. 2,600,000.
• SEL paid the final instalment of the decretal sum after deducting Kshs. 650,940.15 for Pay-As-You-Earn (PAYE) tax and Kshs. 175,000 for an alleged staff loan. Tecla challenged these deductions, arguing the full consent amount was due.
• The trial magistrate dismissed the SEL’s application to have the matter marked as settled, effectively ruling that the decretal sum was not subject to statutory deductions.
• SEL appealed this ruling to the Employment and Labour Relations Court at Eldoret.

Core Legal Issue

The central question for the appellate court was:

Is a monetary award (decretal sum) issued by a court as compensation for unfair termination of employment subject to statutory deductions, specifically PAYE under the Income Tax Act?

Court’s Analysis

The appellate judge, allowed the appeal, overturning the lower court’s decision. The reasoning was based on a detailed analysis of the relevant statutes:

1. The Employment Act, Section 49(2): The court emphasized that this section explicitly states that “Any payments made by the employer under this section shall be subject to statutory deductions.” The payments referred to in Section 49(1) include compensation in lieu of notice, unpaid wages, and compensation for unfair dismissal (up to 12 months’ gross salary).
2. The Income Tax Act, Section 37: This section obligates an employer paying emoluments to an employee to deduct and account for tax. The court noted that the definition of “employee” in the Income Tax (P.A.Y.E) Rules includes an individual receiving emoluments in respect of past employment. This directly counters the trial court’s distinction between a current and former employee.
3. The Employment Act, Section 19: This section authorizes an employer to make various deductions from an employee’s wages. Specifically: Section 19(1)(f) allows deductions authorized by any written law (which includes the Income Tax Act).Section 19(1)(h) allows for the deduction of loan repayments made to the employee, subject to a cap.
4. Case Law: The court cited several precedents, including Directline Assurance Co. Ltd v Jeremiah Wachira Ichaura and Joseph Ogonda Omondi v SBI International Holding AG Kenya, which consistently held that lump-sum payments awarded as terminal dues under Section 49 of the Employment Act are subject to statutory deductions like PAYE tax.

The appellate court found that the trial magistrate erred in law by disregarding these clear statutory provisions and established legal principles.

Final Judgment

• The appeal was allowed.
• The ruling of the trial court dated 18th March 2025 was set aside.
• SEL’s application dated 7th March 2024 was allowed.
• The court held that SEL had fully complied with the consent judgment by making the payments, including the remittance of PAYE to the Kenya Revenue Authority.

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