Why retrenchment should be balanced

Where an employment contract is fixed term, ending the job means paying out for the full term of the contract. FILE PHOTO | NMG 

Retrenchment is a thorny balance at the best of times. For balancing job losses that businesses need to stay afloat, against the personal calamity of a deceased salary and revenue for individuals, pitches human against human for who takes the biggest hit.

Little wonder the law, and judicial interpretation of the law, grapples with such a balancing act. But as our times of economic strain deepen, hard choices need to be made.By law, laying off staff requires notice of redundancy.

All dues must be paid under the contract, for instance a three-month notice clause commands three months’ of pay on redundancy, and staff should, further, be paid a month’s salary for each year worked in their post.

Where an employment contract is fixed term, ending the job means paying out for the full term of the contract.

However, with the pay-out calculated, a first issue arises for staff in that their ‘golden handshake’ very often pushes them into a higher tax take. Spread over time, each month’s money will get a tax-free allowance and fractions in a lower tax band: but once delivered as a single payment that allowance will count once, even over a year of salary, and employees hurtle into a full 30 per cent taxation on almost all of the pay-out.

Since the purpose of that final redundancy payment is to provide a cushion and potential starting capital, and it is calculated as a number of months of salary payment, there is a case for it to be treated as exactly that: a number of months’ of payment.

Yet in its current travails, the Kenya Revenue Authority is unlikely to embrace losing the tax bonus that comes with retrenchments. The one-time payment also creates hurdles for businesses. Tales abound of businesses large and small now in arrears on salaries, it wasn’t only Nakumatt.

Across the city and country, staff are living on air for months on end as ever bigger numbers of companies run into difficulties. In that business environment, finding a one-time pay-off, where there are no loans to make pay-outs to permanently reduce costs, can be a hurdle indeed. The single pay-out is also often disadvantageous for employees.

Many hit redundancy in shock. They don’t have business plans. They are often depressed, and that amount that feels like wealth can disappear in a rush of spending that does not create a new income.

Other options for employers can be to reduce salaries, but keep staff on. By law, if the financial difficulties are proven, they can. But practically, it’s a nightmare option.

The last thing a struggling company needs is demoralized staff, and although the law permits pay cuts on lost sales, the courts very often don’t. Indeed, as we know, our courts may even ban redundancies altogether, as in the case of Kenya Airways #ticker:KQ.

The sum for employers is that they many have already and will continue, in increasing numbers, to move to liquidation. On liquidation, staff get nothing. The earning and jobs just stop. There is no company any more as an operational entity to settle anything.

The tax authorities get nothing, and the entire little unit of economic activity is dead.

Thus, the end point of the current legislative framework is that in harsher business periods such as now, almost everyone gets nothing, and businesses are simply gone.

In short, sales losses on, say, a protracted election year, is a problem without any legal solution, so businesses and jobs, and taxes too, crash, and that’s a problem for everyone – the economy, the country, and hundreds of thousands of individuals.

Elsewhere, there are protection laws to head off that collision, in the US, Chapter 11 bankruptcy protection. It provides a halt on dues, while companies reorganise their cost base and recapture new sales, meaning the crashes are fewer, the lows not as low, the job cuts arrive less often as the savage liquidation kind, and the economy is more resilient and continuity better.

If Kenya wants to stem its business closures, it needs some rules that balance creditors and debts and allow time and mechanisms for reorganization, to keep jobs going and businesses alive, when politics have dented revenues.