Why employers cannot deduct SHIF from awards
Courts
By
Kamau Muthoni
| Dec 02, 2025
Employers cannot deduct money awarded to employees by a court to pay the Social Health Insurance Fund (Shif) or the Housing Levy, a Nairobi court has ruled.
Employment and Labour Relations Court (ELRC) Justice Stephen Radido said such deductions constitute an unfair labour practice, as employers cannot subject court-awarded compensation to contributions for government social schemes.
He noted that the window for making these deductions closes once an employee leaves employment.
“The employee who is awarded compensation for unfair termination must have been registered through the employer, with appropriate deductions made via payroll during employment. It would be an unfair labour practice to subject such compensation to deductions for social health insurance,” Justice Radido stated.
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He ordered Fourth Generation Capital Limited, a neo-bank, to refund Sh1.02 million it had deducted from its former employee, Alexander John Frank.
In the case, the fintech company argued that court-awarded compensation should be treated as income and subjected to deductions to meet government obligations.
Frank, however, contended that it would be unfair to treat such awards as income, as he had already left employment. He argued that money awarded by a court is not subject to income tax or statutory deductions.
He further noted that the legal provisions cited by his former employer apply only to awards made by a labour officer, not by a court. He urged the court to dismiss the company’s claims.
Unfair dismissal
After hearing both sides, Justice Radido noted that Fourth Generation had deducted PAYE, NSSF, Social Health Insurance Fund and Housing Levy from the award.
The judge observed that the law considers compensation for unfair dismissal as a gain or profit, which may be subject to taxation but cannot be reduced through statutory deductions like those imposed during employment.
“In the court’s view, compensation awarded under section 49 of the Employment Act, 2007, qualifies as gains or profits within the meaning of section 3(2)(a)(ii) of the Income Tax Act and is therefore subject to tax,” said Justice Radido.
However, he clarified that a court award is not considered income for other purposes and cannot be used to pay the Housing Levy or Social Health Insurance Fund (SHIF).
He noted that during employment, an employee contributes part of the salary toward these schemes, while the employer contributes an equal amount.
He questioned whether it would be fair for an employer to deduct from compensation without also making an equivalent contribution to the government on behalf of a former employee.
“However, the question is whether the compensation constitutes gross income under the Act. The Act does not define gross income, but generally, such compensation would form part of income. An employee normally pays the Housing Levy with each salary, and the employer also contributes a percentage. Would it, therefore, be fair labour practice to demand payment of the Housing Levy after the employee has left employment?” Justice Radido asked.
On SHIF, Justice Radido said deductions can only be made when there is an existing or binding employment relationship.