Case Citation: Stubbs v Fourth Generation Capital Ltd [2025] KEELRC 3305 (KLR)
Delivered by: Justice Radido Stephen on 25th November 2025
Case Heading: Compensation for unfair termination was not subject to some statutory deductions like Housing Levy and Social Health Insurance Fund, since such levies are tied to ongoing employment and payroll systems.
Background
In a judgment delivered on April 9, 2025 in favor of the Claimant, Alexander John Frank Stubbs, an award of KES 2,800,000 as compensation and pay in lieu of notice for unfair termination, was made. Following the judgment, the matter took several procedural turns involving competing applications for stay of execution after the respondent alleged that the Claimant had executed the decree despite subsisting stay orders.
The outstanding issue identified was whether the respondent lawfully deducted statutory dues when settling the decretal sum. The respondent had deducted PAYE (Pay as you Earn), NSSF (National Social Security Fund), Social Health Insurance Fund contributions, and the Housing Levy. According to the respondent, the compensation was taxable. The claimant argued that such awards did not constitute taxable income. The ruling addressed the issue whether the whether statutory deductions were properly made.
Issues for Determination
The first issue was whether compensation and pay in lieu of notice awarded under section 49(1) of the Employment Act constituted taxable income subject to PAYE. The second issue was whether compensation for unfair termination was subject to deduction of the Housing Levy under the Affordable Housing Levy Act and Social Health Insurance Fund (SHIF) contributions paid after employment had ended.
Court’s Determination
On PAYE deductions on compensation for unfair termination, the Court held that compensation awarded under section 49(1) was subject to section 49(2) of the Employment Act, which required statutory deductions. Sections 3 and 5 of the Income Tax Act expressly classified termination compensation as gains or profits, making it taxable thus it was correct to deduct PAYE.
The final issue was whether the compensation awarded for unfair termination could lawfully be subjected to deductions for the Housing Levy under the Affordable Housing Levy Act and for Social Health Insurance Fund (SHIF) contributions under the Social Health Insurance Act, despite the employment relationship having already ended. The Court noted that termination compensation was not “salary” within the meaning of section 4 of the Affordable Housing Levy Act. Although broadly capable of being described as income, the statutory scheme of the Housing Levy—requiring monthly remittances tied to payroll—presupposed an ongoing employment relationship through which the employer and employee simultaneously contributed. Deducting the Levy from a post-employment award would amount to an impermissible double payment and would offend the principles of fair labour practice.
Turning to SHIF, the Court observed that the 2023 statute required contributions from salaries, wages, or income earned by persons who were either in employment or voluntarily registered as contributors. The framework contemplated deductions processed through payroll systems during employment, not compulsory deductions effected after separation through compensation meant to redress unfair dismissal. The Court rejected the notion that section 49(2) of the Employment Act could operate as an alternative mechanism for enforcing SHIF contributions, emphasising that such deductions would be inconsistent with the Act’s registration and contribution structure and would impose an unfair financial burden on an employee who had already contributed during active service. Consequently, the Court held that neither the Housing Levy nor SHIF contributions could lawfully be deducted from compensation for unfair termination , rendering the respondent’s deductions unlawful and subject to refund.