The National Hospital Insurance Fund (Amendment) Bill, 2021

Posted on August 9th, 2021

Proposed Provision for Amendment Proposed Amendment Our Comments
Title The Bill proposes to amend the title to the Act by adding the establishment of the National Health Scheme to the objects of the Act. This increased functionality is aimed at ensuring that the National Health Insurance Fund (the Fund) makes significant efforts at attaining Universal Health Coverage.
S. 1 The Bill proposes to define a child as a person who has not attained the age of 18 years and includes a posthumous child, stepchild, adopted child and any child to whom the contributor stands in loco parentis that has not attained the age of eighteen (18) years.

 

This definition would exclude persons who are over the age of eighteen (18) years and are students or indentured or are not employed and are dependent on the contributor. Also excluded from the definition of child would be persons with disabilities who are wholly dependent on and living with the contributor. These persons are proposed to be defined as beneficiaries in the Act, hence making the proposed amendment in line with the Constitution and the Children’s Act.
S. 5(1) The Bill proposes to introduce empanelled healthcare providers, who would replace “declared hospitals”. The criteria for the empanelment and contracting of healthcare providers for the purposes of the Act shall be set by the Minister of Health and the National Hospital Insurance Fund Management Board (the Board). This is a change from the current system of using “declared hospitals” to venture into the use of empanelled and contracted healthcare providers. The working of this proposed system is unclear as at now, and it is expected that the regulations to be promulgated by the Minister might shed more light on this.
The functions of the Board are proposed to be expanded to include facilitating the attainment of Universal Health Coverage including communication and stakeholder engagement. This is one of the pillars of Vision 2030 as well as a part of the President’s Big 4 Agenda and is set to be achieved through the National Health Insurance Fund, therefore including it in the functions of the Board is a move towards prioritising the aim given that 2030 is not too far off.
S. 9 The Bill provides for the Chairman and other members of the Board other than the Chief Executive Officer (CEO) to have their sitting allowances or other remuneration paid out of the Fund. The amount shall be determined by the Board and other relevant government agencies. The Act currently provides for this remuneration but only with the Board deciding in consultation with the Cabinet Secretary in charge of health. It does not provide for the sources of the funds. Therefore, the proposed amendment would give clarity on this issue as well as increased accountability when it comes to making the payments.
S. 10 It is proposed to have a CEO recruited competitively by the Board and other relevant agencies, who shall be an ex-officio member of the Board with no voting rights. The CEO shall deal with the day-to-day management of the Fund and shall serve for a term of three years, with eligibility for reappointment for a further and final term of three (3) years.

The qualifications of the CEO are also indicated as follows:

  • Having a Bachelors’ degree from a university recognized in Kenya;
  • Having at least ten (10) years’ experience at a senior management level with skills in health insurance, health financing, financial management, health economics, healthcare, administration, law, or business administration; and
  • Meets the requirements of Chapter 6 of the Constitution which provides for the integrity requirements for public officers.
This proposal is clearer than the current provisions of the Act, which neither provide for the qualifications, term of service and accountability threshold in the appointment of the CEO.
S. 10A The Bill proposes the recruitment of a qualified person to serve as the Secretary to the Board. The Act currently provides for the CEO to serve as the Corporation Secretary to the Board. The functions of the Corporation Secretary shall be as follows:

  • Issue notices for Board meetings in consultation with the CEO;
  • Keep custody of records of the deliberations, decisions and resolutions of the Board;
  • Transmit decisions and resolutions of the Board to the CEO for execution, implementation and other relevant action;
  • Provide guidance to the Board on their duties and responsibilities on matters relating to governance; and
  • Perform such other duties as the Board may direct.
The Act currently does not provide for a Secretary to the Board, therefore this proposed amendment would fill that gap. Further, specifically providing for the functions of the Secretary would also give clarity to the holder of that office as to what their role would be and provide room to hold them accountable should they not fulfil it.
S. 11 This section empowers the Board to appoint officers, inspectors and servants on terms and conditions that the Board shall determine. The Bill proposes to amend this section such that the officers, inspectors, and servants will be collectively referred to as “staff”. This term would allow for the Board to recruit the employees it needs to serve the Fund as needed, without limiting their designation.
S. 12 The Bill proposes to provide for a common seal for the Board, which shall be kept in the custody of the Corporation Secretary and is not to be used except on the direction of the Board. When the common seal is affixed, the Chairperson, CEO or any other person authorised in that behalf by a Board resolution may authenticate it. The Act currently does not clarify the persons that are to authenticate the use of the common seal on behalf of the Board. This proposed amendment would address this lack of clarity. Further, there is also a measure of accountability since the only way any other person other than the Chairperson or CEO can authenticate the common seal is through a Board resolution.
S. 15

 

 

The Bill proposes to have employers whose employees are liable as contributors to the Fund to also be contributors to the Fund. Employers shall make a matching contribution equal to that made by their employee. This shall be a mandatory contribution. The Fund’s Strategic Plan for the period 2018 – 2022 emphasises increased funding, which is geared at enhancing access to healthcare and improved service delivery. This is in line with Vision 2030 and the President’s Big 4 Agenda, which includes affordable healthcare. Therefore, the Fund has come up with these proposals on how to increase its funding. Having found that voluntary contributions have not achieved this aim, the next step is to make contributions mandatory.
The Bill also proposes to have the national government liable as a contributor to the Fund on behalf of the indigent and vulnerable persons identified as such by the relevant government body. The national government’s contribution shall be a special contribution that shall be determined by the Board in consultation with the Minister. This is also proposed to be a mandatory contribution. Employers and the government would have to shoulder this burden to ensure the achievement of these goals should this proposed section be passed into law.
The Bill also proposes to provide for enhanced benefits for members who make voluntary contributions to the Fund. This is also a means of increasing contributions to the Fund as well as services available to contributors and beneficiaries.
The Bill proposes to empower the Minister to make regulations for the better carrying out of this section that it proposes to amend. The passing of regulations by the Minister would provide further details and clarity in terms of operationalizing the Act.
S. 15A The Bill proposes the mandatory registration of all persons who have attained the age of eighteen (18) years that are not beneficiaries under the Act. This proposal is geared at increasing contributions to the Fund. Currently, all Kenyans that are employed and earning at least KES. 1,000 are to be contributors to the Fund. Further, registration by persons who are self-employed is on a voluntary basis. Should this proposed amendment be passed into law, all adult Kenyans, who are not beneficiaries, regardless of whether they are employed or not, would have to be registered under the Act. The indigent and vulnerable persons shall have their contributions paid for them by the government. Enforcement is likely to be a challenge for this proposed section, especially noting that failing to register under the Act has not been proposed to be an offence.
The Bill proposes that the Minister of Health shall make regulations for the better carrying out of the above subsection. It is not clear how the Fund intends to implement this mandatory contribution requirement. Therefore, it is important to enact regulations that will clarify the operationalization of this law.
S. 16 The Bill proposes to protect employees from having to pay the matching contributions in place of their employers. This is through prohibiting employers from deducting this matching contribution from their employees’ salary or other remuneration. Further, the employer would be obliged to pay such contribution in their capacity as an employer. This proposed section is meant to ensure that only employers pay the matching contribution and not subject employees to an additional burden.
The Bill proposes to have employers make matching contributions, where unpaid, only from the time the contributor becomes their employee and not pay it if after all other statutory deductions have been made, the remainder is insufficient to pay that contribution. This therefore means that the term “matching contribution” is given a literal meaning such that if the employee does not make a contribution, then the employer will also not be obliged to make a contribution.
The Bill proposes to delete paragraphs (b) and (c) of subsection (3), which provides for an employer to obtain an NHIF card for their employee where it is lost, destroyed or the employee has not given it to the employer. Further, paragraph (c) obliges the employer to retain the card of the employee except when the employee requires it to make a claim or benefit under the Act. This is a step towards greater practicality. For example, where emergency medical treatment is needed, it would be impractical to require the employee to seek out their employer to get the NHIF card for the purposes of seeking treatment.
The Bill proposes to delete subsection (4) and substitute it with another providing that the sum deducted from the salary or other remuneration of an employee by his/her employer is not recoverable from the employer by the employee once that contribution has been remitted to the Fund. Currently, the subsection reads that the amount is not recoverable once a stamp to the value of that sum has been affixed to a card issued to that person and duly cancelled. Since the use of stamps to prove payment is no longer applicable today, the amendment of this subsection is necessary.
The Bill proposes to amend subsection (6) such that it provides for a penalty for employers for failure to pay both standard and matching contributions into the Fund and imposes a penalty of KES. 1 million upon conviction for failing to make the payment within the time and manner provided for in the Act. This is an effort to promote compliance on the part of employers for both matching and standard contributions. Increasing the penalty from KES. 50,000 to KES. 1 million is also meant to have a deterrent effect on employers.
 

S. 18

On the penalties for late payment of contributions, the Bill proposes to have them applied not only to standard but also to matching contributions. The proposed penalty shall be equal to twenty-five per cent (25%) of the contribution. Currently, the Act provides for a penalty of twenty-five per cent (25%) of the contribution when it comes to micro and small enterprises, while applying a penalty of twice the amount of the contribution to all other entities. This proposed amendment, if passed into law, will have the effect of harmonizing penalties in all classes of enterprises.
For employers, they shall be liable to pay the penalty above, as well as the costs incurred by the employee when seeking treatment from a contracted health care provider during the period when the contribution is due. This penalty is also meant to have a deterrent effect on employers who might be considering defaulting on their contributions to the Fund. Further, it is meant to ensure that employees have access to healthcare services in any case.
The Bill proposes that the mandatory contributions of contributors who are outside the country on the day their standard or mandatory contributions fall due be payable on the day of their return to the country. This amendment would provide some reprieve for contributors who are outside the country when their contributions fall due.
S. 19 The penalty for failing to make special contributions on the part of contributors who are required to make them when due is proposed to be equal to fifty per cent (50%) of the amount of contribution for each month during which the contribution remains unpaid and is recoverable as a sum due to the Fund and when recovered shall be paid into the Fund. This penalty is a reduction from the current penalty of having to pay five (5) times the amount of the contribution for each month it remains unpaid. Perhaps the Fund expects that this will encourage an increased uptake of enhanced benefits through the payment of voluntary contributions.
S. 21

 

The Bill proposes to delete and replace this section with another that provides for the mode of identification of a beneficiary considering the existing legal framework for national registration. For the purposes of payment of contributions, the Bill proposes that the Board may require a contributor to furnish the Board with information or particulars or other documents necessary for the purpose of identification. The mode of identifying contributors or beneficiaries is currently through a card, which is given to the contributor after contributing for some months. The provision seeks to find an alternative method of identifying beneficiaries.
The Bill also proposes making it an offence to knowingly make a false statement relating to liability to remit a standard or matching contribution as well as failure to furnish information or particulars or produce a document when refusing or neglecting to do so without reasonable cause. The proposed penalty on conviction is a fine not exceeding KES 1 million or imprisonment for a term not exceeding twelve (12) months, or to both. This amendment includes matching contributions. Further, a maximum fine of KES. 10,000 is imposed or imprisonment for a term not exceeding six (6) months. This penalty is intended to operate as a deterrent.
Evidence of payment of contributions shall be deemed conclusive if the person liable to pay the contribution has a record of remittance of the contributions and in the case of a standard contribution, a record of the contributor’s monthly payslip that the contribution has been deducted from his/her salary. The proposed amendment seeks to update the type of evidence of payment of contribution as it is currently a stamp, receipt, record of payment in the register of contributors to the Fund, and the contributor’s monthly pay slip.
S. 22

 

The Bill proposes to have the Board pay from the Fund, a benefit to an empanelled and contracted healthcare provider for an expense incurred by the provider for the provision of health care services to the number of beneficiaries determined by the Board. Currently, the Act provides for payments to declared hospitals for expenses incurred by any contributor, his/her named spouse, child or other dependant. This is a move from declared hospitals to empanelled and contracted healthcare providers.
The Bill proposes to delete subsection (2), which provides for the Board paying for the medical or health care expenses covering both inpatient and outpatient medical healthcare.

 

The Fund seeks to limit its expenditure and use this amendment as a means of doing so, more so because the proposed amendment leaves out the expenses that the Fund would cover.
The Bill proposes to delete subsection (3) and substitute it with another, which provides for subjecting the benefits payable from the Fund to such limits, regulations, and conditions that the Board may prescribe and in consultation with the Cabinet Secretary. The Act currently provides for the limits set to what shall be paid out of the Fund i.e. drugs, laboratory tests and diagnostic services, surgical, dental or medical procedures or equipment, physiotherapy care and doctors’ fees, food and boarding costs. Under the proposed provision, the benefits payable will be prescribed in regulations that will follow.
The Bill proposes to delete subsection (4) which provides that no claim or benefit is payable unless the contributor has been making payments and produces this evidence at the time of making the claim or seeking the benefit as well as the card. This proposal is in line with the aim of the Bill to stop using cards for identification purposes when making claims or benefits.
The Bill proposes to add a subsection (5), which provides that where a beneficiary has a private health insurance cover, the private health insurance shall be liable for payment up to the limits the beneficiary is covered and that the Fund shall pay the daily rebate for inpatient. Further, the Fund shall cover the outstanding bill where the private insurance cover’s limits have been exhausted subject to the Fund’s applicable limits. Currently, the Fund tends to be the primary insurer for most people who are co-insured members. Therefore, this move is meant to reduce the Fund’s burden as far as payments and benefits are concerned.
S. 23 The Board is proposed to avail a statement of accounts to a contributor, or a person who is liable to remit standard and matching contributions on their contributions. Currently, for one to get a receipt of payment, they are required to present their card to an officer of the Fund. This is outdated as the Fund uses electronic and mobile payment systems, hence the need to keep the Act up to speed with current norms.
 

S. 24

S. 25(2)(b) & (c)

 

S. 26(a)

The Bill proposes to repeal this section, which provides for the printing and sale of National Hospital Insurance stamps at such prices as the Board may from time to time determine.

Further, the Bill proposes to delete the paragraphs providing for offences related to the use of cards or stamps.

The Bill provides for regulations relating to the issue of any stamps or the replacement of cards under the Act.

If the Bill is passed, stamps and cards shall no longer be used as evidence of contribution; making them obsolete hence requiring the repeal of this section 24; paragraphs (b) and (c) of section 25(2) and section 26(a).
S. 25

 

 

 

 

Subsection (1) provides for offences relating to benefits under the Act i.e. making false statements for the purpose of obtaining a benefit under the Act with a penalty of a maximum of KES 500,000 or to an imprisonment term not exceeding twenty-four (24) months. The Bill proposes to increase it to KES 10 million or to an imprisonment term of sixty (60) months. Concerns have been increasing over the fraud perpetrated to access the benefits of the Fund and the payments from the Fund as well, hence the need to increase the penalties for the same. This amendment is expected to have a deterrent effect and reduce the instances of fraud.
Subsection (2) provides for the offence of impersonating any person whether living or dead with the intent to obtain the payment of any benefit. The Bill proposes to increase the imposed penalty from KES. 500,000 or to an imprisonment term not exceeding three years to KES. 10 million, with the imprisonment term remaining unchanged.
The Bill proposes to delete subsection (5) and replace it with one that obliges the Board to cause the name of every health care provider removed from the register to be notified in the Gazette and at least three newspapers with nationwide circulation. This proposal seeks to widen the publication of this removal to include at least three newspapers with nationwide circulation. It is important for beneficiaries and contributors to know which hospitals have been removed from the register so that they will not seek services from them.
The Bill proposes to add a section 5A, which provides that a health care provider removed from the register shall not be entitled to receive any benefit from the Fund. The Act currently provides for this. The proposed amendment results in a rearrangement of the sections of the Act.
S. 26(d) The Bill proposes to remove the need for the Board to make regulations on rebates for contributors who have no dependants or who fulfil such other conditions or requirements as may be prescribed in cases of voluntary contributions. The rebates would be given at the discretion of the Board, if at all, to contributors without them having to fulfil certain conditions or be part of a certain class of contributors. However, the regulations that the Board may come up with would determine if there are any conditions precedent that would have to be fulfilled to get the rebates.
S. 30

 

 

The Bill provides for the obligation of the Board to consult the relevant accredited bodies and subsequently publish in the Gazette, a list of empanelled healthcare providers for the purposes of this Act.

The Bill proposes to delete subsection (2) and replace it with another which provides that the Gazette notice above may be accompanied by conditions relating to the fees which may be charged by the healthcare provider to any contributor under the Act.

This is to replace declared hospitals and excludes the Chairperson of the Medical Practitioners and Dentists Board from the process of consultation. Further, the proposed amendment would make this a mandatory obligation. It is currently discretionary.
The Bill proposes to give the Board the discretion to revoke, at any time, an empanelment under this section. Currently, the Act provides that the Board must consult the Minister of Health before revoking any declaration under the Act i.e. declared hospitals. This proposed amendment, if passed, would give the Board greater independence and power in relation to revoking an empanelment and may assist in enhancing efficiency.
The Bill proposes to include a subsection (4) which would oblige the Board to make regulations for the better carrying out of section 30 on the empanelment of healthcare providers. As stated in the foregoing, this system of using empanelled healthcare providers is new and the regulations are necessary to enhance clarity when it comes to actual operationalization.
S. 32

 

The Bill proposes to amend this section on the inspection of declared hospitals, to replace the words “declared hospitals” with “empanelled and contracted healthcare provider”. This proposed amendment would regularise the use of terms under the Act since the Bill proposes to phase out the use of the term “declared hospitals” under the Act.
In subsection (3) on the offences of obstructing an inspection or refusing to answer questions or furnish information, the penalty upon conviction is proposed to be enhanced to KES 1 million or an imprisonment term not exceeding twenty-four (24) months. These proposed amendments seek to increase the deterrent effect of the penalties and hence increase compliance with the law.
The Bill also proposes to enhance the penalty for an inspector giving false information to a fine not exceeding KES 10 million or an imprisonment term not exceeding sixty (60) months or to both.
S. 34 The Bill proposes to increase the scope of the use of the Board’s investment funds to include the acquisition of supportive infrastructure for empanelled and contracted healthcare providers. Further, the Bill also proposes to have the Board determine the financial viability of healthcare providers that the investment funds may be applied to in the improvement of any underserved area without including the Minister of Health. This widened scope might increase the Board’s capabilities in increasing the efficiency of healthcare providers. The amendment to the proviso is meant to exclude the Minister of Health from determining underserved areas as far as healthcare providers are concerned. This would give the Board independence from the Minister of Health.
S. 41 The Bill proposes to repeal this section, which provides for the power of the Board to determine whether and when a prosecution may be undertaken for offences committed under the Act. This proposed repeal recognizes that the mandate to prosecute is vested in the Director of Public Prosecutions, and as such the Board cannot be involved in the determining whether or when prosecution shall be undertaken.
S.43 This section provides for the recovery of compensation or damages and refers to the Workmen’s Compensation Act in doing so. The Bill proposes to update this to the Work Injury Benefits Act, 2007 which is the relevant legislation. This amendment would align the Act with the Work Injury Benefits Act, which was enacted in 2007.
S. 45 This section provides for a general penalty for offences under the Act which may not have a penalty applied to them. The penalty is currently a fine not exceeding KES 50,000 or an imprisonment term not exceeding two years or to both and is proposed to be increased to KES 1 million. The Bill does not propose to increase the prison term. The proposed amendment seeks to increase the deterrent effect of the penalties and hence increase compliance with the Act.
Second Schedule The Second Schedule to the Act, which provides for the Conduct of Business and Affairs of the Board, is proposed to be amended in paragraph 4 by providing that the quorum for meetings of the Board is two-thirds of the members. Currently, the quorum is nine (9) members, with Board members being thirteen (13) in total excluding the Chief Executive Officer.

Bill Tracker

Posted on July 13th, 2021

NO. BILL SPONSOR BILL NO. DATED GAZETTE NO. 1ST READING 2ND READING 3RD READING ASSENT REMARKS
1 The Pharmacy and Poisons (Amendment) Bill Hon. Alfred Keter NA.1 15/01/2021 3 09/06/2021
2 The Health Laws (Amendment) Bill Hon. Amos Kimunya NA.2 01/02/2021 8 30/03/2021
3 The Startup Bill Sen. Johnson Sakaja S.1 03/02/2021 9
4 The County Statitistics Bill Sen. Haji Frahiya Ali S.3 10/02/2021 12
5 The Landlord and Tenant Bill Hon. Amos Kimunya NA.3 12/02/2021 13 25/03/2021
6 The National Government Constituencies Development Fund (Amendment) Bill Wafula Wamunyinyi NA.4 23/02/2021 15 10/06/2021
7 The Public Private Partnerships Bill Amos Kimunya NA.6 26/02/2021 19 25/03/2021 13/05/2021; 19/05/2021 Committee stage: Pending
8 The Basic Education (Amendment) Bill Beatrice Kwamboka S.4 08/03/2021 24
9 The County Vocational Education and Training Bill Milgo Alice S.6 08/03/2021 26
10 The Street Vendors (Protection of Livelihood) Bill Abdullahi Ibrahim Ali S.7 08/03/2021 27
11 The Pandemic Response and Management Bill Sen. Johnson Sakaja S.8 08/03/2021 28
12 The Foreign Service Bill Katoo Ole Metito NA.8 08/03/2021 23 04/05/2021
13 The Central Bank of Kenya (Amendment) Bill Hon. Gladys Wanga NA. 10 06/04/2021 56 11/05/2021
14 The Law of Succession (Amendment) Bill Sen. Abshiro Halake S.15 03/12/2021 35
15 The Preservation of Human Dignity and Enforcement of Economic and Social Rights Bill Sen. Abshiro Halake S.21 23/03/2021 43
16 The Computer Misuse and Cybercrimes (Amendment) Bill Hon. Aden Duale NA. 11 16/04/2021 64 Bill published in the Kenya Gazette on 20th April 2021
17 Alternative Dispute Resolution Bill Hon. Amos Kimunya NA. 12 16/04/2021 65 08/06/2021 Bill published in the Kenya Gazette on 20th April 2022
18 The Heritage and Museums Bill S.
19 The Sign Language Trainers and Interpreters for the Deaf S.
20 The Coconut Industry Development S.
21 National Hospital Insurance Fund Bill NA.
22 Sustainable Waste Management Bill NA.
23 The Trustees (Perpetual Succession) (Amendment) Bill Chairperson, Departmental Committee on Finance and National Planning NA. 23 12/05/2021 93 15/06/2021
24 Perpetuities and Accumulations (Amendment) Bill Chairperson, Departmental Committee on Finance and National Planning NA. 24 12/05/2021 94 15/06/2021
25 Alternative Dispute Resolution Bill S.
26 Kenya Citizenship and Immigration (Amendment) Bill S.
27 Statutory Instruments S.
28 Tax Appeals Tribunal (Amendment) Bill Hon. Amos Kimunya NA.
29 Public Service Internship Bill Hon. Naisula Lesuuda NA. 25 13/05/2021 100
30 Certified Managers Bill Chairperson, Departmental Committee on Finance and National Planning NA. 26 13/05/2021 101 15/06/2021
31 The Public Procurement and Asset Disposal (Amendment) Bill NA.
32 The National Risk Disaster Management Bill Leader of the Majority Party NA. 28 18/05/2021 104
33 The County Governments Grants Bill
34 The Lifestyle Audit Bill
35 The Intergovernmental Relations (Amendment) Bill
36 The County Governments (Amendment) Bill
37 The Asian Widows’ and Orphans Pensions (Repeal) Bill
38 The Provident Fund (Repeal) Bill, 2021
39 The Appropriation Bill Chairperson, Budget & Appropriations Committee NA. 31 6/21/2021 120 22/06/2021 22/06/2021; Committee stage: 22/06/2021 22/06/2021 6/29/2021 Bill assented by the President on 29th June 2021
40 The Community Groups Registration Bill Leader of the Majority Party NA. 20 5/5/2021 88 08/06/2021
41 Kenya Industrial Research and Development Institute Bill
42 The Kenya Roads (Amendment) Bill Chairperson, Departmental Committee on Transport, Public Works and Housing NA. 13 4/30/2021 78 10/06/2021
43 The Health (Amendment) Bill Hon. Mwambu Mabongah NA. 14 4/30/2021 79 09/06/2021
44 The National Electronic Single Window System Bill Leader of the Majority Party NA. 15 4/30/2021 80 08/06/2021
45 The Livestock Bill Leader of the Majority Party NA. 16 4/30/2021 81 08/06/2021
46 The Coffee Bill Leader of the Majority Party NA. 17 4/30/2021 84 08/06/2021
47 The County Allocation of Revenue Bill Chairperson, Standing Committee on Finance and Budget S. 30 4/30/2021 77 08/06/2021 15/06/2021; 16/06/2021 Committee stage: 16/06/2021 16/06/2021 Referred back to the Senate for consideration on 17/06/2021
48 The National Disaster Risk Management Bill Leader of the Majority Party NA. 28 5/18/2021 104 01/06/2021
49 The Irrigation (Amendment) Bill Hon. Aden Duale NA. 12 4/16/2021 65 08/06/2021

Two Cents: The Sale & Leaseback Model Alternative

Posted on June 27th, 2018

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Conventional debt and equity financing models have become largely inaccessible amidst the economic slump that has been occasioned by the global financial crisis. The ramifications of this have been felt in Kenya where there has been a slow-down on lending to the private sector. This has inadvertently resulted in a deceleration of economic growth as traditional lenders have scaled back on loan disbursements. This has also been exacerbated by the capping of interest rates chargeable by banks and financial institutions which was introduced in 2016.

The decline in credit issuance and uptake has had an effect on the recent slowdown of Kenya’s economic performance due to the general election in 2017 which greatly affected the country’s economic outlook. These are clear manifestations of a paradigm shift needed in Kenya in the manner in which capital is raised by various entities. But there is hope, with the world economy bouncing back from the global recession in 2010, reforms have been made in the traditional financing models in Kenya. Against this backdrop, companies now have the recourse to explore alternative financing models to remain competitive and profitable.

Sale and Leaseback Transactions

Sale and leaseback financing has proved to be an attractive option for some companies that seek to keep up with their growth strategies. Essentially a sale and leaseback transaction involves a sale of an interest in property with a reservation on the possessory terms. The underlying characteristic of these kind of transactions is that, the seller acts as a lessee and they raise the capital through property that they hold by transferring the property to a buyer through sale. This transaction enables the seller to dispose of the property and obtain capital injection for the business, while maintaining the use of the same property at an agreed lease premium for a specified term. This is especially beneficial to a buyer who seeks to incur the least possible maintenance costs of the property.

Characteristics

A sale and leaseback financing model varies from traditional financing models because it typically entails:

  • A sale of assets by an entity that desires to raise capital from the property to an investor who seeks to achieve a low-risk, high yield investment
  • Simultaneous obtaining of a long-term lease of the property by the seller-lessee from the buyer-lessor which enables the continuing possession and use of the property by the seller-lessee in exchange for payment of rentals at an agreed premium
  • The retention by the seller-lessee of most of the risk and rewards incident to ownership save for the right to mortgage where the lease is an operating lease
  • Transfer of substantially all the risks and rewards incident to ownership where the lease is a capital lease.

Classification of Leases

Whether a lease shall be classified as an operating lease or a capital lease is usually agreed upon at the inception of the transaction. It is important to classify the lease the parties intend to enter into as both have different effects on the parties.

A lease will be classified as an operating lease where the rental premiums are considered as operating expenses in the seller-lessee’s book of accounts, and the property leased does not form part of the seller-lessee’s balance sheet. On the other hand, a capital lease is considered as a loan to the seller-lessee and stated as such in the seller-lessee’s books of account. Most leases in a typical sale and leaseback transaction will be operating leases. However, a capital lease would arise where there is a buyback agreement contained in the lease; there is a buyback option with a defined price in the lease; or the lease value is greater than ninety per cent (90%) of the value of the property.

Advantages and Disadvantages Certain advantages have been identified to inure with sale and leaseback financing model. One key motivation for adopting this financing model is the tax advantages that flow from these transactions. It has been noted that in majority of these transactions, the seller is usually motivated by the need to realise immediate loss which is used to offset the seller’s operating income. The seller in essence receives proceeds from the sale of a non-liquid asset, yet retains for a term the use and possession of the asset.

The seller in a sale and leaseback transaction obtains a greater amount of capital through a leaseback than when they opt for conventional types of borrowing. Needless to say, this financing model is essential in providing working capital to the seller-lessee who will realise approximately one hundred per cent (100%) of the market value of the property unlike debt and equity forms of financing which may not result in the same returns. This is especially important in markets experiencing fluctuations in conventional lending sources.

For the buyer-lessor, this financing model allows it to have a hands-off approach to the management of the property as it incurs no responsibility for the operational or managerial aspects of the property which is left to the seller-lessee.

A sale and leaseback transaction also comes with its fair share of challenges, a notable one being a high interest rate on the lease that the rental property may attract. Tax implications may also be evident with recent changes in the International Financial Reporting Standards.

The fact that the property is no longer under the ownership of the sellerlessee also means that the seller-lessee may have no say with regards to the interest that the buyer-lessor will charge on the leased property. This may in the long run mean that the seller-lessee has to incur higher costs in using and managing the property as this responsibility does not rest with the buyer-lessor. This denotes an inherent risk that is evident in many lease arrangements.

It is clear that the sale and leaseback financing model is an option Kenyan companies could consider in their quest to raise capital to finance their growth strategies in the market. Numerous advantages can be drawn from the adoption of this model, especially in light of the drawbacks of conventional financing models.

Moreover, this model is attractive to entities that are unable to attract a wide variety of financing. This financing model may be useful for companies that may want to accrue some capital to use for their expansion initiatives. Ultimately, these entities could benefit from unlocked real estate value, reduction in a company’s investment in non-core business assets, such as buildings and land and freeing-up of the entity’s cash in exchange for executing a long-term lease.

 

Sealing the Loopholes: Proposed Disclosure Rules Under the Common Reporting Standards

Posted on June 27th, 2018

By Walter Amoko | Lena Onchwari

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As is now well-known, Kenya has signed on to the multi-lateral framework for the sharing of financial information that enables tax authorities detect those seeking to use international borders to avoid paying tax. The Multilateral Convention on Mutual Administrative Assistance in Tax Matters established the Common Reporting Standards (CRS) that were approved by the Organisation for Economic Co-operation and Development (OECD) in July 2014, and which have made it possible for tax authorities of participating countries to access financial information of their tax residents.

While it has been a great international success story, CRS’s full potential is still being undermined by tax-payers who, with assistance of their advisers, are still able to hide their assets and income under various cross-border devices, taking advantage of gaps within CRS to avoid detection. For example, CRS is limited to financial institutions that are located in participating jurisdictions. It is therefore easy to avoid its ambit by restricting one’s dealings to financial institutions located in nonparticipating countries which are not required to report any financial information in regards to a reportable person – a boon to aggressive tax planners hatching tax avoidance schemes.

The Model Rules

In line with their continuing programme of improving mutual disclosure requirements which are uniform but sensitive to local needs, on 9th March 2018, the OECD published the Model Mandatory Disclosure Rules for Common Reporting Standard Avoidance Arrangements and Opaque Offshore Structures (the Model Rules) which specifically target all categories (compendiously referred to as intermediaries) tax advisers. The OECD recognises detecting and deterring offshore tax avoidance schemes “is key both for the integrity of the CRS and for making sure that taxpayers that can afford to pay advisors and to put in place complex offshore structures do not get a free ride.”

As with other rules by the OECD on collection and access of relevant financial information for tax purposes, the Model Rules were developed so as to give a shared model for countries on the contents and structure of their own local regulatory framework in respect to professional service providers such as accountants, tax and financial advisors, banks, lawyers “to inform tax authorities of any schemes they put in place for their clients to avoid reporting under the OECD/G20 Common Reporting Standard (CRS) or prevent the identification of the beneficial owners of entities or trusts.”

The Model Rules are targeted at CRS Avoidance Arrangements or Opaque Offshore Structures. The former is ‘...any arrangement where it is reasonable to conclude that it has been designed to circumvent, or has been marketed as or has the effect of circumventing CRS legislation...” while the latter “…a passive offshore vehicle that is held through an opaque structure” and passive vehicle defined as “legal person or legal arrangement that does not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises in the jurisdiction where it is established or is tax resident.” Whilst not exactly crystal clear from the various examples provided, it is possible to get a sense of what activities and/or structures the Model Rules have in mind. CRS avoidance relates to efforts to exploit gaps within the relevant legislative or administrative framework to avoid disclosure of the information required under CRS.

An opaque structure may also be described as the application of the well known commercial purpose test of an entity to CRS. The idea here is to isolate genuine financial arrangements serving an identifiable commercial purpose from those designed for concealing income and assets and thus avoid disclosure under the CRS regime.

Inquiry is directed at whether the structure has the effect of not allowing the accurate identification of the beneficial owners and specifically identifies well recognised tax planning techniques that can be used to achieve this outcome, such as the use of nominee shareholders, indirect control arrangements or arrangements that provide a person with access to assets held by, or income derived from, the offshore vehicle without being identified as the beneficial owner.

Intermediary’s Role

The Model Rules define “intermediaries” as those persons responsible for the design or marketing of CRS Avoidance Arrangements and Opaque Offshore Structures “promoters” as well as those persons that provide assistance or advice with respect to the design, marketing, implementation or organisation of that Arrangement or Structure “service providers”.

The knowledge and actions of an intermediary include those of their employees acting in the course of their employment, as well as contractors working for an employer, and the disclosure obligation and the penalties for a failure to disclose are imposed on that employer.

To be subject to the obligations imposed by the Model Rules, intermediaries must have a connection – “sufficient nexus” – with the reporting jurisdiction which extends to intermediaries operating through a branch located in that jurisdiction as well as one who is resident in, managed or controlled, incorporated or established under the laws of that jurisdiction.

An intermediary is required to file disclosure in respect of a CRS Avoidance Arrangements or Opaque Offshore Structures at the time the Arrangement is first made available for implementation, or whenever an Intermediary provides services in respect of the Arrangement or Structure. This ensures that the tax administration is provided with early warning about potential compliance risks or the need for policy changes as well as ensuring that it has current information on the actual users of the scheme at the time it is implemented.

Disclosure Obligations

There may be certain instances where the user of a CRS Avoidance Arrangement or Opaque Offshore Structure may have disclosure obligations under the Model Rules. More specifically, in instances where the intermediary is not subject to disclosure obligations as well as those cases where the intermediary is unable to comply with its disclosure obligations under the Model Rules either because it has no nexus with that jurisdiction or because it is relying on an exemption from disclosure such as professional secrecy.

The information required to be disclosed includes the details of the Arrangements or Structures, as well as the clients and actual users of those Arrangements or Structures, and any other intermediaries involved in the supply of the Arrangements or Structures. The requirements under the Model Rules are designed to capture the information that is likely to be most relevant from a risk-assessment perspective and to make it relatively straight forward for a tax administration to determine the jurisdictions with which such information should be exchanged.

The Model Rules do not require an attorney, solicitor or other recognised legal representative to disclose any information that is protected by legal professional privilege or equivalent professional secrecy obligations but only in respect to the scope of such protected information.

All relevant non-privileged Arrangements or Structures that are within the legal representative’s knowledge, possession or control should still be provided. While understandable and correct for legal professional privilege is now accepted as a component of the fundamental right to privacy, this might limit the Model Rules’ efficacy as more and more reliance is placed on practitioners in respect to whom such privilege attaches i.e. lawyers. Efforts by accountants to have legal professional privilege extended to them while giving legal advice, have thus far failed.

Striking a Balance

The information requirements of the model rules seek to strike a balance between the compliance burden on intermediaries to a minimum and still capturing the information that is likely to be most relevant. The requirement to separately identify the jurisdictions where the scheme has been made available for implementation and to specify the tax details of all the intermediaries, clients and reportable taxpayers in connection with that arrangement is intended to make it relatively straightforward for a tax administration to determine the jurisdictions for whom the disclosed information will be relevant for information exchange purposes.

Enforcement

The rules have put in place punitive measures for non-disclosure in the form of penalties. However the same are not cast in stone but are to be determined by each jurisdiction depending on its unique circumstances. However it is expressly stipulated that such penalties are to be set at a level that encourages compliance and maximises their deterrent effect.

Conclusion

The Model Rules are a continuation of concerted international efforts to tighten the noose around tax cheats or dodgers seeking to exploit international borders. As Arthur Vanderbilt remarked “taxes are the lifeblood of government and no taxpayer should be permitted to escape the payment of his just share of the burden of contributing thereto.” While the problem of crossborder tax avoidance affects most countries, the less developed countries are, by a significant factor, the most affected and disproportionately so. It will therefore come as no surprise if Kenya adopts the Model Rules as part of its CRS regime.

Even as the Government moves to implement CRS, a national debate on our entire tax system may well be warranted. It is a recurring question on which no answers are available and, as far as we can tell, has never fully engaged us as citizens despite the constant complaint that we are being overtaxed. It may well be possible that our tax system is inhibiting economic activity and thus, ironically, undermining rather than boosting revenue collection.

 

Onward Forward: Growth of Islamic Capital Markets in Kenya

Posted on June 27th, 2018

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A capital market is a medium for the buying and selling of equity securities (shares) and debt securities (bonds), in order to raise medium to long-term financing. A company may issue securities either through shares or bonds to raise money. Bonds may also be issued by entities who are in need of long-term cash such as national governments. Securities are issued at a primary market and traded in a secondary market. In a primary market, a company would have face-to-face meetings with investors in order to place its securities. Alternatively, a company may work with an investment bank which would act as an intermediary and underwrite the offering. In a secondary market the original investors may sell the securities they have purchased to third parties. The trading of securities in a secondary market is opened up to all participants in the market. One of the main functions of a capital market is to spur economic growth by providing a medium where the demand for funds may be matched with the supply of funds. Capital markets should be supervised and controlled by regulatory bodies to ensure that the highest levels of professionalism and ethics are maintained by all participants.

Islamic Capital Markets

Islamic capital markets (ICMs) refer to capital markets where sharia’h complaint financial assets are transacted. ICMs function as a parallel market to the conventional capital market by helping investors find sharia’h compliant investments. ICMs also play a complementary role to the Islamic banking system in broadening and deepening the Islamic financial markets. There are presently no Islamic–only securities exchanges. ICM instruments are traded on many of the world’s leading securities exchanges (where conventional market instruments are traded). ICMs do not have an organised regulatory authority because they are in the infant stage so the conventional capital market authority in any given country or region ordinarily supervises the ICM as well. An example of this is Malaysia, where the Securities Commission of Malaysia has a sharia’h council that is specifically responsible for sharia’h related matters of ICM activities. Regulatory agencies in other nations with active ICMs have followed suit, including Kenya In a typical ICM, transactions are carried out in ways that do not conflict with the teachings and tenets of Islam. There is certainly an assertion of Islamic law that ICMs are free from activities prohibited in Islam such as usury/interest (riba), gambling (maisir), ambiguity (gharar) and speculation (qimar).

Market Trends

There are various factors that have led to the increased demand for ICM products, including the increase of wealth among Muslim investors (especially from nations that are part of the Gulf Cooperation Council i.e. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates); the growth of the Muslim population in regions such as Africa, Asia, Middle East and South America, especially in Asia and Africa, which currently account for over ninety five per cent (95%) of the world’s Islamic population and which are projected to grow by a further thirty five per cent (35%) by the year 2030. These regions also contain large ‘unbanked’ populations, which can be harnessed by Islamic banking models. Growth in the retirement population is also creating demand for Islamic pension and asset management products whilst there is also an increased awareness about Islamic banking and finance and a rise in per capita income and wealth held by Muslims in line with the trends in other faith-based groups. Africa is currently ranked as the third fastest growing Islamic finance region in the world after Asia and Middle East according to the African Development Bank. This growth signifies an increased demand for sharia’h compliant products and services.

The Global Islamic Finance Report (GIFR) 2010, was the first publication to report that the Islamic financial assets had exceeded USD 1 trillion by the end of 2009. GIFR 2017 reports that the global Islamic financial services industry stood at USD 2.293 trillion at the end of December 2016 which is USD 150.01 billion more than 2015 when the industry stood at USD 2.143 trillion. GIFR 2017 states that the assets under management of the banks offering Islamic financial services was USD 1.719 billion which is seventy five per cent (75%) of the total Islamic financial assets. There are expectations of the market size growing to USD 3.4 trillion by end of 2018, an eighty one per cent (81%) growth according to the Islamic Financial Services Industry Stability Report 2016. The second largest sector in terms of assets under management is Islamic bonds (sukuk), which comprises fifteen per cent (15%) of the global Islamic financial services industry. In the first half of 2015, the global sukuk amount outstanding stood at USD 291 billion, while Islamic funds assets figure was USD 71.3 billion. Islamic investment funds have not yet seen any significant growth and so is the case for takaful ( insurance) and the emerging business of Islamic microfinance.

The Kenyan Approach

Kenya is positioning itself as a hub for sharia’h financial services in East and Central Africa. The country’s Muslim population is estimated to be about eleven per cent (11%) of the total population while the non-Muslim population may also be keen on taking up Islamic finance products. This outstrips the two percent (2%) penetration of Islamic finance in the global economy hence the reason why Kenya has potential for Islamic finance products and services. Currently, the Capital Markets Authority (CMA) has registered two (2) Islamic Collective Investment Schemes and one (1) Islamic Fund Manager.

The strategy to accelerate Islamic finance uptake is underpinned by the ambition to transform Kenya into an International Finance Centre as part of the implementation of the Capital Market Master Plan, which is a Vision 2020 flagship project. As part of this strategy, the CMA was admitted by the Council of the Islamic Financial Services Board (IFSB) as an associate member of the IFSB based in Kuala Lumpur, Malaysia. The decision to admit the CMA was made at the 29th IFSB Council meeting held in Cairo, Egypt on 14th December, 2016. The role of the IFSB which is a global standard setting body is to promote the development of a prudent and transparent Islamic financial services industry.

In line with the Government’s aspiration to position Kenya as an Islamic finance hub in the region and deepen the application of Islamic finance within the economy, the CMA has achieved various milestones, including:-

  • Hosting the joint financial sector regulators Project Management Office (PMO) on Islamic Finance which was launched in October 2017. The PMO is overseen by the National Treasury with the technical and financial assistance of Financial Sector Deepening Africa, and under the mandate delegated to it by Kenya’s Financial Sector Regulators Forum. The PMO is led by Islamic Finance Advisory & Assurance Services, an international consultancy firm specialised in Islamic finance, in collaboration with Simmons & Simmons - an international law firm.
  • Driving a raft of targeted measures which were included in the Finance Act, 2017 designed to support the growth of Islamic finance in Kenya. The measures included amendment to the Capital Markets Act, 2000 to provide for sharia’h compliant capital market products; amendment of the Income Tax Act (Cap. 470) to provide for equivalent tax treatment of sharia’h compliant products with conventional financial products; exemption from payment of stamp duty on transfers of title relating to sukuk and amendment to the Public Finance Management Act, 2012 to allow for Government to raise capital through issuance of sukuk.

Another significant development in Islamic finance in Kenya is the appointment of members of the Islamic Finance Consultative Committee (IFCC) by the National Treasury. The IFCC is an industry stakeholder committee whose main objective is to provide support and feedback on the proposed Islamic finance policies and regulatory changes to facilitate operations in this complementary form of finance. The IFCC is a key governance committee that shall be next in line to the apex committee – the Islamic Finance Steering Committee (IFSC). The IFCC may refer issues that require urgent resolution to the IFSC for expeditious guidance.

In the long term, CMA intends to integrate sukuk issuance within the national public debt management framework so that it is used to raise funds by Government (issuer) on condition that the underlying transaction is structured based on various sharia’h principles or contracts. In addition, CMA should allow for the following products
to investors who are interested in investing in ICMs:

Sharia’h compliant derivatives products which are either exchange-traded such as Futures and Single Stock Futures (provided the underlying shares are sharia’h-compliant) or Over the Counter which can either be Islamic profit rate swap; foreign exchange swap and cross currency swap.

Sharia’h compliant securities, Islamic indexes, Islamic unit trusts, Islamic venture capital/private equity, Islamic exchange traded fund, Islamic fund management, Islamic real estate investment trusts, Islamic structured products and Islamic stock broking.

Employed or Not? Comparing Employees and Independent Contractors

Posted on June 27th, 2018

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It has been said that the traditional model of employment is moribund. With factors such as the entry of millennials into the employment market and technological advancements, employers have increasingly found themselves having to re-invent their employment models. The most prevalent change has been the shift from hiring fully-fledged employees to engaging independent contractors/consultants. It would seem that millennials have slightly different ideals of employment than older generations, with millennials valuing independence and flexibility over stability and job security. This phenomenon has been termed as the “gig economy” which is the growing preference for temporary or short-term engagements.

However, millennials are not solely responsible for the paradigm shift as employers too have sought to engage more independent contractors, or consultants, in a bid to minimise their responsibilities. The question that therefore arises is whether the line between an employee and an independent contractor is clearly demarcated. The South African Labour Guide gives the following quote:

Employers must clearly understand exactly how the Act defines “an employee”. Many employers sit back smiling, falsely believing that all the people who work for them are not employees – so the employer has successfully circumvented the Act. “They are not employees – they are all independent contractors!! It is time to smell the coffee!!”

As aptly put in the quote above, it is vital to distinguish between employees and independent contractors, more so with the disruption of traditional employment models. A person’s status as an employee or an independent contractor could mean the difference between an employer incurring or avoiding liability for acts done by the person.

In the case of South African Broadcasting Corporation v McKenzie (CA8/98) (1998), the South African Labour Appeal Court was of the opinion that the legal relationship between the parties must be deduced primarily from a construction of the contract which they concluded and from the realities of the relationship between them and not simply from the way the parties chose to describe it, so the Court has to give effect to what the relationship really is and not what it purports to be.

Similarly in the Kenyan case of Fredrick Byakika v Mutiso Menezes International Unlimited (2016) eKLR , the Employment and Labour Relations Court (ELRC) found that the use of the terms such as salary, employment terms and conditions, summary dismissal do not, by themselves, confer an employment relationship. The Courts would have to look into factors such as the intention of the parties, to determine whether they give rise to an employment contract or that of an independent contractor.

In Dewhurst v Citysprint UK Ltd ET/2202512/2016, the Central London Employment Tribunal held that it matters not how many times an employer proclaims that he is engaging a man as a self-employed contractor; if he then imposes requirements on that man which are the obligations of an employee and the employee goes along with them, the true nature of the contractual relationship is that of employer and employee.

In the Kenyan case of Maurice Oduor Okech v Chequered Flag Limited (2013) eKLR, the ELRC found that in determining the existence of an employment relationship, the Court is expected to go beyond mere terminologies employed by the parties either in their pleadings or in their testimony. The Court is called upon to inquire into the entire spectrum of facts and circumstances to establish whether an employer/employee relationship as defined in the Employment Act, 2007 (the Act) actually exists.

Kenyan law distinguishes between an employee (contract of service) and an independent contractor (contract for service). A contract of service is one that creates rights and responsibilities between parties to an employment relationship, whereas a contract for service implies that a person is self-employed where the work is under their own terms, as against a person who is employed and is under specified terms with legal protection and defined remuneration. The issue of whether there is a contract of service or a contract for service is one that can be established in law or in fact but also noting that most independent contractor contracts are not written, the facts of each case are paramount and worth consideration as to the intentions of the parties to such a contract.

Section 2 of the Act defines an employer as, “any person, public body, firm, corporation or company who or which has entered into a contract of service to employ any individual.” The Court in Stanley Mungai Muchai v National Oil Corporation of Kenya (2012) eKLR , held that under section 2 of the Act 2007, a contract of service is a necessary ingredient in the definition of employer. The Act defines a contract of service as, “an agreement, whether oral or in writing, and whether expressed or implied, to employ or serve as an employee for a period of time, and includes a contract of apprenticeship and indentured learnership.”

Courts have held that there is a thin line between an employee who is under an employment contract or under a contract of service as against an employee who is employed under a contract for service. The employment contract/contract of service entails an employee undertaking work with rights and duties for specified remuneration, while a contract for service indicates independence, lack of control and an employee who is not integrated into the workforce of an employer for purposes of acquiring certain rights and responsibilities.

Factors to consider in determining the existence of an employment contract include; the degree of control exercised by the employer; whether the worker’s interest in the relationship involved any prospect of profit or risk of loss; whether the worker was properly regarded as part of the employer’s organisation; whether the worker was carrying on business on his own account or carrying on the business of the employer; the provision of equipment; and the incidence of tax and national insurance and the parties’ own view of their relationship. Independent contractors are normally given the contract for service for specific periods while the employment contracts provide for long-term contracts with direct services being provided by the employee.

There are also specific tests employed to determine the status of the relationship. These include:

• The control test whereby a servant is a person who is subject to the command of the master as to the manner in which he or she shall do the work
• The integration test in which the worker is subjected to the rules and procedures of the employer rather than personal command. The employee is part of the business and his or her work is primarily part of the business
• The test of economic or business reality which takes into account whether the worker is in business on his or her own account, as an entrepreneur, or works for another person, the employer, who takes the ultimate risk of loss or chance of profit
• Mutuality of obligation in which the parties make commitments to maintain the employment relationship over a period of time

Courts have however cautioned that the tests are not to be used exclusively by themselves as they only serve as guides based on the facts of each case. The hallmarks of a true independent contractor are that the contractor will be a registered taxpayer, will work his own hours, run his own business, will be free to carry out work for more than one employer at the same time, will invoice the employer each month for his/her services and be paid accordingly and will not be subject to usual “employment” matters such as the deduction of PAYE (tax on income), will not get annual leave, sick leave and other normal entitlements of an employee.

 

 

 

In the Open: Disclosure Requirements Under the New Company Regulations

Posted on June 27th, 2018

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Pursuant to the Companies Act, 2015 (the Act), directors of a company are required to prepare a directors’ remuneration report for each financial year of the company. The Act requires regulations to be in place, which regulations shall prescribe the information to be included in a directors’ remuneration report, how the information is to be set out in the report and what is to be the auditable part of the report. Previously, the Companies (General) Regulations, 2015 (the 2015 Regulations) were in place. The 2015 Regulations had set out the information to be disclosed in a directors’ remuneration report. This included an aggregate amount of remuneration and benefits paid to or receivable by the directors of the company, in respect of their qualifying services.

In September 2017, the Companies (General) (Amendment) Regulations, 2017 (the 2017 Regulations) came into effect. The 2017 Regulations have amended the 2015 Regulations and seek to introduce more disclosure requirements for the directors’ remuneration report. The 2017 Regulations now require disclosure to be made with regard to each individual director as opposed to the aggregate amount of the directors’ remuneration, as was the case in the 2015 Regulations. Consequently, disclosure requirements in the directors’ remuneration report are now more extensive. In addition to the requirement for the report to disclose the remuneration of each individual director, the 2017 Regulations also seek to provide further guidelines for additional information that the directors’ remuneration report should contain. The information to be contained in the directors’ remuneration report is broadly categorised into two; information not subject to audit and information subject to audit.

Not Subject to Audit

The directors’ remuneration report needs to capture major decisions on directors’ remuneration, including any substantial changes relating to the directors’ remuneration, made during the year and the context in which the decisions and changes were made. To this extent, the 2017 Regulations require the report to contain a statement of voting at the previous general meeting as follows:

  • In respect of a resolution to approve the remuneration report, the percentage of votes cast for and against the report and the numbers of votes withheld
  • In respect of a resolution to approve the directors’ remuneration policy, the percentage of votes cast for and against the report and the number of votes withheld

The 2017 Regulations further require that where there is a significant percentage of votes against the resolutions highlighted above, the report should contain a summary of the reasons for those votes, as far as the directors are aware and any actions taken by the directors in response to those concerns. Directors are also required to prepare a policy statement detailing the summary of each director’s performance conditions for the director to be entitled to share options or a long-term investment scheme. A summary of the methods to be used in assessing performance conditions also needs to be stated. The policy statement should also disclose the duration of directors’ contracts, notice periods and termination payments under the contract. In relation to a director’s contract of service, the report shall state whether a director is entitled to compensation in the event of early termination of a contract and such details that enable members of the company to estimate the liability of the company, in the event of such early termination.

The above information though not subject to audit is required to be in the directors’ annual remuneration report.

Subject to Audit

The following information required to be disclosed in the directors’ report is subject to audit:

  • Directors’ Emoluments and Compensation
  • Under this, the following information should be disclosed:

    • The total amount of the salary and fees paid to the director
    • The total amount of bonuses paid or receivable by the director
    • The total amount paid as expense allowances that are chargeable to tax or would be chargeable to tax if the director were an individual
    • The total amount of any compensation for loss of office paid to the director
    • The total estimated value of any benefits received by the director, other than in cash
  • Share Options
  • The report should also contain, in respect of each director of a company, the details of their share option information. This includes the number of shares that are subject to a share option at the beginning and end of the financial year, the number of shares that have been awarded, exercised or have expired or if there has been any variation to the rights. With regard to unexpired share options, the report should state the price paid for each share and the period within which a right should be exercised.

  • Long-term Incentive Schemes
  • Any details of a scheme of interests that a director may have at the beginning of a financial year or if later, on the date of their appointment as a director of the company, should be disclosed. The details of the schemes of interests awarded to the director in the relevant financial year, as well as those that the director may have at the end of the financial year, also need to be disclosed.

    The 2017 Regulations recognise the fact that the long-term incentive schemes are subject to certain qualifying conditions and require that the report sets out the period within which the qualifying conditions for the long-term investment scheme have to be fulfilled and whether there are any variations. A long-term incentive scheme for purposes of the 2017 Regulations means an interest in respect of which assets may become receivable, in respect of the qualifying services of a director.

  • Pension
  • The report also needs to disclose pension information of a director of a company who has served during the relevant financial year and has rights under the pension scheme. The pension information includes the details of the pension arrangement and any changes to those arrangements and the management of the assets and financial affairs of the pension scheme.

  • Past Directors’ Compensation
  • The details of any significant award made in the relevant financial year to any person who was not a director at the time of making the award, but was previously a director of the company must be disclosed.

  • Payments to Third Parties
  • The directors’ remuneration report should also contain the aggregate amount of any consideration paid or receivable by third parties, for making available the services of a director of a company. Payments made to a person who is a director of a company and is involved as the director of any of the company’s subsidiary undertakings or has dealt with any other undertaking by virtue of the company’s nomination should be disclosed.

    It is important to note that the Regulations require the above information to be provided with respect to each individual director, save for information relating to share options, where the Regulations allow for aggregation, in the opinion of the directors. Disclosure in respect of each individual director will result in a disclosure of excessive length.

    The 2017 Regulations will with no doubt enhance transparency in the remuneration of company directors. With the new rules in place for instance, it is now mandatory that companies integrate details of individual director remuneration into their annual financial reports. The 2017 Regulations are also expected to bring an end to the current reporting practice where listed firms only provide an aggregate amount of total director emoluments, leaving shareholders to guess what each executive or director takes home. Shareholders will now more transparently have the power to approve directors’ pay at general meetings, a move that may see boards of loss-making companies take a pay cut to match the company’s economic situation.

    The liability of companies at the time a director joins and leaves a company, as well as after a director has left a company, will now be more certain and can be projected without causing any economic effect to the performance of listed companies.

    Notably, the 2017 Regulations are in line with constitutional requirements that every citizen has the right of access to information. The 2017 Regulations are also in line with the guidelines on corporate governance practices by publicly listed companies in Kenya, which require companies to establish a formal and transparent procedure for remuneration of directors, which should be approved by the shareholders. The Regulations are therefore a remarkable and progressive legislative development.

     

     

     

     

     

    Location, Location, Location: The Making of Nairobi As a Financial Hub

    Posted on June 27th, 2018

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    For quite some time, intense efforts have been made to further diversify the Kenyan economy and attract more foreign investors into the country. This is in line with Kenya’s long-term development plan dubbed “Vision 2030”, which hopes to secure the country’s middle-income status, based on a vibrant and globally competitive financial sector. The Kenya Government hopes to establish a regional financial hub to encourage major economic growth and to position Kenya as a prime financial centre in East and Central Africa. A key milestone in these efforts is the coming into force of the Nairobi International Financial Centre Act (the Act) on 16th August, 2017. The Act seeks to provide the legal framework for the development of an efficient and globally competitive financial services sector in Kenya.
    A financial centre is a location that is home to a cluster of national or international financial service providers such as banks, investment managers, hedge-funds or stock exchanges. Such a centre is usually modeled by harmonising various regulations and laws that affect a business, for example Company Law, Trust Law, Insurance Law, as well as Banking and Tax regulations, with a view of attracting investors. The measures put into place have to be tax-efficient when compared to those established in other countries in the region. International finance centres have been successful in many major cities including Frankfurt, Hong Kong, Johannesburg, London, New York, Zurich, among others. Some of the benefits usually extended to investors include attractive tax rates, encouragement to foreign investors to do business, efficiency in financial transactions and overall economic growth.
    The Nairobi International Financial Centre

    The Nairobi International Financial Centre (NIFC) and the Nairobi International Financial Centre Authority (the Authority) are established pursuant to sections 4 and 5 of the Act, respectively. The NIFC is an operating framework managed by the Authority to facilitate and support the development of an efficient and globally competitive financial services sector in Kenya. The Authority is established under section 5 as a body corporate, whose management vests in a Board of Directors with a non-executive chairperson, appointed by the President.

    Objectives of the Authority

    The main objective of the Authority is to establish and maintain an efficient operating framework to attract and retain firms to the NIFC. The Authority is also tasked to develop and recommend strategies and incentives, in collaboration with the relevant regulatory authorities, to develop Kenya as an internationally competitive financial centre. The Authority is further expected to be responsible for developing, managing and enforcing the regulatory environment, based on the principles of efficiency, transparency and integrity.

    Certification of Firms
    Under section 28 of the Act, a person who intends to operate a NIFC firm is required to apply to the Authority in the prescribed form to be certified. The application should be accompanied by the prescribed fee and any other additional information as the Authority may require. Once certified, the firm may conduct any business which the Cabinet Secretary responsible for matters relating to finance (the Cabinet Secretary) may designate in the Gazette as a qualified activity. In a bid to regulate those who engage in the qualified activities, the Act makes it an offence for a person to conduct any qualified activity as a NIFC firm or hold itself out as such, unless that person is duly certified by the Authority under the Act. A person who contravenes this provision of the Act commits an offence and is liable on conviction to a fine not exceeding KES 10 million (USD 100,000) or to imprisonment for a term not exceeding five (5) years or to both.

    Confidentiality of Information

    Under section 17 of the Act, a director, officer, employee or agent of the Authority or any person who for any reason has access to any record, document, material or information relating to the affairs of the Authority shall not divulge and or publish such information, unless it is required to be disclosed under any law or by Court order. A person who contravenes this provision of the Act commits an offence and is liable on conviction to a fine not exceeding KES 200,000 (USD 2,000) or to imprisonment for a term not exceeding three (3) years or to both.

    Foreign Ownership

    In a move that would be attractive to foreign investors, the Act allows NIFC firms to be fully owned by persons who are not nationals, or resident in, Kenya. This is amended though section 32 of the Act, which provides that NIFC firms shall not be subject to any nationalisation or expropriation measures or any restrictions on private ownership.

    Repatriation of Profits

    The legal framework which is modeled closely after Qatar’s Financial Centre allows firms to have the freedom to repatriate profits and realise investments without any restrictions. This is also geared towards attracting foreign investors. The firms will also have the freedom to recruit and employ staff of their choice, on such terms agreeable to them, subject to work permit provisions and any international treaty obligations, entered into by the Government, in respect of the terms of employment. This is strategic since the firms will be in a position to employ expatriates from other jurisdictions to help in their management, although it may be argued that this may not help in the transfer of knowledge and such valuable skills to Kenyans.

    The Steering Council

    The Steering Council (the Council) which is established under section 19 of the Act consists of the President as the Chair, the Deputy President as the Vice Chair, the Cabinet Secretary, the Attorney General, the Governor of the Central Bank of Kenya, the Chief Executive Officer of the Capital Markets Authority, the Chief Executive Officer of the Insurance Regulatory Authority, the Chief Executive Officer of the Retirements Benefits Authority and the Chairperson of the Authority.

    The Council has the mandate to review the progress of the NIFC, provide direction and address any challenges in the development of the NIFC and the overall financial services sector in Kenya. It may from time to time, give such directions to any person as the Council considers necessary, in order to achieve the objectives of the Act.

    Dispute Resolution

    In a bid to establish a world-class legal environment, the Act has embraced Alternative Dispute Resolution (ADR) as a mode of resolving disputes through the establishment of the Financial Centre Tribunal (the Tribunal). The main objective for the Tribunal is to avoid the high costs of litigation which have become prohibitive, making parties to commercial transactions keen on procedures of resolving disputes which are more affordable, quicker and which maintain parties’ confidentiality. Under section 35(7) of the Act the Tribunal has jurisdiction to hear and determine appeals against any decision or order of the Authority.

    Regulations

    The Cabinet Secretary is expected to come up with regulations for the operationalisation of the Act. In doing this, the Cabinet Secretary is expected to designate qualified activities to be conducted by NIFC firms, determine any benefits, exceptions and incentives available to the firms, determine the general conditions of entry of firms to the NIFC, provide the certification process and to prescribe information required of the firms to facilitate operationalisation of the Act.

    Whether or not the NIFC will be an attractive and competitive financial hub in the region remains to be seen and will depend on a number of factors, including the provision of effective business infrastructure, innovation, a balanced regulatory environment, attractive tax incentives, an effective legal system and dispute resolution mechanisms that provide cost-effective and expeditious resolution of all business disputes. Plus, the Government’s willingness to adopt international best practices from other successful international financial institutions.

    It is only through careful consideration of such issues that the NIFC will offer a lucrative base for investors to base their operations in Nairobi. The commencement of the Act is only the beginning of the journey towards making Nairobi a financial hub. A lot more will, however, need to be done for the Act to fully achieve its objectives.

     

    Permission to Enter and Work: What Foreigners Need to Know About Working in Kenya

    Posted on June 27th, 2018

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    Kenya has one of the largest and fastest growing economies in East and Central Africa, specifically in the areas of agriculture, manufacturing and mining. As a thriving regional business market, the country has seen many multinationals and non-governmental organisations set up base here. This has caused a large number of foreign nationals to migrate into the country for work. Despite the growing economy, unemployment levels remain very high for locals and for this reason the Government has put in place laws to protect jobs that can be undertaken by locals, while at the same time putting up stringent legal processes for foreign nationals to gain work in Kenya.

    The Kenya Citizenship and Immigration Act, 2011 (the Act) was enacted to provide for matters relating to citizenship, travel documents and immigration. The Act provides under section 34(1) that the presence in Kenya of a person who is not a citizen of Kenya shall be unlawful unless that person holds a valid work permit, residence permit or pass.

    The Act makes it an offence for a foreign national to engage in any employment, occupation, trade, business or profession without being authorised to do so. It is also an offence under the Act for a person to employ a foreign national whom the employer knows or has reasonable cause to believe is not authorised to work in Kenya. Further, the Act empowers the Cabinet Secretary in charge of matters relating to citizenship to make an order in writing, directing that any person whose presence in Kenya is unlawful to be removed from and remain out of Kenya either indefinitely or for such period as may be specified in the

    Duties and Obligations of Employers

    Section 45(1) of the Act provides that no person shall employ a foreign national who entered Kenya illegally or whose status does not authorise that person to engage in employment. Employers are also prohibited from employing foreign nationals on terms different from those authorised in their status. Under section 45(2) of the Act, every employer must apply for and obtain a work permit or special pass conferring on the foreign national the right to engage in employment before granting the foreign national employment.

    For the purpose of section 45, a person who performs any work or service of any kind which is commonly performed by a person in employment for the benefit of or at the request of another person is deemed to engage in employment and that other person shall be considered to employ that person. It should also be noted that the Citizenship and Immigration Regulations, 2012 (the Regulations) empower the Director of Immigration Services (the Director) to inspect places of employment and businesses with or without prior notice for the purpose of verifying information contained in a work permit or special pass application and monitoring compliance with the terms and conditions contained in permits and passes issued.

    In the case of an employee ceasing to work for the employer for any reason, the employer specified in the work permit is required to report in writing to the Director within fifteen (15) days that the holder of a permit has ceased to engage in the employment in respect of which the permit was issued and any employer who fails to do so commits an offence

    Types of Permits There are nine (9) classes under which a work permit may be issued, namely:

    • Class A is for a person who intends to engage, whether alone or in partnership, in prospecting for minerals or mining in Kenya who has obtained a prospecting or mining right or license and has a minimum of USD 100,000 for that purpose
    • Class B applies to a person who intends to engage, whether alone or in partnership, in agriculture or animal husbandry in Kenya and who has all permissions necessary to acquire an interest in land of sufficient size and suitability for that purpose and sufficient capital or resources at his disposal for that purpose
    • Class C is for members of a prescribed profession who intend to practise that profession, whether in partnership or alone, in Kenya. The applicant must possess the prescribed qualification, have sufficient capital or resources for that purpose and be registered with a professional body, association or institute in his own country. The prescribed professions include medical practitioners, dentists, advocates, surveyors, estate agents, valuers and land agents, architects and quantity surveyors, pharmacists, veterinary surgeons, engineers, nurses, physiotherapists, accountants, chartered secretaries, actuaries, scientists and information technology experts
    • Class D relates to persons who are offered specific employment by a specific employer and who have skills or qualifications that are not available in Kenya. The processing fee is USD 100 and the issuance fee is USD 2,000. This permit tends to be more difficult to obtain due to the need to show that local expertise is not available, a requirement which stems from a ministerial policy aimed at preventing companies from employing foreign nationals for work that Kenyans can perform
    • Class F applies to a person who intends to engage, whether alone or in partnership, in a specific manufacture in Kenya who has obtained a license, registration or other permission that may be necessary for that purpose and who has at least USD 100,000 at his disposal for that purpose
    • Class G applies to persons who wish to engage, whether alone or in partnership, in a specific trade, business, consultancy or profession in Kenya (other than a prescribed profession, which are covered under Class C)
    • Class I is reserved for persons who are members of institutions registered under the Societies Act (Cap. 108) and who are engaged as missionaries, members of companies limited by guarantee, and members of trusts registered under the Trustee Act (Cap. 167)
    • Class K is designed for ordinary residents who are over thirty five (35) years and have funds or an assured annual income of at least USD 24,000 or its equivalent in Kenya Shillings and undertake not to accept employment (paid or unpaid) or engage in any income generating activity of any kind without a permit of the relevant class. The income must be derived from sources outside of Kenya which will be remitted to Kenya or from a pension or annuity payable from sources in Kenya
    • Class M is for persons who have been granted refugee status in Kenya and the only supporting document required is a recommendation letter from the Department of Refugee Affairs. A person to whom a Class M work permit has been issued and the spouse of such person may engage in any occupation, trade, business or profession

    The Regulations provide that an application for a work permit shall be made to the Director in Form 25. The application must include a signed cover letter from the employer, applicant or organisation addressed to the Director, copies of the applicant’s national passport, two (2) recent coloured passport size photographs and a copy of the applicant’s current immigration status if in the country.

    The Director will issue a work permit in any of the classes specified above upon payment of the applicable fees and if satisfied that the requirements of that particular class have been met and the engagement or the applicant’s presence in Kenya will be of benefit to Kenya. While the Act provides that permits will be issued for a period not exceeding five (5) years, at the moment work permits are only issued for a maximum period of two (2) years.

    Special Pass

    A person who is applying for a work permit or wishes to enter or remain in Kenya to temporarily to conduct any business, trade or profession may apply to an immigration officer in Form 32 for a special pass in accordance with the Regulations. Special passes are often applied for to perform a specific task within a specified period of time, for example installation and repair of machines, auditing of accounts, training and other specialist jobs for which Kenya lacks expertise.

    The special pass will be issued for a period not exceeding six (6) months once the issuance fee of USD150 per month has been paid and will allow the permit holder to re-enter Kenya at any time during the period of validity of the pass. The special pass may be renewed for a further six (6) months upon payment of the prescribed fees.

    East African Community

    The East African Community Common Market Protocol (the Protocol), which came into force on 1st July 2010, permits certain classes of workers who are nationals of a Partner State to move freely within the East African Community (EAC) region in pursuit of employment opportunities. The Protocol also guarantees EAC nationals the right to establish a business and pursue economic activities as self-employed persons in any Partner State and requires that Partner States remove all nationality-based restrictions on the right of establishment with respect to companies and self-employed persons.

    Additionally, the Protocol grants holders of work permits and their families the right of residence in the Partner State where they are employed or established. To this end, Partner States are required to issue residence permits to holders of work permits and their families.

    As far as work permits are concerned, Kenya and Rwanda have already waived the applicable fees for all Partner States while Uganda has done so on a reciprocal basis. This means that an EAC national is not required to pay the prescribed fees when applying for a work permit in Kenya.

    However, the Protocol has maintained the requirement for a work permit. Consequently, EAC nationals who wish to work or establish a business in Kenya are still required to submit a work permit application to the Immigration Department.

    The Protocol also grants competent authorities of Partner States the power to reject an application for a work permit. While the grounds for rejection are a matter left to national legislation, the Protocol does make provision for the right to be notified in writing of the reasons for the rejection and a right to appeal against the rejection. In case of cancellation of a work permit, for instance where the holder ceases to engage in the employment for which the work permit was issued, the Protocol grants the worker thirty (30) days within which to regularise his status or leave the Partner State.

    Strength in Numbers: The Way Forward in Collective Bargaining Agreements

    Posted on June 27th, 2018

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    The upsurge in the number of strikes called in recent times by various cadres of workers, including teachers, doctors, nurses and lecturers, has witnessed a common thread – an outcry for the implementation of Collective Bargaining Agreements (CBAs) between the workers and their respective employers. This has caused a natural spike in the Kenyan public’s interest in the concept of a CBA - what it is, what it entails and what its implementation means for both the workers and the employers.
    What is a CBA?
    The concept of collective bargaining is entrenched in the Constitution of Kenya under Article 41 which provides for rights relating to labour relations, including the right to fair labour practices, the right to reasonable working conditions, the right to join and participate in the activities of a trade union and the right to go on strike. Article 4(d) specifically provides for collective bargaining on terms that, “every trade union, employers’ organisation and employer has the right to engage in collective bargaining.
    Section 2 of the Labour Relations Act, 2007 (the Act) defines a “collective agreement” as a written agreement concerning any terms and conditions of employment made between a trade union and an employer, group of employers or organisation of employers. On the other hand, a “recognition agreement” is defined as an agreement in writing made between a trade union and an employer, group of employers or employers’ organisation regulating the recognition of the trade union as the representative of the interests of unionisable employees, employed by the employer or by members of an employers’ organisation.
    Ordinarily, the employer first enters into a recognition agreement with the trade union so as to recognise the trade union for purposes of collective bargaining. The recognition agreement has to be in writing, in line with the provisions of section 54(3) of the Act and it sets out the terms upon which the employer recognises a trade union. Thereafter, the employer and the trade union may negotiate and enter into a CBA which sets out the terms and conditions of employment of the workers.
    Simply put, the recognition agreement is the initiating document that provides the enabling environment for trade unions and employers to enter into a CBA. A CBA covers a number of issues affecting the employees concerned, including; hours of work, salaries payable percentages of salary increments, promotions of the employees and the process to be followed in case of termination of their services including redundancy.
    Legal Effect of a CBA
    Section 59(5) of the Act provides that a CBA becomes enforceable and shall be implemented upon registration by the Employment and Labour Relations Court (ELRC) and shall be effective from the date agreed upon by the parties. Registration of a CBA with the ELRC is therefore a mandatory requirement for it to be legally valid and enforceable. This is the main issue that plagued the 2016/2017 doctors’ strike where doctors in the public sector were seeking a three hundred per cent (300%) pay increase pursuant to a CBA between the doctors’ union and the Ministry of Health on behalf of the Kenyan Government. The Government’s position was that the CBA had never been registered with the ELRC and was therefore unenforceable.
    The Act further provides that once a CBA is signed, it becomes binding on the parties to the agreement, for the period of the agreement, while the terms of the CBA are incorporated into the employment contracts pursuant to the provisions of section 59(3) of the Act.
    For example, during the recent doctors’ and nurses’ strikes, issues of promotions and allowances took centre stage and the case advanced in support by the unions was that these were matters covered under the respective CBAs and ought therefore to be implemented as part and parcel of the employment contracts.
    Applicability and Relevance
    Due to changing circumstances in the world of business and financial constraints in the current world economy, many private companies have been re-structuring their businesses and cutting-back on the number of employees that they maintain. As a result, there is a marked increase in the number of terminations of employment, on account of redundancy.
    The challenge that these companies are facing in carrying out the redundancy processes is that whether out of omission or commission, they often times do not comply with the prescribed procedures set out in the CBA. Matters such as giving the concerned union at least one (1) month’s notice before effecting a redundancy process and the fact that the company usually has to consider compensating the employees for the number of years served for example, are issues that companies do not always take into consideration.
    The concerned employees end up suing the company, whether as individuals or through their unions and the ELRC has not hesitated to apply the provisions of the Act, by finding that the terms of the CBA are binding and ought to be implemented.
    Court Decisions
    There have been several key decisions handed down by the ELRC in connection with CBAs. In the case of Kenya Plantation & Agriculture Workers Union v Coffee Research Foundation (2014) eKLR the Union brought that claim on behalf of ten (10) Claimants who were the Respondent’s security guards. Here, the ten (10) Claimants had worked for the Respondent for periods exceeding five (5) years, during which the Respondent had concluded a CBA with the Union. The CBA contained a thirteen per cent (13%) wage increment for each year and benefits including termination benefits under the retrenchment clause, which the Respondent chose to ignore when it terminated the Claimants’ services. The ELRC found that the Respondent had discriminated against the Claimants and ordered implementation of the CBA with respect to pay in arrears underpayment of wages and pay of redundancy benefits.
    In Kenya Union of Commercial Food and Allied Workers v Kenya National Library Service (2016) eKLR, the Respondent had concluded a CBA with the Claimant union but the Respondent had partly implemented the CBA by paying new salaries, allowances and part of the arrears. The balance which was left unpaid, it was argued by the Respondent, was an amount that had been factored into the Respondent’s 2014/2015 budget submitted to the parent Ministry, but no funds had been availed to enable the Respondent implement the CBA. It was the Respondent’s defence therefore that they had not refused to fully implement the CBA but that its hands were tied by the unavailability of funds from the National Treasury.
    The ELRC was unimpressed and held that once a CBA has been registered, as was the case in the claim before it, section 59(5) of the Act had already taken effect and therefore the CBA was binding and enforceable and failure to implement any part of the CBA gave the wronged party a remedy of specific performance. The ELRC further held the view that since the Respondent was claiming inability to pay due to acts of a third party, nothing prevented it from joining any such party/parties to the case for them to bear responsibility of the owing dues. In the upshot of its decision, the ELRC entered Judgment for the Claimant against the Respondent for specific performance of the terms of the CBA.
    Cases such as the above set strong precedents for the notion that there are no shortcuts to implementing a CBA.
    Way Forward?
    Public bodies and private entities alike ought to appreciate that collective bargaining is a constitutionally guaranteed right, duly entrenched under the Bill of Rights and that there can be no avoiding of CBAs. All parties ought to be keen at the negotiation table of CBAs, so that they fully understand what they are binding themselves to. If any terms seem complex or difficult to decipher, it is advisable to consider seeking legal advice on the same so that those provisions are well interpreted and understood by the parties prior to agreeing to the same.
    Employers also need to consider the long term financial effects of CBAs before negotiation and execution, as it is no defence to blame a third party for non-compliance with a CBA. Unions also need to be aware of the necessary steps to be taken to ensure that a CBA is legally valid and enforceable, so as not to become unstuck at the crucial time of agitating for implementation of the CBA.

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