With the unending gymnastics of the Kenya shilling against major hard currencies, employers are increasingly coming under pressure from both existing and prospective employees to pay their salaries in convertible currency, preferably the US dollar or Sterling Pound.

The key driver for this preference, which is gradually becoming a deal breaker in recruitment negotiation, is the need to cushion employees who have financial obligations abroad such as payment of college fees, mortgage, investment schemes or medical bills against the impact of the weakening Kenya shilling against the major world currencies. This depreciation has progressively eroded their purchasing power in the countries where they spend the bulk of their money. It makes no sense for such employees to be paid in a fast-depreciating local currency. 

It is also an open secret that most international organizations and multinationals operating in Kenya pay their expatriate and senior Kenyan staff in foreign currency, contrary to an obscure provision in the Employment Act which requires employers to pay their employees in Kenyan currency. Failure to comply with this provision is a criminal offence which attracts a fine of up to Ksh.100,000 or imprisonment for two years or both. The provision contains no exceptions under which salary can be paid in any other currency.

While it is understandable why the law seeks to protect employees against cheeky employers who may want to pay them in Rupees, Dirhams, Yuan or the Ringgit, there appears to be no valid reason to prohibit payment of salary in convertible currency if that is the preference of the parties.

The courts and relevant regulatory authorities have, rightly, viewed such arrangements as a minor infraction that does not merit penal consequences provided the relevant taxes and statutory deductions are made and remitted in Kenya shillings using the prevailing exchange rate on the due date. The employee should also not be disadvantaged by the rate of exchange applied in the conversion.

The courts in particular, have adopted an ambivalent approach to avoid finding fault in such arrangements. They have ruled that while the law requires employers to pay salaries in Kenyan shillings, it is not unlawful for the employment contract to provide for remuneration in foreign currency so long as the actual payment is made in local currency.

This tenuous interpretation, while practical, does not, however, solve the issue because the employees demanding such terms do not want their salary converted or paid in Kenyan shillings at all. They want to receive their pay in foreign currency after deduction of all local taxes and statutory deductions.

The solution, therefore, lies in amending the law to allow for payment of salaries in any convertible currency of the parties’ choice. However, to ensure compliance with local tax obligations and earn the country some foreign exchange, the payment should be made into a Kenyan bank account.

In the meantime, the laws requiring tax and statutory deductions to be made in Kenyan shillings should be relaxed to allow KRA, NSSF, NHIF and NITA to operate foreign currency-denominated bank accounts to facilitate the remittance of taxes and statutory deductions in such currency and thereby avoid the necessity of conversion at the point of payment.

The article was featured in the Business Daily on 7 September 2023 and can be accessed here.