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Former employees take on audit company in David vs Goliath row

FINANCIAL STANDARD
By Macharia Kamau | February 2nd 2021
It began with the acrimonious ouster of a former partner who sued Ernst & Young for Sh450 million before the immediate former Eastern Africa CEO also sought legal redress over his disputed retirement package. And now nearly 30 sacked workers are suing the global audit firm for wrongful dismissal.

It is often said that a company’s greatest assets are its employees.

But what happens when the same employees exit the firm in droves?

Do they become the firm’s goodwill ambassador? And what if the exit was acrimonious?

Should the former employees be treated as adversaries since they know the company too well?

One audit firm has perhaps found the answers to these questions and they could be unsettling.

Ernst & Young (EY) Kenya, the local arm of one of the global big four audit firms, is incessantly finding itself at war with its former employees.

The company is fighting legal suits against dozens of its former staff, some having worked with the firm for more than a decade, including its former chief executive.

The firm towards the end of last year received numerous demand letters from some of the over 40 employees it let go last July in a retrenchment exercise, threatening to sue the firm for unfair termination.

The demand letters are in addition to a suit filed by EY Kenya’s immediate former chief executive Gitahi Gachahi, claiming that his retirement package had been slashed by Sh10 million.

Before then was the case of Laban Gathungu who went to court, claiming that his partnership at the firm was irregularly terminated. He was claiming Sh450 million from the company

Close to 30 of the retrenched employees have since sent demand letters to the company, protesting the move to lay them off as unfair, unlawful and unprocedural.

Among the reasons that some of the former employees cited in their letters are failure to give valid reasons for the retrenchment and lack of clarity in the criteria used in selecting employees for the retrenchment exercise.

In the different letters, the employees also say they were never given options such as voluntary exits or even taking pay cuts, considering that one of the factors cited by the company for the layoffs was cash flow difficulties occasioned by Covid-19.

In their various letters to the company, they noted that the firm had “grossly” understated their severance pay.

A number of the affected employees were middle-level managers, making upwards of half a million shillings a month, with each seeking compensation running into millions of shillings.

Jointly, they are seeking more than Sh100 million from the firm for wrongful termination of their employment. 

But responding to one of the demand letters by a former employee, EY lawyers Anne Babu and Company Advocates noted that all the employees were, at a meeting last year, appraised on the status of the firm, including how it had struggled for several years, making it difficult to continue operating normally.

During the virtual meeting held on May 29, the law firm noted, the employees were told that Covid-19 had made an already bad situation worse as clients cancelled or delayed projects, significantly affecting its cash flow.

At the meeting, the chief executive also communicated to the affected employees the firm’s decision to restructure its operations.

The immediate former chief executive Gachahi, who has also sued the company for slashing his retirement package, has backed the fired employees’ push for redress.

In an affidavit, he noted that the company had been on a solid footing and that the reasons used to justify the staff redundancy were not supported by facts.

“Despite being a major shareholder in the firm, I was not engaged when Covid-19 economic conditions were used to justify staff redundancy despite not being supported by facts,” he said.

“Despite the prevailing economic conditions, there was a revenue growth from the previous financial year and no decline in the gross margin.”

Gachahi filed the suit, claiming that his exit package following his June 2020 retirement fell short by Sh10 million.

In the affidavit filed in court, Gachahi noted that the firm had capped his leave days at 60 instead of the 153 days that he was entitled to, which saw his dues reduced by the said amount.

Another Sh2.8 million was taken from his partnership drawings – profits due to him as a partner of the firm – allegedly owing to the harsh impact of Covid-19 on the business despite the company’s earnings rising last year.

“The decline in the total income could be attributed to a change in the accounting policy that increased depreciation from $90,000 (Sh9.8 million) to $690,000 (Sh75.2 million), which has in any event, no cash flow impact,” he said.

EY has asked the court to refer the case to arbitration, while Gachahi’s lawyers have asked for time to review the application granted by the court.

The firm also faces a Sh450 million lawsuit by one of its former partners, Laban Gathungu, who claims he was irregularly removed from his position.

Mr Gathungu had been the partner in charge of the public sector business until November 2018 when the company terminated his partnership, an action he claims is null and void as it contravenes a 2015 partnership agreement, which stipulates the process of kicking out a partner.

He also disputes the grounds used in terminating his partnership.

He, however, got a reprieve after the court issued an injunction restraining EY from removing him.

Gathungu also protested the slashing of his earnings with his profit allocation for the year to June 2018, reducing by 27.4 per cent compared to previous year’s earnings.

It is not the first time that a Big Four audit firm is facing a major partnership dispute.

KPMG East Africa was recently rocked by a fallout with one of its senior partners, who had served the firm for more than two decades.

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