Layoffs: How employers are coping with high cost of labour

Four per cent of companies have reduced their workforce, often due to lower levels of new business. [iStockphoto]

Joy Mulwa has been employed by a Kenyan company that has operated in the region for over a decade, with various roles primarily focused on customer care.

Throughout her tenure, she has witnessed the company navigate through various challenges and also experience periods of success.

However, since the outbreak of the Covid-19 pandemic, the company has been facing significant difficulties.

Despite this, Joy and her colleagues remained hopeful that this was just one of the many obstacles their employer had overcome in the past.

Unfortunately, as other firms began to recover, unforeseen factors continued to disrupt their operations, leaving them ill-prepared to handle the situation.

Consequently, in July of this year, Joy’s employer announced a plan to lay off a portion of its workforce, including herself.

Following the completion of the layoff process, the company surprised its former employees by announcing new job openings and inviting them to apply.

Upon reviewing the available positions and job descriptions, the workers realised that these were essentially the same roles they had held before being declared redundant.

Outsourced jobs

However, there was a twist - those who were hired would be working for a company that had been outsourced to handle most aspects of customer care.

Despite the uncertainty, Joy and several of her colleagues decided to give the new job opportunity a chance.

To their dismay, they discovered that they would now be receiving much lower pay, which in Joy’s case was 65 per cent of her previous salary.

This is despite performing essentially the same job they had done with their former employer, who had outsourced their roles.

Furthermore, they were now on a six-month contract, which, although renewable, meant they were no longer able to save for retirement through pension pay.

Additionally, the medical cover they had enjoyed at their previous workplace was no longer available, except for the National Hospital Insurance Fund (NHIF).

At the time of the layoff, Joy’s employer had been forced to make such decisions due to the challenging business environment.

Unfortunately, the situation has since worsened with the introduction of new taxes that have further pushed up labour costs in Kenya.

Similar to Joy’s employer, many companies have had to confront multiple unexpected challenges in recent years. 

The current situation is deteriorating, as the government has implemented new taxes that have resulted in increased labour expenses.

Earlier this year, the government hiked the contributions for the National Social Security Fund (NSSF), whose costs are shared between the employee and employer.

NSSF rates went up to Sh1,080 in February from Sh200.

There are also plans to raise NHIF rates to 2.75 per cent of gross salary that will then be matched by employers at 2.75 per cent.

NHIF rates are currently on graduated scale, with those earning Sh100,000 and above paying the highest Sh1,700 per month.

It was changed in 2021 when workers and their employers paid a combined Sh700 per month.

The Finance Act 2023 has introduced new taxes including the Housing Levy Fund that has further pushed up the direct labour costs, and other tax measures such as the doubling of value added tax (VAT) on petroleum products have significantly increased operating costs for companies.

Industry players say these costs have made it increasingly expensive to create and sustain jobs, and have severally asked the government to have a predictable taxation policy that allows companies to absorb one tax measure before introducing another one.

The consequences on the labour market have been evident, with most companies refraining from hiring new employees unless it is absolutely necessary for critical positions.

According to Stanbic Bank’s Purchasing Managers’ Index (PMI) for September, there has been a decline in employment levels among Kenyan companies.

Approximately four per cent of companies have reduced their workforce, often due to lower levels of new business.

However, a similar proportion of companies have experienced an increase in employment. The only sector that has seen a rise in employment is agriculture, while other four sectors have witnessed a decline.

The Finance Act 2023 has played a significant role in driving up labour costs. On one hand, it has resulted in a decrease in take-home pay for formal sector employees through various measures, including the implementation of a 1.5 per cent affordable housing levy.

On the other hand, it has increased payroll expenses for employers.

The Federation of Kenya Employers (FKE) recently said the amount of taxes levied on employers and employees has become unbearable.

“One trend we are seeing is taxes are levied on gross pay...that has had a major tax employees on allowances, leave and such,” FKE Chief Executive Jacqueline Mugo told the National Dialogue Committee recently.

Additionally, the higher fuel costs have led to increased operating expenses for businesses.

The Finance Act raised VAT on petroleum products from eight per cent to 16 per cent, causing pump prices to reach record highs in July.

Bad climate

Furthermore, due to high taxes and other factors such as the weakening of the Kenya Shilling and international geopolitical issues, pump prices reached new historic highs recently.

“They are not working…the climate in which business is being done is terrible. You can’t have a country where you have 20 layers of taxes,” Ms Mugo said.

Ken Gichinga, chief economist at Mentoria Economics, expressed concerns about the impact of the Finance Act on the labour market in a previous interview.

“It is going to make employee costs go up, so there will be a temptation among companies to reduce their workforce, which complicates the job outlook at a time when we should be reducing unemployment.,” he said.

“Some companies, depending on the strategy, might try to rationalise but the effects will significantly affect the job market”

Mr Gichinga said employers will also have to consider the fact that “the cost of labour is becoming more expensive yet it appears that we are not tapping it to the full”.

This way, employers might try to get more done with less by seeking to fully utilise the personnel that they have.

Sustained higher labour costs might affect Kenya’s attractiveness as a destination for investors who may consider other countries in the region.

“The medium- and long-term effects especially for multinationals coming to invest and comparing with other countries in the region, does this make us more competitive than the region,” said Gichinga.

“Those are some of the things that the government will need to counter as it rolls out this thing.”

He said the impact of the higher labour costs would be felt differently across sectors, but sectors such as banking and media which are disrupted fast by technology are likely to suffer lower employment rates and even employees being sent home in some instances.

“Sectors that are highly disrupted by technology, I think that is where you will find a huge significance of these policies…they will be the most prone to that temptation to rationalise.”

The Act has also increased taxes for the small businesses that pay turnover tax to three per cent from one per cent, which will also see these companies change the manner in which they engage with employees, many of them engaged as casual workers.

Analysts say job creation as well as retention of the current force in the labour market might prove difficult in the coming years with the employers expected to react to new taxes that will see labour costs shoot up by holding off hiring plans.

Employment slowdown

They say  the larger burden by the State might see employers react in different ways, whose end result will be a likely slowdown in employment creation.

“The new Housing Levy, the hike in NSSF rates and the planned increase for NHIF will affect employers in the private sector negatively,” said Alex Kanyi, Partner in Tax and Exchange Control at Cliffe Dekker Hofmeyr.

“The employers at the beginning of the (calendar) year did not budget for the increased contributions or taxes that they will pay for their employees.

“The wage bill for employers will certainly increase because of this.|

Mr Kanyi said employers may consider resizing the number of employees - which could mean layoffs or delaying decisions to recruit additional staff or changing the terms for some employees so that they are only retained on consultancy basis.

“The planned changes do not augur well with the government’s plan to create jobs.

“Employers are hard pressed with the depressed economy and other financial pressures therefore they are likely to look for a way to reduce costs and the victims could be the employees for whom the government is seeking to create jobs for,” he said.