Hiring Your First Employee In Kenya: Contracts, Payroll And Statutory Costs (2026)

Before you hire, be honest about the cost

The salary you agree with your first employee is not what they cost you. On top of gross pay you carry an employer share of NSSF, an employer share of the Affordable Housing Levy, the industrial training levy, and the administrative burden of running a compliant payroll every single month, on time, whether or not the business had a good month.

Most first-time employers in Kenya discover this in month two, when the money that felt affordable at the interview turns out to be roughly seven to eight per cent more than the headline figure — before you count the cost of leave you must still pay for, sick days you must still pay for, and a termination process you cannot shortcut.

None of that is a reason not to hire. It is a reason to price the hire properly before you make the offer, because withdrawing an offer or cutting an agreed salary later is both a legal problem and a trust problem. This guide walks through what the law requires, what the deductions actually are, and what one employee genuinely costs.

The written contract: what the law actually requires

Section 9 of the Employment Act 2007 is the provision that catches people out. A contract of service for a period, or a number of working days, amounting in aggregate to three months or more must be in writing. So must a contract for work that could not reasonably be expected to be finished inside three months.

Two things follow that first-time employers routinely get wrong.

First, the obligation to draw up the contract sits with you, not the employee. Section 9 makes the employer responsible for causing the contract to be drawn up, stating the particulars of employment, and for ensuring the employee consented to it. "He never asked for a contract" is not a defence.

Second, an oral agreement for a job that obviously runs past three months does not become legal because both sides were happy with it. If a dispute reaches the Employment and Labour Relations Court, the absence of a written contract tends to be resolved in the employee's favour on the disputed facts, because you were the party legally required to create the record.

Section 10 gives you a small amount of breathing room on paperwork: the written particulars must be given not later than two months after the beginning of the employment. Use that window to get it right, not to forget about it.

What must be in the contract

Section 10 sets out the particulars a written contract must state. In practice, your document should cover:

The employee's name and personal details, and your name as employer
The job title and a real job description
The date employment starts
The place of work
The hours of work
Remuneration, how it is calculated, and when it is paid
Leave entitlements, including annual leave, sick leave and maternity or paternity leave
The length of the contract, if it is for a fixed term
Notice required to end the contract

Add, because they prevent arguments rather than because a section compels them: a probation clause if you want one, a confidentiality clause if the role touches customer data or pricing, and a clear statement of who owns work the employee produces.

Keep the language plain. A contract your employee cannot read is a contract that will not help you.

Minimum wage: you cannot negotiate below the Order

Kenya's minimum wages are set by order under the Labour Institutions Act, not by agreement. The current position comes from the Regulation of Wages (General) (Amendment) Order 2026 and the Regulation of Wages (Agricultural Industry) (Amendment) Order 2026, published in Kenya Gazette Supplement No. 128 as Legal Notices 95 and 96 dated 29 May 2026, and deemed effective from 1 May 2026. They raised general minimum wages by 12 per cent and agricultural minimum wages by 15 per cent.

The Order is not a single number. It is a schedule that varies by occupation and by location — Nairobi, Mombasa and Kisumu sit in the highest band, certain municipalities in a middle band, and the rest of the country in a third. A house worker in the major cities, for example, is widely reported at KSh 18,047 a month under the 2026 Order. A skilled trade in the same city sits considerably higher.

Because the schedule is occupation-specific, do not take a headline figure from a news article and apply it to your role. Find the occupation in the Order itself, or ask the Ministry of Labour, before you set the salary. Paying below the applicable minimum is an offence, and the shortfall is recoverable by the employee regardless of what they signed.

An employee's take-home is also not their gross, which is where most salary conversations go wrong. Our guide to how PAYE and net pay work is worth sharing with a candidate who is comparing your offer to another, and the income tax calculator will show them the same figures you are working from.

The statutory deductions you now administer

From the moment you have one employee, you are a collection agent for four separate obligations. Three of them are deductible from pay before PAYE is calculated, under the Tax Laws (Amendment) Act 2024 — which materially reduces the tax bill compared with the position before that Act.

NSSF. Under the NSSF Act 2013, contributions are 6 per cent from the employee and a matching 6 per cent from you. Tier I applies to pensionable pay up to KSh 9,000 and Tier II runs from there to the upper limit of KSh 108,000, so the maximum employee contribution is KSh 6,480 a month, matched by you. The employer half is a genuine cost, not a deduction. What the fund does with the money, and when your employee can touch it, is covered in our explainer on how NSSF works.

SHIF. Contributions to the Social Health Insurance Fund are 2.75 per cent of gross pay with no upper cap and a minimum of KSh 300 a month. Unlike NSSF, there is no employer match — but you must deduct and remit it. The three funds it pays into, and what your employee actually gets, are set out in our guide to SHA cover.

Affordable Housing Levy. 1.5 per cent from the employee and 1.5 per cent from you. Like the employer NSSF share, your half is a cost you carry.

PAYE. Deducted using the monthly bands — 10 per cent up to KSh 24,000, 25 per cent from KSh 24,000, 30 per cent from KSh 32,333, 32.5 per cent from KSh 500,000 and 35 per cent above KSh 800,000 — charged on taxable pay, meaning gross minus NSSF, SHIF and the housing levy. From the result you subtract the personal relief of KSh 2,400 a month (KSh 28,800 a year). KRA requires the deduction to be remitted, and the PAYE return filed on iTax, on or before the 9th day of the following month.

There is a fifth item that is not a deduction at all: the industrial training levy, payable to NITA at a rate widely stated as KSh 50 per employee per month. Registration thresholds and the position for a brand-new employer are reported inconsistently by advisory firms, so confirm your own obligation directly with NITA rather than assuming you are in or out.

A worked example: hiring at KSh 45,000 a month

Take an employee on a gross salary of KSh 45,000.

Their deductions

NSSF: 6% of the first KSh 9,000 = KSh 540, plus 6% of the remaining KSh 36,000 = KSh 2,160. Total KSh 2,700.
SHIF: 2.75% of KSh 45,000 = KSh 1,237.50
Housing Levy: 1.5% of KSh 45,000 = KSh 675
Taxable pay: 45,000 − 2,700 − 1,237.50 − 675 = KSh 40,387.50
PAYE before relief: 10% of 24,000 = 2,400; 25% of the next 8,333 = 2,083.25; 30% of the remaining 8,054.50 = 2,416.35. Total KSh 6,899.60.
Less personal relief of KSh 2,400 → PAYE of about KSh 4,500

Net pay: about KSh 35,888.

Your cost

Gross salary: KSh 45,000
Employer NSSF: KSh 2,700
Employer housing levy: KSh 675
NITA levy: KSh 50

Total: about KSh 48,425 a month, or roughly KSh 581,000 a year — about 7.6 per cent above the salary you quoted. Add the value of 21 days of paid leave and you should budget closer to KSh 630,000 for the first year.

That is the number to test against your revenue before you hire, not the KSh 45,000. If the gap is what is stopping you, look hard at whether the role can start part-time or on a genuinely fixed-term project basis before you reach for business borrowing to cover payroll — funding a salary with debt is how small businesses get into trouble.

Registering as an employer

You need a KRA PIN for the business and to be registered for PAYE as an obligation on iTax; if you do not yet have one, start with our walkthrough on getting a KRA PIN. You will then file a monthly PAYE return alongside your other obligations — the mechanics are the same as any other iTax return, covered in our guide to filing on iTax.

You also register as an employer with NSSF and with the Social Health Authority so you can remit on your employee's behalf, and with NITA if the levy applies to you. Each has its own portal and its own reference number, and none of them accepts "I was registering elsewhere" as a reason for a late payment.

If you are a small trader currently paying turnover tax, note that this changes nothing about your own tax basis — PAYE is a separate obligation you administer on behalf of someone else, and the two are filed separately.

Leave and entitlements that catch first employers out

These are statutory. They do not depend on what your contract says, and a contract offering less than the Act is unenforceable to that extent.

Annual leave (s.28): not less than 21 working days with full pay after every twelve consecutive months of service. You may split it with the employee's agreement, provided at least two uninterrupted weeks fall within the earning period.
Maternity leave (s.29): three months on full pay, with the right to return to the same or an equivalent job.
Paternity leave (s.29): two weeks on full pay.
Sick leave (s.30): after two months of service, not less than seven days on full pay plus a further seven days on half pay in each twelve-month period, on production of a medical certificate.

Budget for these as certainties, not risks. An employee who takes all 21 leave days and a week of sick leave is not costing you anything unexpected — that is the deal the law wrote into the contract.

Ending it properly: notice and severance

Section 35 sets minimum notice by pay cycle. An employee paid monthly, or at longer intervals, is entitled to 28 days' written notice. Shorter cycles carry shorter notice, and daily-paid workers may be terminated at the end of the day.

Two further points matter far more than most first employers expect.

Process, not just notice. Kenyan law requires a fair reason and a fair procedure. Terminating on misconduct without hearing the employee, with a representative present if they want one, is the single most common way a defensible dismissal becomes an expensive one at the Employment and Labour Relations Court.

Redundancy is different. If you are cutting the role rather than the person, section 40 applies: severance pay of not less than 15 days' pay for each completed year of service, on top of notice and any accrued leave. Calling a redundancy a resignation to avoid this does not work — the Court looks at what actually happened.

Records you must keep

Part IX of the Employment Act obliges employers to keep employment records, including each employee's annual leave entitlement, days taken and days due. Practically, keep for every employee:

The signed contract and any variations
A monthly payslip showing gross pay, each deduction and net pay
Proof of every statutory remittance
The leave register
Any warning letters, and the notes of any disciplinary hearing

Keep them for at least five years. When a dispute or an inspection arrives, the employer with contemporaneous records almost always does better than the one reconstructing events from memory — and the burden of producing employment records falls on you.

Casuals, interns and "consultants"

Three shortcuts that reliably backfire:

Rolling casual contracts. Engaging someone as a casual month after month for the same continuous work does not keep them casual. Where the arrangement in substance amounts to continuous employment, the courts have converted it into a term contract with full entitlements — backdated.

Unpaid interns. If a person is doing work you would otherwise pay someone to do, on your premises, under your direction, the "intern" label carries very little weight. Structure internships around genuine training with a stipend.

Calling an employee a consultant. Substance beats form. If you control what the person does, when and how, provide the tools, and they work only for you, an invoice does not make them independent — and if it is later found to be employment, you owe the PAYE you never deducted, plus penalties and interest.

Frequently asked questions

Do I need a written contract for someone working two months? Section 9 requires writing for contracts of three months or more, or for work that could not reasonably be finished within three months. Below that, writing is not compulsory — but write one anyway. It costs nothing and settles the terms.

What happens if I remit PAYE late? KRA states a late-filing penalty of the higher of 25 per cent of the tax due or KSh 10,000, and a late-payment penalty of 5 per cent of the unpaid tax plus 1 per cent interest per month. Because the money was your employee's, not yours, this is one bill worth prioritising over almost anything else.

Are allowances and benefits taxed? Cash allowances form part of taxable pay. KRA treats non-cash benefits as taxable where their value exceeds KSh 5,000 a month, with specific valuation rules for items such as a company car, housing and low-interest staff loans. Check the rule for the specific benefit before you assume it is tax-free.

Do I pay NSSF for a part-time employee? The Act applies to employees rather than to a minimum number of hours, so contributions are generally due on pensionable pay. Where the arrangement is genuinely casual or irregular, confirm the treatment with NSSF directly instead of guessing.

Can I agree with my employee to skip the deductions and pay them more? No. Statutory deductions are not negotiable, and an agreement to forgo them is unenforceable. If it is discovered, you carry the arrears, the penalties and the interest — while the employee keeps the extra cash they were paid.

How much should I set aside beyond salary? As a working rule, budget about 8 per cent above gross for employer contributions and levies, and roughly another 6 per cent for the paid leave you will fund. Fourteen per cent above the quoted salary is a realistic first-year planning figure.

Reviewed 31 August 2026. Figures are drawn from the Employment Act 2007, the NSSF Act 2013, the Tax Laws (Amendment) Act 2024, KRA guidance and the Regulation of Wages Orders of 2026. Rates, wage orders and thresholds change — confirm the current position with KRA, NSSF, the Social Health Authority and the Ministry of Labour before you rely on a figure. This is general information, not financial or legal advice.