Acknowledgement of Debt in the Employment Context: Legal Implications and Best Practices
When employees sign an acknowledgment of debt (AOD) to their employers, they create binding legal obligations that can have significant implications for their financial well-being. When and how employers can make deductions from employee salaries based on these acknowledgments should however be understood correctly.
Understanding Section 19 of the Employment Act, 2007: The Foundation for Deductions
The Employment Act, 2007 establishes clear parameters for when an employer may deduct money from an employee’s remuneration. Section 19(1) states that an employer may not make any deduction from an employee’s remuneration unless:
The employee agrees in writing to the deduction for a specific debt; or
The deduction is required or permitted by law, collective agreement, or court order.
When employees sign an AOD, they fall squarely within the first category, creating the legal basis for the employer to make deductions from their salary.
The Binding Nature of Acknowledgments of Debt
In Standard Chartered Bank Kenya Limited v Intercom Services Limited & 3 others [2018] eKLR, the High Court emphasized the binding nature of AODs once signed. The court affirmed that a signed AOD creates a valid legal obligation between the parties.
“Whatever circumstances under which he had signed the acknowledgment of debt, whether ‘hastily’ so or not, he had made himself liable to the respondent in terms thereof. Whatever arrangements he might have made… had nothing to do with the respondent.”
Limitations on Deductions Based on AODs
While Section 19(1) creates the legal basis for deductions based on AODs, Section 19(3) places important constraints on these deductions. It mandates that the total deductions from an employee’s salary in any one month cannot exceed two-thirds of the employee’s gross salary for that month. This limitation applies to all forms of deductions, including those for loss or damage. The loss must have occurred in the course of employment and been due to the employee’s fault.
The employer must follow a fair procedure, giving the employee a reasonable opportunity to show why the deductions should not be made. The amount deducted cannot exceed the actual loss or damage.
However, where the AOD relates to e.g., a staff loan or workback agreement in exchange for receiving paid maternity leave, the two-thirds limitation still applies to the total of all deductions, as it is a general cap on monthly deductions.
AODs and Pension Benefits: Special Considerations
In the event of a pension fund member leaving an employer’s service where he / she has caused damage to the Employer by reason of theft, dishonesty, fraud or misconduct, the employer may lay claim to the member’s pension fund benefits, as per the Retirement Benefits Act (RBA). In order for the Fund Administrator to repay the amount to the Employer, the following needs to be submitted:
- A fully completed Fund Administrator completed form signed by the member.
- A copy of the member’s ID document or passport.
- An acknowledgment of debt signed by the member; or
- A judgment obtained by the employer against the employee.
When Drafting AODs:
Ensure the AOD clearly specifies the exact debt amount and its origin. Include specific repayment terms and timeframes (including a clause that the entire debt may be deducted from the employee’s final salary, subject to the two-thirds rule).
Specify reasonable installment amounts.
A clause stating that the agreement is not subject to the Central Bank of Kenya Act or the Banking Act. Should an AOD be classified as a credit agreement, it must comply with the requirements of these Acts, including registration as a financial services provider and adherence to procedural and substantive provisions. An AOD may be classified as a credit agreement if any charge, fee, or interest is payable in respect of the deferred debt.