After termination, are staff preferential interest rates up for debate?

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The presumption that is then made is that upon termination of an employment contract, the employer would then convert the interest rate applicable to the facility from a preferential staff rate to a commercial lending rate. This understanding is often expressly reflected in the lending agreement, which stipulates that upon exit, commercial lending rates would apply. However, current jurisprudence suggests that it is no longer that simple.

The prevailing view emanating from various court decisions is that where an employee is unfairly terminated, the preferential mortgage facility cannot be separated from their employment contract. The courts have said that the two are related because the only basis upon which the benefit was extended to the employee was the employment relationship.

This view has been expressed in a recent decision of Kenya's Employment and Labour Relations Court (ELRC) in Zamzam v Gulf African Bank Limited.

In this case, the claimant had obtained a mortgage facility from the respondent bank on preferential staff interest rates, and a mortgage agreement was signed. Subsequently, the claimant’s employment was terminated during the term of the mortgage.

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The claimant sued the bank for unfair termination and sought, among other reliefs, that his mortgage facility should continue to attract the preferential staff interest rate.

In agreeing with the claimant, the Court held that

the loan facility cannot be removed from the employment relationship and termination thereof.

Furthermore, the Court held that unfair termination of employment "went to the root of (his) mortgage facility" therefore, an employee should not be disadvantaged by the employer’s breach of fair labour practices.

Key takeaways

This recent decision reiterates the following key principles that employers should keep in mind when extending preferential interest rates for loans offered to their employees:

• Loan and mortgage facilities provided under staff schemes should have very clear and express terms as to the applicability of commercial lending rates, upon termination of employment. Employees’ consent to this should be indicated in writing including a declaration that the terms have been read and understood.
• The general view emanating from the courts is that where an employer is found to have terminated an employee unfairly and the employee had a loan facility with preferential rates, the employer must continue to apply the preferential rates for the remainder of the term of the loan.
• Employers should consider having discounted loan facilities provided by third-party lenders to derisk against them being required to apply the benefit to an exited employee.