How to Calculate Deductions for the Employee Compensation Scheme

In 2011, the National Assembly replaced the Workmen’s Compensation Act with the Employee Compensation Act (ECA). The ECA is an act that directs employers to contribute 1% of their total emoluments to the NSITF (Nigeria Social Insurance Trust Fund). The amount is set aside as insurance to employees with compensation for injuries in workplaces, mental stress, occupational hazards, and even death.

How do employers contribute?

This is where there have been controversies. The NSITF, in their newspaper advertorial, requested that employers contribute an amount equal to 1% of total salary. This has wide implications for companies, and even small businesses where payroll may include salaries, allowances, benefits, health cost, etc. 1% of that is certainly a lot more than 1% on specific parts of what constitutes payroll.

Fortunately, the Nigerian Employers Consultative Association (NECA) released guidelines based on a clarification meeting with NSITF on what constitutes total emoluments which the 1% will be applied to.

Total emolument was hereby defined as the summation of basic salary, transport and housing allowances. For example, let’s assume that in your organisation, your payroll breakdown is made up of the following:

Total Payroll

Based on the above, your company will only contribute:

Basic (N5,000,000) + Housing (N2,000,000) + Transport (N1,000,000) × 1% = N80,000.

Compare the above to 1% of N26.5m (N265k) which the NSITF erroneously requested that employers should pay.

Employers were also expected to begin implementation from July 2011, as against January, 2011, which was advertised by NSITF. So for small businesses and startups, it is important that you note the above as it applies to all employers, whether private or public and irrespective of size of employees.

Also, note that by the act setting up ECA, Workmen’s Compensation is no longer required.

This article first appeared on Nairametrics on July 13, 2012.