How to calculate deduction for employee compensation scheme

Just some years ago, the National Assembly replaced the Workmen's compensation act with the Employee Compensation Act (ECA).

The National Assembly had few years ago replaced the Workmen’s Compensation Act with the Employee Compensation Act (ECA).

The ECA directs employers to contribute 1% of their total emoluments cost to the Nigerian Social Insurance Trust Fund (NSITF). This is set aside as insurance for whatever incident employees recorded while discharging their duties. These include injury in work place, mental stress, occupational hazard, and even death.

How do employers contribute?

This matter has generated controversies for decades. Successive governments had tried to address the problem and put an end to this age-long dispute between employers and employees. The NSITF, had in a newspaper advertorial requested that employers contribute an amount equal to 1% of total salary. This has huge implication for companies and even small businesses where overheads include salaries, allowances and health insurance among others.

The Nigerian Employers Consultative Association (NECA) had released guidelines on the workers’ contribution to the compensation scheme after a meeting with NSITF where discussions on employees’ total emoluments came up.

Total emoluments, according to NECA, is the summation of BASIC SALARY, TRANSPORT AND HOUSING ALLOWANCES.

For example, the information in the payroll below will give readers insights into how employees’ deductions in the compensation scheme are computed.

Basic – N5,000,000

Housing – N2,00,000

Transport – N1,000,000

Leave Allowances – N2,500,000

Medicals – N2,000,000

Training – N3,500,000

Utilities – N500,000

Travel & Holiday – N2,000,000

Meal Allowance – N3,000,000

Vehicles to Senior Staffs – N5,000,000

Total ——–N26,500,000

Based on the above your company will only contribute (Basic N5,000,000)+(Housing N2,000,000)+(Transport N1,000,000) X 1% = N80,000.

Compare the above to 1% of N26.5 million which is N265k which the NSITF erroneously requested that we pay. Employers are also expected to begin implementation from JULY 2011 as against January 2011 advertised by NSITF.

So, for small businesses and start ups, it is important that you note the above as it applies to all employers whether private and public and irrespective of size of employees. Also not that by the act setting up ECA, Workmen’s Compensation is no longer required.

NOTE: This article was initially published in 2012 and is being republished to benefit those who never saw it.