How to Calculate Deductions for the Employee Compensation Scheme

By Nairametrics Financial Advocates | 1 min read
5th September 2018
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

Basic N5,000,000
Housing N2,000,000
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 N26.5m (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 setting up the ECA Act, Workmen's Compensation Act is no longer required.

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

Nairametrics Financial Advocates
Nairametrics is a leading financial resource company based in Nigeria with special focus on financial literacy, investor advocacy and business intelligence. Nairametrics.com was founded by Ugochukwu “Ugodre”Obi-chukwu and is owned by Nairametrics Financial Advocates.
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