How is Severance Pay calculated in Pakistan?

In Pakistan, severance pay, often referred to as "gratuity" or "end of service benefits," is regulated by labor laws and is typically paid to employees upon termination of employment, retirement, or resignation under certain conditions. Here's how severance pay is handled in Pakistan:

1. Eligibility for Gratuity

• Minimum Service Requirement: Generally, an employee is eligible for gratuity if they have completed at least five years of continuous service with the same employer. However, this period may vary depending on company policy or specific contractual agreements.
• Type of Employment: Gratuity is typically offered to permanent employees, though some companies may extend it to contractual or temporary employees based on their policies.
• Conditions for Payment:
  • Retirement: Employees who retire after completing the required period of service are eligible for gratuity.
  • Resignation: Employees who resign after completing the requisite years of service may also be entitled to gratuity, depending on the company's policy.
  • Termination (Other than Misconduct): If an employee is terminated for reasons other than gross misconduct, they are generally eligible for gratuity.

2. Calculation of Gratuity

• Formula: Gratuity is typically calculated as one month's basic salary for each completed year of service.
• Calculation Method: $$\text{Gratuity}=\text{Last Drawn Basic Salary}\times \text{Number of Completed Years of Service}$$
• Example Calculation:
  • If an employee has completed 10 years of service and their last drawn basic salary is PKR 50,000:
• $$\text{Gratuity}=50,000\times 10=PKR500,000$$
• Basic Salary Considered: The "last drawn basic salary" generally refers to the employee's basic pay, excluding allowances, bonuses, or other benefits unless specified otherwise in the employment contract.

3. Payment Timing

• Upon Termination or Retirement: Gratuity is typically paid at the time of termination, retirement, or resignation. The payment should be made as soon as possible after the termination of employment, usually within 30 days.
• Interest on Delayed Payment: If there is a delay in the payment of gratuity, the employer may be liable to pay interest on the outstanding amount, depending on company policy or applicable laws.

4. Statutory Provisions

• Industrial and Commercial Employment (Standing Orders) Ordinance, 1968:
  • This ordinance mandates that gratuity is paid to eligible employees upon the termination of their service after at least one year of continuous employment.
  • The ordinance stipulates that gratuity should be paid at the rate of 30 days' wages for each completed year of service.
• Payment of Gratuity Act, 2010 (specific regions): In some regions, there are specific laws that govern the payment of gratuity, such as in Sindh and Khyber Pakhtunkhwa, where the payment and conditions might differ slightly.

5. Exceptions and Special Cases

• Misconduct: If an employee is terminated for gross misconduct, they may forfeit their right to receive gratuity. Misconduct typically includes serious breaches of company policy, theft, or other criminal acts.
• Contractual Agreements: Some companies may have agreements that provide more favorable terms for gratuity than the statutory minimum. These agreements are legally binding and must be honored by the employer.
• Voluntary Retirement Schemes (VRS): In cases of voluntary retirement, the gratuity might be calculated based on special terms provided by the employer, which might be more generous than the standard calculation.

6. Dispute Resolution

• Labor Courts: If there is a dispute regarding the payment of gratuity, employees can seek redress through labor courts. Labor courts have the authority to enforce the payment of gratuity and can order employers to pay any outstanding amounts.
• Government Authorities: Employees can also file a complaint with the local labor office, which can mediate disputes between employees and employers regarding severance pay.

7. Additional Severance Payments

• Ex-Gratia Payments: Some companies may offer additional severance payments, often referred to as ex-gratia payments, as part of a negotiated settlement during mass layoffs, downsizing, or voluntary retirement schemes.

Key Considerations

• Industry Practices: Different industries might have specific practices regarding severance pay, especially in sectors like banking, manufacturing, or public service.
• Company Policy: Some companies offer gratuity schemes that are more favorable than the statutory requirements, providing additional financial security to employees.

In summary, severance pay in Pakistan, primarily in the form of gratuity, is a legally mandated benefit provided to eligible employees upon termination of employment, retirement, or resignation after a specified period of service. The payment is usually calculated based on the employee's last drawn basic salary and the number of years of service.