What Severance Pay Rules Must Employers Follow in Pakistan?

Which Employees Qualify for Severance Pay?

• Employees classified as “workmen” under the Industrial and Commercial Employment (Standing Orders) Ordinance 1968 who are retrenched or laid off may qualify for retrenchment compensation.
• Permanent employees terminated due to redundancy, closure, or downsizing often receive severance where this is promised in contracts, HR policies, or collective bargaining agreements.
• Staff covered by a company gratuity, end-of-service, or separation-pay scheme may qualify if they meet the minimum service conditions in those schemes.
• Employees whose contracts or appointment letters specify severance or notice-pay in lieu of notice are entitled to those amounts when terminated without cause.
• Unionised employees may qualify for enhanced severance where a collective agreement or settlement provides more generous separation terms than the statutory minimums.
• Senior or managerial staff may receive contractual or ex-gratia severance based on market practice, even where the labour statutes do not mandate it.

What Are the Legal Timelines for Paying Severance?

In Pakistan, you should aim to pay all final dues - including any retrenchment compensation, gratuity, or contractual severance - on or very shortly after the employee’s last working day. Labour authorities generally expect payment within the normal wage period following termination, and delays can trigger wage-claim proceedings. Best practice is to calculate dues before issuing the termination letter and obtain written acknowledgment of payment at exit. Where a dispute exists, you should still pay any undisputed portion promptly and document your position on the balance. Keeping clear payroll records and signed settlement receipts will help you defend your company if a claim is filed later.

What Penalties Apply if Severance Is Not Paid Correctly?

If your company fails to pay legally due severance, retrenchment compensation, or other end-of-service benefits in Pakistan, you risk wage-claim proceedings, labour inspections, and potential criminal fines. Non-compliance can also lead to reinstatement orders or back-pay awards, especially where termination procedures under the Standing Orders or provincial laws were not followed.

• Administrative or criminal fines can be imposed for breaches of the Standing Orders or wage-payment laws.
• Labour courts may order payment of outstanding dues with possible additional compensation or damages.
• In some cases, wrongful termination findings can lead to reinstatement with back wages.
• Repeated or willful non-compliance can increase penalties and attract closer scrutiny from labour authorities.
• Your company’s reputation and ability to manage unions or employee relations can be seriously damaged.

Does Outsourcing Employment via an EOR Change Severance Liability?

Using an Employer of Record (EOR) such as https://www.playroll.com/employer-of-record can shift day-to-day payroll and termination administration to a local expert, but it does not remove the need for your company to respect Pakistan’s labour framework. In most EOR models, the EOR is the legal employer on paper and is responsible for calculating and paying any statutory or contractual severance. However, your company typically bears the commercial and funding responsibility under the service agreement, and you may be joined in a dispute if the arrangement is seen as sham outsourcing. You should ensure the EOR’s contracts, policies, and termination templates align with Pakistani law and any collective or company-level commitments you have made to staff.

Be 100 Percent Compliant in Offering Severance with Playroll

With Playroll, your company can standardise how you handle severance and end-of-service payments for employees in Pakistan, reducing the risk of inconsistent or ad hoc decisions. Our team tracks changes in federal and provincial labour rules, typical retrenchment practices, and market-based severance norms so your offers remain both compliant and competitive. We help you structure contracts, policies, and exit documentation so that notice, retrenchment compensation, and any ex-gratia amounts are clearly defined and easy to administer.

Playroll’s Employer of Record and global payroll solutions centralise calculations, approvals, and payment workflows so your finance and HR teams are not scrambling at the point of termination. You get clear breakdowns of statutory versus contractual amounts, standardised checklists for lawful termination, and auditable records for every exit. That way, you can protect your company from avoidable claims while treating departing employees in Pakistan fairly and consistently.