What Severance Pay Rules Must Employers Follow in Ethiopia?

Which Employees Qualify for Severance Pay?

Employees in Ethiopia qualify for severance pay if they:

• Are terminated due to redundancy, business closure, or downsizing
• Are dismissed for reasons other than serious misconduct
• Resign due to employer breaches, such as unsafe working conditions or unpaid wages
• Have completed at least one year of continuous service with the employer
• Are terminated because of long-term illness or incapacity not caused by their own fault

What Are the Legal Timelines for Paying Severance?

Employers must pay severance immediately upon termination or, at the latest, by the next payroll cycle. The law emphasizes prompt payment to ensure employees receive their benefits without unnecessary delay.

In practice, most compliant employers process severance along with the employee’s final paycheck, including any unused annual leave and other entitlements. Delayed or partial payments can expose employers to labor claims or enforcement action by the Labour Board.

What Penalties Apply if Severance Is Not Paid Correctly?

Failing to pay severance correctly or on time can lead to significant compliance risks in Ethiopia, including:

• Fines or administrative penalties imposed by labor authorities
• Employee claims before the Labour Board, which may award compensation plus interest
• Legal disputes that can result in back payments, damages, and reputational harm
• Possible suspension of business licenses in cases of repeated violations

Ensuring severance pay accuracy is therefore not just a compliance issue—it’s key to maintaining trust and avoiding costly penalties.

Does Outsourcing Employment via an EOR Change Severance Liability?

Yes, using an Employer of Record (EOR) in Ethiopia transfers severance obligations to the EOR. Under Ethiopian law, the EOR is the legal employer of record, responsible for managing employment contracts, payroll, and statutory benefits — including severance pay.

This means that when a client company ends an employee’s engagement, the EOR handles the severance calculation, compliance checks, and payment. The EOR assumes the full local employment liability, helping businesses stay compliant without needing in-country HR or legal expertise.

Be 100% Compliant in Offering Severance with Playroll

Managing severance across multiple countries can be complex, especially when every jurisdiction — like Ethiopia — applies unique rules and calculations. Playroll makes global compliance easy by managing every aspect of severance pay: from accurate entitlement calculation to on-time payment, in full accordance with Ethiopian labor law.

With Playroll, your business doesn’t need to interpret local regulations or worry about missing a deadline. Our platform ensures your employees are treated fairly, your obligations are met precisely, and your company stays fully compliant — wherever your team works.

Partner with Playroll to remove the complexity from global employment. Stay confident knowing your severance payments are always correct, compliant, and on time.