Severance pay is a critical component of labour law, designed to provide a financial safety net for employees whose employment contracts are terminated. In Ethiopia, the Labour Proclamation No. 1156/2011 outlines the conditions under which severance pay is due. However, the application of these provisions often involves complex interpretations, particularly concerning the interplay with other benefits like pension and provident funds, the nature of employment contracts (fixed-term vs. permanent), and the circumstances surrounding termination (employer fault, employee resignation, or force majeure).
This chapter will delve into the Federal Supreme Court of Ethiopia’s jurisprudence on severance pay, exploring key cassation decisions that have shaped the understanding of entitlements, clarified exclusions, and refined the principles governing the calculation and award of this vital benefit. We will examine how courts distinguish between different types of employment relationships and termination scenarios to ensure fair and consistent application of the law.
1. Severance Pay Entitlements: The General Rule and Its Nuances
The fundamental principle governing severance pay is rooted in the Labour Proclamation. Article 39(1)(ሸ) of Proclamation No. 1156/2011 stipulates that an employee who has served for at least five years with an employer, voluntarily resigns, and is not eligible for pension benefits under relevant pension law, is entitled to severance pay. This provision highlights a key purpose of severance pay: to assist employees in transitioning to new employment or to provide financial support when other social security benefits are unavailable. Additionally, employees are generally entitled to payment for any unused annual leave.
The Mammo Mena Case: Voluntary Resignation and Long-Term Service
Cassation File No. 239268, dated April 24, 2015 E.C. (ባቾሬ መካከለኛ ክሊኒክ vs. አቶ ማሞ መና), is a foundational case illustrating the application of these principles to employees who voluntarily leave employment after long service.
Ato Mammo Mena, a laboratory technician, claimed unlawful dismissal and sought various payments, including severance pay, after leaving work due to a family bereavement and subsequent alleged exclusion by his employer, Bachore Medical Clinic. The lower courts, however, established that Ato Mammo had voluntarily left his work by being absent for more than two months without permission, rather than being unlawfully dismissed by the employer.
Despite this finding, the Oromia Regional Cassation Court, whose decision was affirmed by the Federal Supreme Court, ruled that since Ato Mammo had served for over five years and was found to have voluntarily left his job and was not eligible for pension benefits, he was entitled to long-term service severance pay under Article 39(1)(ሸ) of Proclamation No. 1156/2011. He was also entitled to payment for unused annual leave.
This decision clarifies that even in cases of voluntary departure, provided the employee meets the service duration and pension ineligibility criteria, severance pay for long service may still be due. It also implicitly underscores the employer’s responsibility to formally terminate employment in writing if citing employee misconduct as per Article 27(2) of the Proclamation.
2. Severance Pay and External Factors: Force Majeure and Organizational Closure
Beyond direct employer-employee actions, external factors can lead to employment termination and raise questions about severance pay.
The Sibhatu & Sons Case: Severance Pay in Force Majeure Terminations
Cassation File No. 234903 (similar to 234904, 234908), dated December 25, 2015 E.C. (ስብሐቱና ልጆቹ የንብረት አስተዳደርና የጥበቃአገልግሎኃ/የተ/የግ/ማህበር vs. እነ አቶ ሰለሞን ሀዋሪያት ሲሳይ /6 ሰዎች/), examined severance pay entitlements when an employment contract is terminated due to force majeure, specifically a government order.
Sibhatu & Sons Property Management and Security Service PLC faced a government ban on its operations, leading to the termination of its employees’ contracts. The employees sought severance pay and other benefits. The employer argued that the termination was due to force majeure, thus absolving it of severance pay obligations.
The Federal Supreme Court affirmed that even if an employment contract is terminated due to force majeure (e.g., a government ban) and not due to the employer’s fault, the employees are still entitled to severance pay under Article 39(1)(ሀ) of Proclamation No. 1156/2011, provided they are not eligible for pension. This principle asserts that even if the business continuity becomes impossible due to unforeseen circumstances, employees retain a right to some form of compensation for their service. The Court also affirmed the right to payment for unused annual leave, regardless of the termination reason.
Statute of Limitations (ይርጋ): This case also provided important clarification on the statute of limitations for payment claims related to contract termination. While Article 163(4) of Proclamation No. 1156/2011 generally sets a six-month limit from the date of contract termination, Article 164(1) states that the period begins when the right becomes exercisable. In this instance, because the government ban created uncertainty about when employees could effectively claim their rights, the court upheld the lower court’s decision that the claim was not time-barred. This highlights that the commencement of the limitation period depends on the exercisability of the right, not just the event of termination.
3. Severance Pay and Pension/Provident Fund Overlap: Preventing Double Compensation
One of the most complex areas of severance pay jurisprudence revolves around its relationship with pension and provident fund benefits. The courts have consistently aimed to prevent “double compensation” for the same social objective.
The Dino Teka Ahmed Case: Pension Eligibility Precludes Severance Pay
Cassation File No. 237493, dated June 29, 2015 E.C. (አቶ ዲኖ ተካ አህመድ vs. አርትስቲክ ማተሚያ ድርጅት), provides a clear principle: if an employee is eligible for pension benefits, they cannot also claim severance pay.
Ato Dino Teka Ahmed, after over 34 years of service, resigned and sought severance pay. His employer, Artistic Printing Enterprise, argued that Ato Dino was eligible for pension and thus not entitled to severance pay. The Federal High Court agreed, reversing the First Instance Court’s decision, and the Federal Supreme Court upheld this.
The key legal principle established is that if an employee is eligible for pension benefits under Proclamation No. 1268/2014 (e.g., by reaching retirement age or completing sufficient years of service, typically 25 years), they lose the right to claim severance pay under Article 39(1)(ሸ) of Proclamation No. 1156/2011. The rationale is that both benefits serve a similar social purpose—to support the employee upon leaving employment. Therefore, if the pension benefit achieves this purpose, the employer should not be compelled to pay severance pay for the same objective. The employee’s eligibility for pension takes precedence.
The Netsanet Nigatu Chernet Case: Provident Fund Contributions vs. Pension Eligibility
Cassation File No. 235176, dated November 24, 2016 E.C. (ነፃነት ንጋቱ ቸርነት vs. ኢስት አፍሪካ ትሬዲንግ ሃውስ ኃ/የተ/የግ/ማህበር), further refined the distinction between mere provident fund contributions and actual eligibility for pension benefits.
W/ro Netsanet Nigatu Chernet, after 11 years of service, resigned and sought severance pay. Her employer argued that since provident fund contributions were made on her behalf, she was eligible for pension and thus not entitled to severance pay.
The Federal Supreme Court reversed the lower courts’ decisions, ruling that an employee does not lose the right to severance pay simply because provident fund contributions were made on their behalf; the right is determined by their actual eligibility for pension benefits. The Court clarified that the purpose of severance pay is to provide temporary financial support to an employee upon contract termination. While pension benefits serve a similar aim, merely contributing to a provident fund does not equate to being “eligible for pension” if the employee has not met the age or service year requirements for pension eligibility. Therefore, denying severance pay solely based on provident fund contributions, without proving pension eligibility, is a fundamental error of law. The employer must prove pension eligibility, not just contributions, to preclude severance pay.
The Harameya University Case: The Need for Due Diligence in Provident Fund Verification
Cassation File No. 233211, dated May 16, 2015 E.C. (ሐረማያ ዩኒቨርሲቲ vs. አቶ ዋቅቶላ አያና ደበላ), highlighted the judiciary’s expectation for thorough investigation regarding provident fund payments and their impact on severance pay.
Ato Waqtola Ayana Debela, a former employee of Harameya University, sought severance pay, annual leave payment, provident fund, and penalty for delayed payment after his resignation. The lower courts made conflicting decisions regarding his entitlement to severance pay and whether provident fund payments were actually made or entitled.
The Federal Supreme Court found fundamental errors in the lower courts’ decisions. It reiterated its binding interpretation (Cassation File No. 35197) that an employee covered by a provident fund scheme does not have a right to additional severance pay upon contract termination, as the social objective of both payments is similar. Crucially, the Court emphasized that lower courts must thoroughly investigate and confirm whether provident fund payments were indeed made and if the employee was genuinely covered by such a scheme. Failure to do so, or making a decision without properly examining the factual existence of provident fund coverage, constitutes a fundamental error of law. The Court also reiterated that penalties for delayed payment are only applicable if there is an undisputed and acknowledged outstanding payment.
The case was remanded to the lower court for proper investigation into the provident fund coverage and actual payments, emphasizing the importance of detailed factual findings.
The Niyala Insurance S.C. Case: Reaffirming No Overlap Unless Expressly Agreed
Cassation File No. 212037, dated November 28, 2014 E.C. (ኒያላ ኢንሹራንስ አክሲዮን ማህበር vs. አቶ ሰለሞን አባቡ), firmly reaffirmed the principle against the overlap of provident fund benefits and severance pay.
Ato Solomon Ababu, a former employee of Niyala Insurance, sought severance pay. The employer argued that since Ato Solomon was a provident fund beneficiary, he was not entitled to severance pay. The lower courts, misunderstanding previous cassation rulings, awarded severance pay.
The Federal Supreme Court explicitly overturned these decisions, re-emphasizing its long-standing binding interpretation (from prior laws like Proclamation No. 377/96, in cases like No. 35197 and 37048) that an employee who is a beneficiary of a provident fund or pension scheme does not have a concurrent right to severance pay. The Court stressed that the purpose of both types of payments is similar: to assist the employee upon leaving employment. Therefore, paying both constitutes double compensation.
Employer’s Express Agreement: The Court did, however, introduce a crucial exception: if an employer, through a clear and express agreement (e.g., in a written contract, collective agreement, or internal regulation), voluntarily chooses to pay both severance pay and provident fund/pension, then there is no legal impediment. However, simply budgeting for severance pay in financial reports is not sufficient proof of such an express agreement.
This case unequivocally clarifies that in the absence of an explicit and verifiable agreement by the employer to pay both, the general rule of no overlap between provident fund/pension benefits and severance pay applies.
The Nib International Bank Case: Reinforcing the Similar Social Purpose
Cassation File No. 213607, dated May 29, 2014 E.C. (ንብ ኢንተርናሽናል ባንክ አ/ማ vs. ወ/ሮ አዲስዓለም ታምሩ), further reinforced the principle of similar social purpose between provident fund and severance pay.
W/ro Addis Alem Tamiru, a former employee of Nib International Bank, sought severance pay after 14 years and 4 months of service. The bank argued that she had received a significant provident fund payment and therefore was not entitled to additional severance pay, citing previous binding interpretations. The Federal High Court had overturned the First Instance Court, granting severance pay by interpreting Article 39(1)(ሸ) to mean that unless specifically disqualified by receiving pension, severance pay was due.
The Federal Supreme Court reversed the High Court, affirming the First Instance Court’s decision. It clearly articulated that the social objectives of both severance pay and provident fund payments are identical: to help an employee cope with the financial implications of leaving employment. Since one payment (provident fund) fulfills this purpose, the employer should not be required to make a second payment (severance pay) for the same objective. The Court clarified that the phrase “not eligible for pension benefits” in Article 39(1)(ሸ) applies by analogy to provident funds due to their similar aims, meaning that if an employee receives a provident fund, they are deemed to have received compensation for the purpose severance pay would serve.
4. Severance Pay for Non-Permanent Employees: Fixed-Term Contracts and Project Completion
The nature of the employment contract, particularly whether it is for a fixed term or a specific project, significantly impacts severance pay entitlements.
The Mulat Tegegn Case: No Severance for Fixed-Term/Project Employees upon Completion
Cassation File No. 232984, dated January 24, 2015 E.C. (እነ አቶ ሙላት ተገኝ /5 ሰዎች/ vs. ኪልንተን ሄልዝ አክሰስ ኢንሼቲቭ), is a key ruling on severance pay for employees on fixed-term or project-based contracts.
Five individuals, including Ato Mulat Tegegn, were employed on a one-year fixed-term contract for a SAPHE (Strengthening and Accelerating Primary Healthcare) project, which was extended for another six months due to COVID-19. Their contracts were terminated upon the project’s budget and work completion. They sought severance pay, arguing that the project was a permanent part of the organization’s branch and thus they were entitled.
The Federal Supreme Court affirmed the lower courts’ decision: employees on fixed-term or project-based contracts are not entitled to severance pay upon the expiration of their contract term or the completion of the project. The Court clarified that severance pay under Article 39(1)(ሀ) of Proclamation No. 1156/2011 is primarily for situations where an organization permanently closes due to bankruptcy or other reasons.
Furthermore, the Court defined “organization” (ድርጅት) under Article 2(2) as an entity established for commercial, industrial, agricultural, construction, or other legal purposes, operating under a single management. It explicitly stated that a project, by its nature of being a specific task undertaken for a definite period, is not considered a self-contained branch or organization. Therefore, employees engaged for such projects are not entitled to severance pay when the project concludes. This distinction is crucial for understanding the rights of project-based workers versus permanent employees in Ethiopia.
The Amhara Building Works Construction Case: Project Completion vs. Workforce Reduction
Cassation File No. 209650, dated February 30, 2013 E.C. (የአማራ ሕንፃ ሥራዎች ኮንስትራክሽን ድርጅት ምስ/አማራ ቅ/ጽ/ቤት vs. ስንዳዮ መንግስቴ፣ ብርቱካን ካሳው፣ ገነት ምትኩ), reinforced the distinction between termination due to project completion and termination due to workforce reduction, highlighting that only the latter (under specific conditions) might entitle an employee to severance pay.
Three employees (Sindayo Mengiste, Birukan Kassaw, Gennet Mitiku) sought severance pay after being terminated from Amhara Building Works Construction Enterprise, Mesraq Amhara Branch Office, upon the completion of a hospital expansion project. They had served for over ten years. The Regional Cassation Court had initially sided with the employees, equating project completion to workforce reduction.
The Federal Supreme Court reversed this, stating that severance pay is not a universal consequence of all employment contract terminations. It is limited to the specific reasons outlined in Article 39(1) (a-q) of the Labour Proclamation. Termination due to project completion falls under Article 24(1) and does not automatically trigger severance pay. The Court clarified that Article 39(1)(ሐ), which refers to termination due to “workforce reduction,” does not apply to the completion of a construction project. Even though Article 30 allows for reducing staff as construction work concludes, the mere fact of long service does not entitle severance pay if the termination reason is project completion, not “reduction” in the sense defined by the law.
Procedural Propriety: The Court also criticized the Regional Cassation Court for raising a new argument (workforce reduction) that was not argued or proven in the lower courts, violating Article 329(1) of the Civil Procedure Code, which limits appellate review to issues raised at the trial level. This emphasizes the importance of proper case management and adherence to procedural rules.
5. Calculation of Severance Pay: What Constitutes “Wages”?
The basis for calculating severance pay is crucial. Courts clarify which components of an employee’s remuneration are considered “wages” for this purpose.
The VSF Germany Case: Desert Allowance is Not Part of Wages for Severance
Cassation File No. 195381, dated February 30, 2013 E.C. (ቪ.ኤስ.ኤፍ ጀርመን vs. አቶ አብዱ መሐመድ), addressed whether “desert allowance” (የበረሀ አበል) should be included in the calculation of severance pay and delayed payment penalties.
Ato Abdu Mohammed, a former employee of VSF Germany, sought severance pay and a penalty for delayed payment. The lower courts, in calculating the three-month delayed payment penalty, included “desert allowance” in the wage calculation.
The Federal Supreme Court ruled that “desert allowance” is not considered part of an employee’s “wage” for the purpose of calculating severance pay or delayed payment penalties. Article 53(1) and 53(2)(b) of Proclamation No. 1156/2011 define “wage” as regular payment for work performed. The Court found that desert allowance, paid due to specific working conditions, does not fall under this definition. Therefore, its inclusion in the calculation was a fundamental error of law.
This case highlights that only the regular, core components of an employee’s salary should be used when calculating statutory benefits like severance pay, unless otherwise specified by law or clear agreement. It also reiterated that judgments must be clear and specify exact amounts for payments to ensure enforceability.
Conclusion: A Comprehensive Framework for Severance Pay
The Federal Supreme Court’s cassation decisions provide a comprehensive and evolving framework for understanding severance pay entitlements in Ethiopia. These rulings emphasize several key principles:
- Compensatory Purpose: Severance pay aims to mitigate financial hardship for employees upon contract termination, especially when other social security benefits are unavailable.
- No Double Compensation: Employees are generally not entitled to both severance pay and pension/provident fund benefits if these benefits serve the same social purpose, unless there is a clear and express agreement by the employer to provide both.
- Pension Eligibility is Key: The critical determinant for precluding severance pay is actual eligibility for pension benefits, not merely participation in a provident fund scheme.
- Distinction in Contract Types: Severance pay is typically for permanent employees or those terminated due to specific employer-initiated reasons (e.g., organizational closure, workforce reduction), not for fixed-term or project-based employees upon contract completion.
- Strict Calculation Rules: Only components defined as “wages” by the Labour Proclamation should be included in severance pay calculations.
- Procedural Compliance: Courts must ensure proper case management, including accurate identification of factual and legal issues, and adherence to rules regarding the statute of limitations and the raising of new arguments on appeal.
This jurisprudence clarifies the nuanced application of Proclamation No. 1156/2011, ensuring that severance pay provisions are applied consistently and fairly, reflecting the dynamic nature of employment relationships in Ethiopia. Understanding these precedents is essential for employers to manage their liabilities and for employees to assert their rights effectively.