EMPLOYMENT COMPENSATION

IN ETHIOPIA

Poet and Writer Alemseged Sisay

AUGUST/2019
Current Job Position: Senior Compensation, Performance, and Labor Relation
Officer in Hiddassie Telecomm Share Co.
Former Job Positions
•Head, HR, Material Procurement, and Purchase in Addis Diary Private
Company;
•HR administration Work Process Coordinator (Team Leader) of Kirkos Sub City
Woreda 05 of Addis Ababa City Administration;
•Lead HRD in Ethiopian Road Construction ;
•Senior Training Officer in Ethiopia Road Construction;
•Human Resource Officer in the former Ethiopian Telecommunication
Corporation;
•Junior Human Resource Officer in the former Ethiopian Telecommunication
Corporation;
•Telecomm Technician in the former Ethiopian Telecommunication Corporation;
and
•Junior Telecomm Technician in The former Ethiopian Telecommunication
Corporation.
Education
•MA in Human Resource and Organizational Development in Education.
•BA in Management , BIS, Accounting and Finance ( BA)
 INTRODUCTION
Employee benefit is a main issue in any modern organization to attain its
planned goal.
In this civilized and modern global era most organizations focus in their
fiscal and strategic planning and budget to allocate the benefits of
employees financially. Employees benefit issue is not the will of
organization at its basic level. It is a mandatory operational cost as
legislated with law and as accepted management principle which is must
be obeyed to better Performance.
Organization can think beyond the basic obligation which is set by their
country and ILO legislation to pay more than that to their employees;
however, they can’t violate to give the basic requirements of benefits to
their employees which are to be payable to workers. Employee benefits
can have different names and applications based on their style and kind
of provisions. Most benefits are benefits which are payable while
employees are on their job; and others are payable while they left their
job permanently before their retirement age.
Ethiopia has predefined benefit plans on its labor and
employment laws. But the benefit plans are different among
organizations which are operating in its federal and regional
states and territories. Some organizations of the government
obliged to pay what others are not allowed to pay.
The reason to this is organizations in the country are not
governed with one similar employment law. Therefore, some
workers with equal effort and contribution to their public are
not beneficial albeit others do get it.
The purpose of this paper is to explain briefly the application
and scope of employment benefit as compensation in Ethiopia
as well as its applications with brief discussion of applicable
laws and procedures of the country.
 CHAPTER ONE
DEFINING COMPENSATION AND WORK
TERMINATION COMPENSATION
Compensation is defined as the benefit that an
individual shall be granted to collect from the other
due to failure of obligation or due to the provision
made by law; and its also an obligation to pay to
another individual to redeem for his/her deeds. There
are many kinds of compensation that are to be payable
or acceptable. Compensation ordered by criminal court
to plaintiff due to the lost benefit or injury made by
the crime maker; compensation ordered by civil court
to plaintiff to the lost or denied financial or material
The compensation which is known in HRM of
organization has not far meaning from the above
definitions and examples. Organizations operate
with the sum effort of peoples who are hired
permanently or temporarily. These peoples are
called employees of the organization and their
effort leads the organization to its final product
output. Compensation in this context deals
with employees versus organizations. Therefore
employee’s compensation has the following
meaning:
Employee’s compensation is the benefit of
monetary or non monetary reward of employees
from their organization in which they are
working on it due to failure of obligation of
employer or due to the mandatory provision by
labor law; and vice versa.
In the above definition, the payment is to be
done
a) to employees,
b) to employer.
A) Employers pay to employees when it is mandatory to pay
to them in which the law obliges to pay to them in the
following reasons:
•If the employer terminates the employment unlawfully;
•If the employer terminates employment due to bankruptcy;
•If the employee terminates his job if the employer violet his
right, and the humiliation action is deemed by law as an
offence ;
•If the employer terminates the employment while the
company ceases its operation permanently;
• If the employee terminates his job due to industrial safety
measures;
•If the employment is terminated due to physical disability;
•If the employment is terminated due to the Death of the
employee.
 B)
Employees pay to employers if they fail to obey the
obligation made by the law:
some employees may leave their job without
giving notice to employer and the work they assigned
on it may be stopped be run so that the employer may
lose the product from that employee performance
because of his leave without notifying to employer. In
this case the Ethiopian Labor law has a provision to
pay compensation to employer for his/her unlawful
deeds.
 THE MOST KNOWN TYPE OF EMPLOYEES
COMPENSATION IN ETHIOPIA
The veracity of many literature writings from many scholars
defined Compensations with many different concepts and
words. Beyond the definition , they categorized compensation
in to two types by overlooking the state of compensation by
being on work or not . According to According to
the Cambridge Dictionary, compensation is:
“1. Money that is paid to someone in exchange for something
that has been lost or damaged or for some problem.”
“2. The combination of money and other benefits (= rewards)
that an employee receives for doing their job.”
As accepted academically writings , Compensation is divided
in to three. These are:
The most known type of employee’s compensation in
Ethiopia due work termination is called Severance
Pay.
Severance pay is one of the compensation scheme in
which organizations oblige to pay while they
terminate employees job by their own deliberate
decision or the compensation that is must be payable
to employee if the employee leave his own job on the
ground of unlawful action or behavior of the
employer;
or job termination made by employer against the provision of
law; or the compensation which is payable to employees if the
employer need to reduce employee due to downsizing of
organizational structure which resulted from reduction of
earning or profit or bankruptcy.

From the above broad definition we recognize that a severance

pay is one of the compensation type which is payable while
the job is terminated permanently but not applicable to
retirement termination. Therefore the aim of severance pay is
to aid workers for resistances of hardship while unplanned job
termination comes unto they get another employment and
hired by another organization.
Basically we can categorize compensation in to
two:
1- Direct Compensation, and
2- Indirect Compensation

-Direct compensation is a compensation made to

employees directly in financial payment;
-Indirect Compensation is a compensation made
by non financial provisions and gifts.
Broadly we can classify Compensation in to the
following:
1-Compensation on work
- Both direct and indirect compensations are
compensation on work types of compensations
2- Work leave compensation
The most identified work leave compensations
are
 Severance pay; and
Retirement Allowance
The practice of Job Termination
compensation in Ethiopia.

Severance pay and Retirement allowance

are the two widely known types of work
leave compensations to employees. Let us
discuss in brief each of them.
•Severance Pay
Severance pay is payable in Ethiopia in the
following legal grounds and provisions:
I - If the employer terminates the
employment unlawfully- Severance Pay
and Back pay to be decided with court.
Employers may terminate employee’s job
unlawfully due to their wrong decision. In
this case to get compensation in the form of
severance pay becomes very challenging
because the action is taken by managers
deliberate or carless administrative
decision.
.
The reason to terminate job in this type
of unlawful termination can be:
•Inadequate knowledge of handling
disciplinary measure ;
•Un adequate knowledge of managers
about the work to be done;
•Hate of superior to subordinate or
disturbed industrial relation of boss and
subordinate;
Inadequate knowledge of handling disciplinary
measure: if superiors are not well informed with the
organization’s disciplinary procedures as well as their
countries grievance and disciplinary measure
regulations; they can make faults on discussion which
may result employment termination or banning of
employment. Banning of employment is the decision
of managers to forbid employees temporarily from
earning salary and duties to predetermined time. This
banning decision is made to restrict the suspected
employees to further investigation of fact finding by
the disciplinary committee before taking the final
decision to rigorous faults.
If the employee loses his job with improper decision of the
managers or the committee he shall get his compensation.
But the organization assumes as the employee as fault maker
and the termination is made by the ground of discipline.
So, it is not voluntary to pay any kind of compensation to the
grieved employee.
In this case, the employee shall appeal to labor litigation
courts or other tribunal bodies.
For example to Federal Ombudsman Commission by holding
all his relevant documents to win the employer. If he/she
wins, the court decides to him/her to earn all the compensation
for unlawful termination of job with re instating him on his job
or not.
Compensation of the worker in the case
of unlawful termination in the
Ethiopian labor law is to be decided
by grievance hearing courts. For
instance in the Ethiopian labor law
since its first declaration unto now the
court decides to compensate the
employee if he/she wins the litigation
based on the following three reasonable
judgment :
Unless otherwise the employment is terminated by the
grounds of termination of employment by law; which
are
1- Termination of employment with the agreement of
employer and employee;
2- Termination of employment with out and with
notice
( related with disciplinary measure which are allowed
by law to employers ); and
3- If it is reduction of employee due to cessation of
employees in part or in whole resulting in the
necessity of a reduction of the work force which may
be due to profit reduction or technological change.
The court will decide from the following
two options in the perspective of the judge
but not to the worker:
1- To pay to the worker compensation and
termination of his job permanently;
2) To reinstate the employee to his previous
job with compensation payment.
In the first case, if the court assumes in the
perspective of the judge that dispute may
arise if the employee returned back to his
job; for the dispute settlement ,tribunal
may order the dismissal of the worker
upon payment of compensation even if the
worker demands to be reinstate on his job.
The worker will get financial compensation
but cannot return to his job.
The financial payment is as Severance Pay because
the employee uses it to survive from upcoming living
challenges and problems unto he/she gets another
job. The fact is, sometimes new jobs can’t be obtained
within three or four months even longer that these
time period spans, may be up to a year; the
challenging question is at this point. For example ; if 5
( five) years experienced worker loses his job
unlawfully and the court decides to pay for him
compensation in the form of severance pay, according
to the labor law articles ( article 39-40 ) the severance
payment is not more than the employees 5 ( five)
month salary while you calculate it.
If someone served over 34 years
and his job is terminated by his
own request or by any means ;
his severance pay is not exceed
his one year salary. According
to the proclamation you can
derive the formula as follows:
Let y, be last month salary while employees
leave his job;
Let x, be the number of years served after
the first years of service year;
Based on the severance pay calculation:

Basic Severance pay ≤ [y+ (1/3y) x < 12 y]].

Therefore no one can get at least the
sum of his 12 month salary for his
severance pay; and to the fact ,most of
the time it is challenging to obtain
another equivalent job within one year
in Ethiopia.
In the second case, if the judge assumes that may
not be industrial dispute arises among the workers
and the worker; the employee can reinstate to his
previous job with financial compensation payment,
and the compensation payment reaches to his 6
month salary if the case is decided by the first
instance regional labor court or the
compensation reaches to 1 (one) year salary
payment if the case is rewind on the appeal hearing
court with severance pay type of compensation in
according to the country’s proclamation.
Option 1-
Compensation to Permanent employees
if the court decides not to reinstate on job.

•If the decision will be finished at court:

apply according to the information
provided in the following table:
 Compensation = back pay of not more than six months salary +
compensation according to the case of termination + notice period
salary
Notice period salary :
- 1 months salary to employee who completed probation period and
served up to a year;
- 2 month salary to employee who served from 1 year up to 9 years
in the company ;
- 3 month salary who served over 9 (nine) years.
- 2 month salary to whom that are completed probation period and
terminated his work due to reduction of work force.
If the court approved that the employer did violate the worker human right and
it is an offensive act by the criminal law ; in the case of about to happen dangers
( imminent ) and the employer was not aware to this industrial safety measures;
and the employer has been repeatedly failed to fulfill the obligation towards the
worker which is included in the labor law proclamation the above severance pay
is calculated as
Severance pay = basic severance pay + 2 month salary which is equals to
Severance pay due to bankruptcy ≤ [y+ (1/3y) x < 12 y]] + 2 month salary.
Article 40 (1) and (2) are basic severance pay and (3) is added to bankruptcy.
Article 41 is added on article 40 (1) and (2) for violation of employer on
employee’s right.
 Option 2-
Compensation to Permanent employees if the court
decides to reinstate on job.
 If the decision will be finished on the first
instance court:

Compensation= back pay of not more than six months

salary

If the decision will be ended at appeal hearing

court:
Compensation =back pay salary not exceeds from a year
salary
 (C) Compensation to temporary
employees in which the court decides.
NB: Before taking the case to courts if the employer is
willing to make correction on its wrong doing on the
employee right; and if the employee agree to accept it; all
the above compensation paying methods which are
mentioned in the above paragraphs of “part I” can be
payable by the employer without waiting before the court
decides on the case. Therefore the case will be terminated

Compensation = sum of wage up to completion date

of the contractual agreement not more than 6 (six)
month salary.
II- If the employer terminates employment due to
bankruptcy;
In accordance with article 39 (A) of the labor law
proclamation of Ethiopia, a contract of employment
can be terminated because of cease of the company’s
operation permanently due to bankruptcy or in any
other reason. Any other reason means any reasons
which are causes to bankruptcy of the company.
Employees who are expected to be terminated are not
more than 10 % of the average number of employed
stuffs of the company before 12 months of the
reduction action.
This means in big size organizations number of
employees who are not employed before a year
are not considered to reduction. Therefore the
number of employees to be reduced is a few
while we compare with the total employee size
of the company’s stuff. The reduction of
employees is must be undertaken to over 10
days, and the company shall notify to its
employees before 2 (two) months of job
termination.
(Refer article 29 and 35 (D) of labor
proclamation of Ethiopia).
Severance pay of compensation is
payable while termination of
employment is taken by the company
due to bankruptcy. The amount of
severance pay in this case will be two
month salary increment on the basic
formula of severance pay. i.e
Severance pay due to bankruptcy ≤ [y+ (1/3y) x <
12 y]] + 2 month salary + notice period salary
 II- SEVERANCE PAY IF THE
EMPLOYEE TERMINATES HIS JOB
BY HIS OWN WILL
Employees can terminate their job by their
own will in to two conditions:
1- If they want to leave without the
employer fault ;or
2- If they want to leave their job without
notice by the employer unlawful behavior
and act.
In the first cause, the employee
needed to leave the job for his own
reason because he may not want to
stay more days on the job that he
has been doing.
In this case, he may get severance
pay if he served the minimum five
years of service in this
organization.
If he served above 5 (five) years in
this organization, the employee shall
be entitled to grant severance pay
which is only the basic severance
pay in accordance with article 40 (1)
and (2) only; which is only Basic
Severance pay ≤ [y+ (1/3y) x < 12
y]].
In the second cause, Employees
may lose their job with employer’s
unlawful action suddenly.
In this Cause , the employee shall
get severance pay as of the notice
period mentioned above with basic
severance payment.
 B-
PENSION
Pension is the mechanism of distributing loss
among the entire employees of a country
to pay back some calculated allowance unto the
death of employees after their retirement age.
This is done by pension fund. in accordance
with the Ethiopian social security proclamation
Pension fund means the established fund for the
purpose of collecting pension contribution and
affecting benefit payments (Eth Proc 715 (2) -
12 ).
Most organizations which are established in
accordance of their perspective law has
a pension plan to register in private
organization Social security Agency
if they are not government owned; and
others government owned organizations are
registered in government organization
employees social security agency for their
employees retirement plan.
Some organizations which are not government
owned has an insurance policy purchased
from insurance company for their employees
retirement compensable allowance if they don’t
want to be registered by private organizations
social security agency.
In accordance with Insurance proclamation
number 746/2003 of Ethiopia, article 24(4);
organization can purchase among long term
insurance business services the pension
insurance service to their employees.
 CHAPTER TWO

COMPENSATION AND
BENEFIT WITH OUT
TERMINATION OF JOB
As you learnt from yours formal management
education or as you knew before, there are two
types of Compensation. Many literatures have
ignored the defining and classifying
compensation in the perspective of without
termination of and compensation with job
termination Principles.
Broadly compensations are categorized in to
two; which are described in the first chapter are:
• Direct Compensation,
•Indirect Compensation.
Without termination of job benefits and compensations are
included in Direct Compensation and Indirect Compensations;
Or both can categorized in to it; because both direct and
indirect compensations are payable or prepared to be as a gift
to employees who are still working their job, i.e. to employees
who are not fired from job, or left their job by their will or by
any means.

The above two types of Compensations classifications ahave

overlooked the compensation which will be payable
while job terminates. Therefore for broadly employees
compensation is classified in to two,
which 1) Compensation while the job terminated, and 2)
Compensation without termination of job.
Fartherly, these classifications are tailored as the following:
•

1- COMPENSATION WITH OUT JOB

TERMINATION
•Direct Compensation, and
• Indirect Compensation
2-COMPENSATION WHILE THE JOB
TERMINATED
•Severance pay
•Back pay salary
•Reinstating on the previous Job
Compensation is also payable to
employees in cash or in material, or by
giving to them a physical rest while
they are employees.
The main type of compensations which
organizations are rendering to their
employees are categorized in to the
following groups. All are
compensations with out job
termination.
 Indirect Compensations
•Occupational Injuries and Disablement
Payment ;
•Occupational disease and Medical Benefit
Payment
•Benefit of Rest from work
(Annual Leave, Maternity leave, weakly rest
day, Public holiday rest, special leave for
marriage, death of relatives, leave for labor
union representatives, leave for special purpose
sick leave)
•Education fees
•Telephone
•Obligatory material provision benefit /
example : Shoe and Gown to
Mechanics , Hand Gloves to Cleaners /
•Executive benefits / example: Car with
fuel, Position allowance, house rent,
etc/
 Direct Compensations

•Salary increment,
•Performance Related Bonus,
Occupational Injuries and Disablement Payment

Occupational injuries can happen while employees are

at work place by performing their work. Most non
government owned organizations has an insurance
plan to their employees while an occupational injury
occurs for their disablement payment to compensate.
Employees who work in government owned
organizations, unless otherwise the organization
purchased an insurance they are covered with
Government Employees Social Security Agency’s
Employments Injury Pension and Gratitude Scheme.
According to the social security’s
proclamation of government employees
(proc no 714/2003 article 27); all
government employees are insured for the
occupational injuries and they can accept
the disablement payment if they are
injured. According to the degree of
disability they will be payable for their
disablement: according to the proclamation,
there are four types of disablement:
•Temporary disablement ,
•Permanent partial
disablement,
•Permanent total
disablement, and
•Death
All not government owned organization employees are
beneficial if their organization is registered in to
Private Organization employees Social Security
Agency as of Government Employees. The provisions
are made in Proclamation number 715 /2003 of
Ethiopia. But the observed trend is different. Most
organizations purchase personal accident insurance
according to the insurance proclamation of Ethiopia.
They pay the pension contribution as well as the
insurance scheme contribution by deducting from
employee’s salary and from their company
contribution.
 •Occupational disease and Medical
Benefit Payment
Modern and profitable organizations have
their own Medical Centers for their
employee good health. They establish
health centers and hire health professionals
to their employee’s health. Therefore
employees benefit from this and this is one
type of compensation by their organization
for better performance.
To long years of time most
Government owned organization
employees specifically, the civil service
employees have not been guaranteed
occupational disease and medical
benefit payment compensations unless
otherwise they are employees of
public enterprise that have been
established for profit making to
government.
This has been the disadvantage of being the civil
sectors stuffs in Ethiopia and the de motivating factor
among other issues; for instance very low payment
salary scale issues of health sector professionals,
every level teachers and university lecturers and
professors, municipality workers and professionals
with down salary scales. Defense force and other
military force stuffs have well occupational and
medical benefit schemes since the emperor Haile -
Selassie era albeit their salary scale have not
motivating others.
Others well managed private organizations
or share companies, or Corporations
purchase health insurance schemes to their
employees if they can’t provide medical
centers at their work place. Insurance
companies used to refund the expense
made by employees to their medical
expense and organizations usually pay the
premium to insurers.
REFFERENCES
•Ethiopian labor law proclamation /2019
•Federal government employees administration
Proclamation 1064/2018,
•Ethiopian Proclamation-no-799-2013-vehicle-
insurance-against-third-party-risks-proclamation,
•Ethiopian Proclamation-no-746-2012-insurance-
business-proclamation,
•Ethiopian Government employees pension
Proclamation 714/ 2011,
•Ethiopian Private Organization employees Pension
Proclamation 715/2011.