What you need to know about severance pay

Have you looked out for the term severance package in your contract? Well, severance pay is a provision in the law, in simple terms a compensation that is subject to negotiation between the employer and the worker.

Thousands of Ugandans have lost their jobs due to the Coronavirus pandemic that induced an economic shutdown. Many companies laid off their employees and several others cut their (employee) salaries to reserve cash during these unprecedented times.

But few people in Uganda are ignorant about the term severance package/pay that can help them receive salary under certain conditions, when they are laid off.

In order to understand the legalities around the severance package, Prosper got in touch with an advocate and partner at Kampala Associated Advocates, Mr Augustine Obilil Idoot, who also has expertise in Technology, Media and Telecommunication law.

 What is a severance package?
A severance package/pay is any form of compensation and/or benefits an employer provides to an employee after employment is over. Severance package can be a goodwill gesture on the part of the employer and can provide the employee with a buffer between working and unemployment.

Who can get severance pay?
Generally speaking, unless a contract/ employee handbook requires it, employers are not legally required to pay severance. In Uganda, Section 87 of the Employment Act, provides that; severance allowance is only due where an employee has been in continuous service for a period of six months or more and under circumstances provided for under the Act such as: -
a)unfair dismissal of the employee by the employer;
b) death of the employee in service of the employer not attributable to any wilful misconduct of the employee;
c)termination of the contract by the employee due to physical incapacity not attributable to any misconduct of his/her own;
d)termination by reason of the death or insolvency of the employer;
e) termination by a labour officer following the inability or the refusal of the employer to pay wages; or
f)Such other circumstances as provided by the Minister.

One is therefore not entitled to severance allowance if their contract does not provide for it or if they do not meet any of the above circumstances under the Act.

Can you negotiate severance package?
Yes, a severance package is negotiable between the employer and the workers or the union that represents them.

Amount
How much severance pay does an employee receive?
As earlier indicated, severance pay is negotiable between the employer and employee or labour union (where a Union represents employees in a Collective Bargaining Agreement).

However, the Courts have held that in the event that an employee meets the statutory criteria as stipulated under the Employment Act and there is unfortunately no method of calculation provided for in the contract or otherwise by the employer, the employee/ claimant will be entitled to one month pay per year of service period.

Right to receive it
What happens if your employer is not giving a severance package?
The right to receive severance pay is not automatic for every employee. It is a right that is either contractual or expressly stipulated under the Employment Act. In the latter case, one only becomes entitled to receive severance if one falls under the circumstances stipulated under section 87 of the Employment Act.

Where severance allowance is payable, it is paid on the cessation of employment or on the grant of any leave of absence pending cessation of employment, whichever occurs earlier.

Under Section 92 of the Employment Act, an employer who is liable to pay severance allowance and willfully without good cause fails to pay the allowance is liable to pay a fine at two times the amount of severance payable to the employee or such person receiving the severance allowance.

For the fine to be imposed, the affected employee can and should file a complaint to a Labour Officer in the District where the Employment contract was performed seeking the grant of orders for the payment of the severance package/ pay.

Is severance pay taxable?
Under the Employment Act, severance package is termed as an allowance. According to S.19(1)(a) of the Income Tax Act Cap 340, (which is the principal law that governs the taxation of all income) an allowance is part of income derived by an employee from any employment.

Severance package is, therefore, taxable as part of an employee’s employment income.

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