PRIVATE SECTOR EMPLOYERS CRY OVER SEVERANCE PAY

UNCLAS SECTION 01 OF 02 LILONGWE 000145 SIPDIS STATE FOR AF/S E.O. 12958: N/A TAGS: EFIN ELAB ECON MI SUBJECT: PRIVATE SECTOR EMPLOYERS CRY OVER SEVERANCE PAY -------------- Summary -------------- ¶1. A long-running debate over Malawi's law mandating severance pay is coming to a head after large private employers have begun shutting down their voluntary pension schemes. This is a response to a 2004 court action requiring employers to pay both severance and pension at termination of employment. The GoM is reportedly working on a draft amendment to the law for the April sitting of Parliament. End summary. -------------- A Needed Law on Severance Pay -------------- ¶2. The legislature introduced the concept of severance pay on termination of employment when it passed Employment Act No. 6 on September 1, 2000. The Act provides that "...on termination of contract, by mutual agreement with the employer or unilaterally by the employer, an employee shall be entitled to be paid by the employer...a severance allowance...." In addition to the "mutual agreement" circumstance, employers must also pay the severance allowance when the employee dies. Severance allowance is not payable when the employee leaves on his or her own accord or is to blame for the termination of services, or when a contract expires. ¶3. The GoM consulted trade unions and employers as it formulated the Employment Act. All three sides supported the severance allowance provision in the act. The understanding then was that the severance allowance would be a minimum social security provision (obligatory terminal benefit) to be paid out in the absence of better alternative benefits. The intent was to correct a situation in which many small informal sector employers, and even some large formal sector employers, were not paying any formal benefits to their employees if they were dismissed, regardless of length of employment. -------------- Employers: What Went Wrong? -------------- ¶4. The final version of the Employment Act of 2000 did not specify that those employers already providing better terminal benefits, such as pension fund withdrawal benefits, retirement benefits, death in service benefits and gratuity redundancy, should not be required to pay severance allowance in addition to these better benefits. Most employers reacted angrily to the Act as passed by Parliament. Employers argued that the severance pay provision as it stands amounts to an inequitable double payment for socially responsible employers, effectively increasing their labor costs and rendering them less competitive on the market. On their part, employees feared that employers would shift to short, fixed-term contracts in order to avoid the severance allowance requirement. This would eliminate the long-term social security benefit paid under voluntary schemes to retired employees. -------------- Fixing Things, Breaking Them Again -------------- ¶5. In early 2002, after meetings with trade unions, employers, and other stakeholders, the labor ministry prepared an amendment order, specifying that severance allowance is not to be paid where the employer provides better terminal benefits. But two years later, in November 2004, Blantyre High Court Justice Healy Potani nullified the amendment order, finding that the ministry had exceeded the limits of its constitutional powers. Potani advised the GOM to either obtain additional powers from Parliament or to let the legislature amend the Act itself. ¶6. The practical effect of this ruling has been to induce the few large employers that offer their own pension and benefits package to begin backing out of them. The issue has come to a crisis in recent months, as it became evident that Parliament, distracted from the GOM legislative agenda by the prospect of impeaching the President, was not getting closer to amending the Act. Facing the prospect of mandatory severance pay stretching into the indefinite future, employers have stopped complaining and started acting. Already two major agricultural firms, Illovo Sugar and Lujeri Tea Estates, have announced plans to eliminate their voluntary pension plans. -------------- COMMENT: MORE LOSERS THAN WINNERS -------------- ¶7. With the 2004 ruling, the Employment Act of 2000 has created yet another source of anxiety in an economy that is already full of worries and disincentives. (In the World Economic Forum's Growth Competitiveness Index, Malawi dropped from 87 to 105 of 117 rated countries in 2005; according to the World Bank, Malawi's cost of firing is among the highest in the world at 90 weeks' wages.) Not that there are no winners: the Act certainly has given a leg up for workers in households, small businesses, and throughout the informal sector. For them, the Act is a boon, and the amendment controversy is irrelevant. ¶8. But the country's tiny and fragile formal sector has viewed the GOM's inability to resolve this issue as another aspect of a business environment they characterize as unfriendly and unpredictable. If the issue is not resolved soon, the pension industry, an important source of investment finance with $14 million in investments across the economy, will suffer. This will hardly wreck the economy, but it will send a little-needed chill through Malawi's fledgling finance industry. CLOUD