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

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Summary
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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.

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A Needed Law on Severance Pay
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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.

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Employers: What Went Wrong?
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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.

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Fixing Things, Breaking Them Again
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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.

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COMMENT: MORE LOSERS THAN WINNERS
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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