ETHIOPIA

Compliant HR, Payroll, Immigration & Tax

Ethiopia Flag

OVERVIEW

Ethiopia is a country in North – East Africa, nestled right next to the horn of Africa bordered by Eritrea, Kenya, Sudan, South Sudan and Somalia. Ethiopia is the oldest independent country and its 2nd largest in terms of population of about 94.1 million next to Nigeria. Ethiopia has never been colonised in spite of being part from a five-year occupation by Mussolini’s Italy. Periodic droughts and famines resulted in a long civil conflict in the 20th century and a border war with Eritrea.

Perhaps what Ethiopia is most famous for is the fact that it’s the only African nation that was independent of European control during the infamous “Scramble for Africa” in the 1980s. A few African and Caribbean nations adopted Ethiopia’s flag colours after they received independence.

Ethiopia has tons of historical relevance being one of the oldest countries in the world.

Ethiopia is also at the centre of many spiritual ideologies and religious stories. It has a unique cultural heritage, that being the home of the Ethiopian Orthodox church which is one of the oldest Christian churches and a monarchy that ended only in the coup of 1974. Speaking of the Ethiopian Orthodox Church which are tied to some of the most unique structures on this planet. The monolithic rock cut churches which were found in the northern parts of the Ethiopian town of Lalibela perfectly illustrates this point.

The country’s economy runs mainly on Agriculture, telecommunications, financial insurance etc . Ethiopia is one has been declared as one of the world’s leading coffee producers.

Amharic is the recognized official national language of Ethiopia, while English is the most popular foreign language. Another popular language spoken in Ethiopia is Oromo.

GENERAL INFORMATION

country capital

CAPITAL CITY

Addis Ababa

language

OFFICIAL LANGUAGE

Amharic

currency

CURRENCY

Ehtiopian Birr

dial code

DIALLING CODE

+251

tax calculator

TAX AUTHORITY

The Ethiopian Revenues and Customs Authority (ERCA)

tax dates

TAX YEAR

8 July – 7 July

time zones

TIME ZONE

CAT (GMT +3)

GENERAL INFORMATION

country capital

CAPITAL CITY
Addis Ababa

language

OFFICIAL LANGUAGE
Amharic

currency

CURRENCY
Ehtiopian Birr

dial code

DIALLING CODE
+251

tax calculator

TAX AUTHORITY
The Ethiopian Revenues and Customs Authority (ERCA)

tax dates

TAX YEAR
8 July – 7 July

time zones

TIME ZONE
CAT (GMT +3)

MORE INFORMATION

Fun Fact:

Ethiopia successfully defeated the invading Italians at the battle of Adowa on March 1, 1896 which was the climax of the First -Italo-Ethiopian War under King Menelik II.

Prior to this, Italy had colonized both Eritrea and Somalia, both neighbours of Ethiopia, and sought to improve its economic position by adding Ethiopia to its “portfolio.” The Italians succeeded in invading Ethiopia, years later during the Second Italo-Ethiopian War under dictator Benito Mussolini in spite of been defeated .

Official Holidays:

 7 January (Ethiopian Christmas)

19 January (Epiphany)

2 March (Adowa Victory Day)

26 April (Ethiopian Good Friday)

28 April (Orthodox Easter))

1 May (International Labour Day)

5 May (Freedom Day)

28 May (Derg Downfall Day)

29 July (Green Legacy Initiative)

11-12 September (Eid al-Adha)

12 September (Enkutatash)

27 September (Meskel)

9-10 November (Mawlid)

Visas and Work Permits

Visa

In order to lawfully work in Ethiopia all foreign employees should obtain a work permit. The employer and Employee must apply for a work permit. The Ministry of Labour and Social Affairs provide work permits which are renewed annually. For residency of 90 days the employee must apply for a residence permit with the Department of Immigration. All foreign workers are exempt from paying social taxes even though they are entitled to the same rights as Ethiopian citizens.

Work Permits

Should all requirements provided by the Ministry be fully complied with the turnaround time for getting a work permit at the Ministry of Labour and Social Affairs is not more than 2 days
The work permit can be processed parallel to the employee travelling on a business visa. Travelling on a business Visa is allowed and it can then be converted into a work permit.

Requirements: (Based on the kind of work for which the permit is requested)

  • Work permit of the hiring organization
  • A recommendation letter for the concerned governmental bodies and other pertinent Government organs
  • Appropriate Educational and Experience documentation

This criterion differs from Private Organization, Non-Governmental Organizations (NGO’s/CSO), and a Government Organ.

Residence Permit in Ethiopia

It is possible to request for a residence permit from Ethiopian Immigration authority once a foreigner acquires a work permit from the Ministry of Labour and Social Affairs Office.

Requirements:

  • Application letter requesting the permit
  • The appropriate and valid travel documents
  • Visa
  • Health Certificate and other required documents

Ethiopian Payroll and Tax Compliance

Employ Africa can you support the Payroll & Tax Compliance of all your expatriate and local Staff & Contractors in Ethiopia.

Taxes have to be paid to the Ethiopian tax authorities within one month of calculation during monthly payroll preparations. Late submissions of tax returns and other statutory deductions result in penalties.

All income such as fuel, representation, housing allowance and cash indemnities etc are taxed fully as long as the whole remuneration package is above a certain level.

Accrued, unused annual leave tax rates are pro-rated over the period of months in which the income applies to and subject to the maximum tax rate.

Severance pay is taxed at a monthly salary rate.

Outstanding performance awards remuneration are taxed at the same rate as the normal monthly salaries.

Social Security

Payments are withheld within 30 days following the end of the previous month’s payroll by Employers.
Employers contribute 11 % of the payroll towards Ethiopian Social Security. Employees contribute 7 % of their salary towards Social Security

Tax rates:

Salary Income Tax = Calculated taking the Gross Salary * Tax Rate) – Deduction
Employee Pension – Gross Salary x 7 %
Net Income = Gross Salary-Salary Income Tax – Employee Pension – Taxes which are applicable
Employee Pension – 7 %
Company Pension – 11 %

Employment

Revision of the labour law has gone through various drafts and discussions over the past years. Since the enactment of the previous law in 2003, the Ethiopian labour force has dramatically changed in the last 16 years, with new industries requiring a new set of skills and a shift in employer-employee relations. A large majority of the provision of the Proclamation 377/2003 were directly transplanted to the new law verbatim. Although the Proclamation attempts to address some practical challenges encountered due to gaps in legislative drafting, the new law does not introduce a new conceptual framework or shift to create a more private sector/investment-friendly legal regime. Compared to the length of time it took to revise the law and the changes that were seen on the ground, many of the revisions under the Proclamation are not fundamental in nature. The new law does not exhibit any shift in policy, for example, in terms of relaxing some of the more restrictive rules on the ability of the employer to terminate contracts. It does not offer contractual freedom to the parties and flexibility to allow an employer and employee to on agreed terms different from what is stipulated under the law. Unless it is included in a collective agreement, the law leaves little space for a worker and an employer to independently agree with the terms of employment.

Secondly, the scope of the labour law is applicable to all employment relations and does not offer industry-specific exceptions. With the exception of managerial employees and the diplomatic community, the Proclamation is applicable to all sectors across the board. This does not take into account industry-specific labour needs and requirements and the different labour dynamics that should be subject to different regulatory considerations. By way of an example, countries adopt different labour rules for industrial undertakings and for service sectors. Although manufacturing and industrialization is a key development vision for the country, this is not sufficiently reflected in the labour law.

On July 5 2019, the House of Peoples’ Representatives approved a draft Labour Proclamation that will repeal Labour Proclamation No. 377/2003 (Labour Proclamation) together with its amendments. The Proclamation replaces a law that has been in place for the last 16 years. This has been a period where Ethiopia saw a major shift in investment and business environment as well as the overall labour market. Acknowledgement was given by the new Proclamation of the key role of a skilled and disciplined workforce to Ethiopia’s industrialization efforts and improve its global competitiveness by expressly stating in its preamble and the need of creating a favourable environment for investment. In this issue of our legal update, we present some of the key changes introduced by the new law with our observations included at the end.

Administrative penalties

The Proclamation increases the administrative penalties to be imposed on employers violating the rules of the Labour Proclamation. Accordingly, the range for fines attributed to various violations under the Proclamation has increased from 300-1200 to 5,000-70,000. 

Secondly, the scope of the labour law is applicable to all employment relations and does not offer industry-specific exceptions. With the exception of managerial employees and the diplomatic community, the Proclamation is applicable to all sectors across the board. This does not take into account industry-specific labour needs and requirements and the different labour dynamics that should be subject to different regulatory considerations. By way of an example, countries adopt different labour rules for industrial undertakings and for service sectors. Although manufacturing and industrialization is a key development vision for the country, this is not sufficiently reflected in the labour law.

Vicarious Liability for Employers

Under the existing labour law, employers will be liable for any unlawful acts prohibited by law. These unlawful acts are those including but not limited to, discrimination of employees based on ethnicity, sex, religion, political outlook, HIV/ AIDS or disability or any other grounds; terminating a contract of employment contrary to the law; compelling employees to execute any task which is hazardous to life; committing sexual harassment or sexual assault at workplace; and physically abusing anyone in a workplace. The new Proclamation holds the employer liable if these acts are committed by any of its management employees. The effect of commission of these acts by either the employer or the managerial employee is that it will expose the employer, depending on the nature of the act committed, to a fine of up-to ETH 60,000 (approx. USD 2,000) or if repeated more than three times, for the closure of its organisation.

More obligations to Employers

The new Proclamation maintains the obligations of the employer under the existing law, such as providing work to the employee, paying wages, respecting the dignity of the employee etc. In addition, the new law obligates the employer to: a) deduct union dues from the employee’s regular wage, and transfer the cash into the trade union’s bank account, if so requested by the employee b) raise awareness of employees on work rules of the organization c) register information on workplace location and work-related data and transfer to the Ministry of Labour and Social Affairs (MoLSA).

Employee Liability

The Proclamation expands the list of unlawful acts by employees (which under existing law include endangering life and property of the employer, taking away properties, reporting to duty while intoxicated, refusing to observe safety and accident prevention and refusing to submit to medical examination with the exception of HIV/AIDS), to include the following acts: a) making use of falsified document or an attempt thereof: b) conducting meetings during working hours in disregard to the time assigned by the collective agreement or without obtaining the permission of the employer; c) commit sexual harassment or sexual violence at workplace; and d) physically abusing anyone in a work place. The implication of the above unlawful acts is that the employer will be able to terminate the contract of employment without prior notice to the employee within 30 days of knowing the existence of commission of such acts.

Added Employee Benefits

The new Proclamation extends existing maternity leave from 90 consecutive days to 90 working days. The 30 working days are granted prior to the mother giving birth and 60 working days subsequent to birth. Furthermore, the law introduces, for the first time, paternity leave of three consecutive days for male employees. This is less generous from the 5 working days paternity leave that is granted to civil servants under the Civil Service law.

Probation Period

When the parties agree to have a probation period, the probation period shall not exceed 60 working days beginning from the first date of employment.

A probation period gives an employer the opportunity to test the suitability of the employee for the position. Both employees and employers will have the right to terminate contracts without notice and with no legal consequences prior to the expiry of the probation period. The new proclamation retains the existing rules that a probation period must be agreed between the parties and it must be done in writing. The law does not presume probation to exist in the absence of a written undertaking. At the completion of a probation period, if the employment is not terminated, then a contract of employment for an indefinite period is presumed to have been created.

“Unless the law or work rules or collective agreement provides otherwise, the probationary worker shall have the same rights and obligations that a worker who has completed his probation period possesses. If the worker, during his probation, proves to be unfit for the post, the employer can terminate the contract of employment without notice and without being obliged for severance payment or compensation.”

New Rules on Minimum Wage

The idea of introducing a minimum wage has been a topical issue for the Ethiopian government for quite some time. Previous administrations have commissioned studies on minimum wage, though none of these were able to see the light of day. Under the new Proclamation, the government has gone one step forward to establish a Wage Board comprising of representatives of government, employees and trade unions together with other stakeholders that will carry out studies for setting and periodically revising minimum wages.

Increased Minimum Working Age

The Proclamation raises the minimum working age from fourteen years of age to fifteen while maintaining the list of tasks and conditions permitted to young workers.

Adjustment to Overtime Work and Payment

The new Proclamation retains the maximum working hours to 8 hours a day and 48 hours a week. Work done in excess of these hours is considered overtime work. Under the new law, maximum overtime work is capped at 4 hours per day and a maximum of 12 hours per week. The maximum monthly and annual overtime hours of 20 and 100 hours respectively were removed. Depending on the time of work, the rate of payment for overtime work has also slightly increased from 1.5 multiplied by daily hourly rates to 1.75 multiplied by the daily hourly rate. As the previous legislation, the new Proclamation does not offer any flexibility for parties to agree on the extension of overtime beyond the limit stipulated by law.

Grounds for Termination of Contracts

The existing Labour Proclamation allows employers’ ability to terminate contract of employments only to specific conditions provided by law. Any termination that is not in line with the labour law will be deemed as unlawful termination. An unlawful termination of a contract by an employer may have two consequences. a) It may either allow the employee to be reinstated to his/her previous position or b) it may entitle the employee severance and compensation payments. Under the new proclamation, the same approach is retained and grounds for termination of contracts (with notice and without notice) are exhaustively listed. However, there were some adjustments made to the maximum number of days that employees may be late or absent from work. Failure to adhere to these numbers of days will entitle the employer to a summary termination of employment contracts. Accordingly, the new law provides that reporting late to work eight times in six months period; and absence from work for a total of five days in six months’ period while being warned in writing of such a problem will lead to termination of contracts without notice. Furthermore, employers will be able to terminate contracts of employment with prior notice, if there is a manifested loss of capacity or skills on the part of the employees. Employer must, however, prove this by creating a performance evaluation system.

Redundancy

Under the existing law, if an organization is compelled to reduce its work-force, the organization is permitted to prioritize and retain those employees that have the highest skills and level of productivity. In case where there are employees with equal skills and rates of productivity, the law provides for the order of reduction that should be made. Thus, employees that have the shortest length of service and those having fewer dependents will be reduced first while expectant mothers and mothers within 4 months of post-natal will be reduced last. The new Proclamation adds those employees with disability (regardless of how the disability was acquired) not be subject to reduction prior to others. Other than this slight amendment, the law maintains the strict rules and procedures that must be followed in order to reduce any workforce.

Automatic dismissal 

The new proclamation has also revised the previous proclamation, which gives right to the employer to dismiss an employee without any notice if he or she is absent for five consecutive days.
According to the new proclamation, if an employee without justifiable reason arrives late for eight days within six months period even if it is not continuously, or absent for five days even if it is not continuously, the employer has the right to automatically dismiss the employee without prior notice. But an employer can’t dismiss a woman in four months after she gave birth if she is late for work.
The new labour proclamation has repealed Ethiopia’s Labour Proclamation No. 377/2003; Proclamation No. 466/2005, Proclamation No.494/2006 and proclamation 632/2001.

In a related news today, the parliament has also approved the revised value added tax (VAT) proclamation that aims to resolve impediments in tax collection. The revision also is expected to facilitate trade activities across the country.

Termination

Should an employee or employer wish to terminate employment, this must be done in writing.

One Year employment – 1 months’ notice

1-9 years – 2 months’ notice
9 years + – 3 months’ notice

Probation Period

When the parties agree to have a probation period, the probation period shall not exceed 60 working days beginning from the first date of employment.

A probation period gives an employer the opportunity to test the suitability of the employee for the position. Both employees and employers will have the right to terminate contracts without notice and with no legal consequences prior to the expiry of the probation period. The new proclamation retains the existing rules that a probation period must be agreed between the parties and it must be done in writing. The law does not presume probation to exist in the absence of a written undertaking. At the completion of a probation period, if the employment is not terminated, then a contract of employment for an indefinite period is presumed to have been created.

“Unless the law or work rules or collective agreement provides otherwise, the probationary worker shall have the same rights and obligations that a worker who has completed his probation period possesses. If the worker, during his probation, proves to be unfit for the post, the employer can terminate the contract of employment without notice and without being obliged for severance payment or compensation.”

New Rules on Minimum Wage

The idea of introducing a minimum wage has been a topical issue for the Ethiopian government for quite some time. Previous administrations have commissioned studies on minimum wage, though none of these were able to see the light of day. Under the new Proclamation, the government has gone one step forward to establish a Wage Board comprising of representatives of government, employees and trade unions together with other stakeholders that will carry out studies for setting and periodically revising minimum wages.

Increased Minimum Working Age

The Proclamation raises the minimum working age from fourteen years of age to fifteen while maintaining the list of tasks and conditions permitted to young workers.

Adjustment to Overtime Work and Payment

The new Proclamation retains the maximum working hours to 8 hours a day and 48 hours a week. Work done in excess of these hours is considered overtime work. Under the new law, maximum overtime work is capped at 4 hours per day and a maximum of 12 hours per week. The maximum monthly and annual overtime hours of 20 and 100 hours respectively were removed. Depending on the time of work, the rate of payment for overtime work has also slightly increased from 1.5 multiplied by daily hourly rates to 1.75 multiplied by the daily hourly rate. As the previous legislation, the new Proclamation does not offer any flexibility for parties to agree on the extension of overtime beyond the limit stipulated by law.

New Rules on Sexual Harassment and Sexual Violence

The Proclamation introduced a new regime to regulate workplace sexual harassment and sexual violence. Sexual harassment includes any act that is made to persuade or convince another through utterances, signs or any other manner, to submit for sexual favour without his/her consent. Sexual violence includes any sexual harassment accompanied by force or any attempt thereof. Accordingly, employees that have suffered sexual harassment or sexual violence will be entitled to terminate their contracts without notice, and will also be eligible for severance payment and compensation. The law provides a higher amount of compensation payment for employees who are forced to terminate their contract, without notice, for reasons of sexual harassment and sexual violence. Forced termination of contracts by employees for reasons that are unlawful acts of the employer will entitle the employee to one month’s compensation payment whereas sexual harassment and sexual violence victims will be granted three months of compensation payment.

Statutory Benefits/Payments

Annual Leave
Amendment was made to Annual Leave Entitlements stating that the new Proclamation increased employees’ annual leave days from 14 working days on the first year of service to 16 working days. 

An additional one leave day will be granted for every two years of services as opposed to every year of services as it was currently provided.
The first period of leave is granted after one year of service and the next subsequent periods in the course of each calendar year, in accordance with a leave schedule drawn up by the employer on employees consent and to the need for maintaining the normal functioning of his/her undertaking. If the employment contract expires before a employee could be granted annual leave, compensation for leave is made in proportion to the length of his/her service. Annual leave may be interrupted and the e employer recall the employee on leave only where for operational needs. The recalled employee is entitled to a payment covering the remainder of his/her leave excluding the time lost for the trip and the employer has to bear the expenses incurred by the employee as direct consequences of his or her being recalled and per-diem.

Any collective or other agreement, providing compensation in lieu of annual leave or renouncing or waiving the right to paid annual leave is null in void.

If the employee falls sick during the annual leave the provisions related to sick leave are applicable.

Sick Leave for Severe illness

Employment of an ill employee is secure during the term of his/her sick leave.

The Labour Proclamation provides for the paid sick leave for up to 6 months on completion of probation period if sickness is certified by a qualified doctor.

An employee is entitled to sick leave if he/she is not able to work due to the sickness other than resulting from occupational injury. A employee must inform the employer about his/her absence due to the sickness and provide a medical certificate which is issued by a medical organisation recognized by the Government.

The Employer may provide paid sick leave as follows:

  • Sick leave is granted as follows:
  • Wages are paid in full during the first month of sick leave
  • Wages are paid 50 % during the second and third months of sick leave
  • Sick leave taken for four to six months will be granted as unpaid leave

The Social Health Insurance Proclamation which was passed in 2010 makes provision for medical and health services to the employees. All employees are required to be a member of social health insurance scheme.

Weekly Rest Days

The Ethiopian Labour Law requires that a weekly rest day, in principle, should fall on a Sunday unless due to the nature of work, another day may be substituted as a weekly rest day.

A weekly rest must include the period from 06: 00am to the next 06:00am.

Employees are entitled to a weekly 24 consecutive hour rest period.

Maternity Leave

Female employees are entitled to a fully paid maternity leave of 90 days (30 days antenatal and 60 days postnatal) on recommendation of a medical practitioner. Additional leave is allocated in the event of a pregnant employee who does not deliver within 30 days of antenatal leave until her confinement. Postnatal leave only commences after delivery in the event of a pregnant employee who delivers before the 30 days period has elapsed.

Female employees are also entitled to paid leave for medical examinations related to pregnancy and paid leave during pregnancy on recommendation of a medical practitioner.

The Labour Proclamation requires that a pregnant employee be granted full paid leave during the first 30 days of her leave before confinement. And it is silent about the payment of the 60 days post confinement, hoover the Constitution of Ethiopia provides that female employees have the right to maternity leave with full pay.

No maternity related statutory benefits are provided. A new law i.e. Social Health Insurance Proclamation

has been passed whereby all employees are required to be members of social health insurance scheme. This law however, does not expressly deal with maternity related health benefits.

Marriage Leave

Newlywed employees are entitled to 3 days of paid leave after their marriage.

Employer of Record for Ethiopia

An Employer Record often works with a staffing agency however the two are separate business entities. Each has specific roles and responsibilities in their symbiotic relationship.

Purpose

An employer of record serves as an employer for tax purposes while an employee performs work for the client, such as a staffing firm or other business. An employer of record handles all personnel functions, including payroll processing and funding; tax deposits and filing; and employment contracts and paperwork. Maintaining a Certificate of Insurance, and Verification forms; unemployment insurance; and workers’ compensation are done. An employer of record also performs background checks and drug screenings; administers benefits; terminates employees; and may handle worker issues. Conversely, a staffing firm recruits employees and assigns them to businesses for worker absences, temporary skill shortages, seasonal work, or special projects. Their main focus is to match temporary, temp-to-hire, long-term, or permanent workers with clients in need.

Benefits

Using an employer of record allows the client company to free up time and cost-effectively outsource its necessary human resource functions, employee benefits, payroll, workers’ compensation, and compliance issues. The money saved by outsourcing these functions can be used to expand the business, provide steady income for the owner, or fill a variety of other purposes. Onboarding quality talent is done quickly by an employer of record so clients can quickly ramp up staff and staffing agencies can deliver top quality workers to their clients. Most staffing agency owners don’t have the HR training, payroll and accounting skills, compliance knowledge, or risk management, insurance, and employee benefits background to meet the demands of being an employer.

Responsibilities and Liabilities

The client company or staffing agency owner retains control over business operations and responsibility for workplace safety and compliance. The employer of record assumes responsibilities and liabilities for employment issues such as administration, payroll, taxes, benefits, and maintaining employee records. Because the employer of record assumes most of the responsibility for compliance and tax laws, the client or staffing services owner receives peace of mind, knowing their business is being taken care of by qualified professionals.

Whereas an employer of record and staffing agency often work together, they have diverse purposes in the workplace.