PAYMENTS ON CESSATION OF EMPLOYMENT

After an employee has worked for the employer and a time comes to separate, the employer is required to calculate and pay all that is owed to the employee. 

#1. When Wages are Due and Payable

Section 66.(4) of the Employment Code Act No. 3 of 2019 (“the *Code* ”) stipulates that “An employer shall on the termination of a contract of employment, pay an employee all wages additional to basic pay including overtime pay and allowances on the date of termination of the contract of employment.”

An employee whose contract has ended should therefore be paid all dues on their last day of work. 

Remember, Article 189.(2) of the Constitution of Zambia (Amendment) Act No. 2 of 2016 (“the Constitution”) stipulates that “Where a pension benefit is not paid on a person’s last working day, that person shall stop work but the person’s name shall be retained on the payroll, until payment of the pension benefit based on the last salary received by that person while on the payroll.”

Article 266 of the Constitution defines a pension benefit to include “A pension, compensation, gratuity or similar allowance in respect of a person’s service.”

#2. What is Payable at End of Employment

Clause 26.0 of the Zambia Revenue Authority Practice Note No.1 of 2020 has guided on the tax treatment of the payments at the cessation of employment as outlined herein.

It is stipulated that the following payments may be made on cessation of employment by way of dismissal, resignation, end of the contract term, redundancy/retrenchment, retirement, or death:

(a) Pension;

(b) Refund of employee’s pension contributions;

(c) Withdrawal of employer’s pension contributions;

(d) Gratuity;

(e) Redundancy pay;

(f) Severance pay or compensation for loss of office;

(g) Salary in lieu of notice;

(h) Repatriation allowance;

(i) Service bonuses eligible for payment only at the end of employment;

(j) Monthly salary;

(k) Commutation of accrued leave days; and

(l) Accrued service bonuses.

#3. Tax-Free Payments

Now, following the amendment to the Constitution, with effect from 5th January 2016, the payments below are exempt from tax as they fall within the definition of pension benefit:

(a) Pension;

(b) Refund of employee’s pension contributions;

(c) Withdrawal of employer’s pension contributions;

(d) Gratuity;

(e) Redundancy pay;

(f) Severance pay or compensation for loss of office;

(g) Salary in lieu of notice;

(h) Repatriation allowance; and

(i) Service bonuses eligible for payment only at the end of employment.

#4. Taxable Payments

The following payments are taxable under the applicable PAYE bands:

(a) Monthly salary;

(b) Commutation of accrued leave days; and

(c) Accrued service bonuses.

The monthly salary, commutation of accrued leave days and accrued service bonuses are taxable because they are emoluments that have been earned during the course of one’s employment. 

Note that accrued service bonus is one which is linked to performance and is taxable in the period in which it accrues.

Conclusion

When separating with employees, ensure that you calculate and pay the leaving employees the correct amounts on time. 

Ensure that you have the final payslip and proof of payments.

Owen Katongo Kabanda

Management and Leadership Advisor

Email: [email protected] 

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