Labour Laws in Pakistan: A Guide for Companies Setting Up in Pakistan.

We are trying to offer a summary of Pakistan’s significant applicable labour laws, with the goal of giving new businesses an overview of what they need to cover. Pakistan, one of South Asia’s largest countries and populations, offers a lot of potential for companies looking for a growing market and a young and skilled workforce. 

Knowing the critical labour laws of Pakistan will allow businesses to better understand the legal framework, employment practices and local regulations. This will enable companies to establish a productive and agreeable work environment for smooth and positive relationships with their employees while fulfilling HSE and corporate social responsibility requirements. 

Pakistan’s different provincial and federal labour laws can be complicated for a new business busy setting up its operations. It is necessary for every business operating in a country to be aware of its legal framework. This allows companies to satisfy all their legal and regulatory obligations with ease.  for an overview of the legal requirements, visit our blog Basic Employee Benefits most Businesses are mandated to offer in Pakistan

Critical Points of Pakistan’s Labour Laws

The labour laws currently in force in Pakistan follow over 30 international conventions enforced by the International Labor Organization (ILO). The primary requirements are: 

• Minimum legal wage (approx. PKR 35,000 as proposed in the June 2023 Budget)
• A maximum of 14 calendar days of annual vacation leave 
• Maternity leave between 90 days-180 days
• Working hours are capped at six hours a day during the month of Ramadan 

Pakistan’s employment laws primarily address the terms of employment and working conditions of blue-collar employees. These laws can, however, be used to guide the terms and conditions of negotiated employment contracts for white-collar employees. 

All organizations, commercial establishments, industrial establishments, and factories operating in Pakistan must comply with the following labour laws: 

• Employee’s Old Age Benefits Act, 1976
• Provincial Employees Social Security Ordinance (PESS), 1965
• The Industrial and Commercial Employment Ordinance (Standing Orders), 1968
• Punjab Shops and Establishments Ordinance (The Ordinance), 1969
• Workers Children (Education) Ordinance, 1972
• Minimum Wages Ordinance, 1961
• Payment Of Wages Act, 1936
• Companies Profits (Workers Participation) Act, 1968
• The Factories Act of 1934
• Workmen’s Compensation Act, 1923
• West Pakistan Maternity Benefit Ordinance, 1962
• Apprenticeship Ordinance, 1962
• Disabled Persons (Employment and Rehabilitation) Ordinance, 1981
• Workers’ Welfare Fund Ordinance (WWF Ordinance), 1971
• Punjab Industrial Relations Act, 2010
• Industrial Relations Act, 2012

Eventually, enforcing Pakistan’s labour code depends on the provincial labour departments.  

Employment Contract

Pakistan’s labour law prescribes the following six categories of employment contracts: 

1. Permanent: the most common form of employment contract, executed after the probationary period
2. Probationers: offers space for trial and assessment for both employer and employee. This is usually for a period of three months.
3. Substitutes (Alternate): for temporarily appointing employees in the place of a permanent or probationary employee who is absent for some time.
4. Temporary: usually hired if the work duration is less than nine months  
5. Apprentices: drafted for training employees
6. Contract worker: primarily applied in the case of remote workers and gig workers or instances where overtime payment is not necessary.

Pakistan’s employment laws require that the following information is specified in an employment contract:

• A detailed description of job roles & responsibilities (job description)
• Working hours, probationary period, leave schemes, and other benefits are specified
• Termination/dismissal clause or transferability of services are mentioned
• Salary details, payment schedule, and further details of financial compensation
• the confidentiality agreement between employer and employee is mentioned.

Employers can terminate the employment contract without notice during the three-month probationary period. However, the employer must issue a written termination order to the employee with a specific reason for termination. 

Disputes related to the employment of blue-collar employees are settled in the labour courts and that of white-collar employees in the civil court of appropriate monetary jurisdiction.

Payroll Rules and Obligations

Concerning payroll, employers in Pakistan must

• Obtain a national tax numbe­r
• Register with the Employees Old-Age Benefits Institution (EOBI)
• Open a local bank account.

• Pakistan’s employment rules specify the net salary of an employee’s calculation on 

[Gross Salary – Income Tax – Employee’s Social Security Premium Share = Net Salary]

Rules for Tax withholding and reporting:

• Employers must withhold income tax from their employees’ salaries monthly and file an annual tax return electronically by September 30. 
• The income tax in Pakistan is progressive, with the highest tax rate of 35%. There is no income tax on the first PKR 600,000. 

Social Security Contributions

• Pakistan’s labour law specifies mandatory deductions from standard payrolls like Employees’ Old-Age Benefits Institution (EOBI). Employers contribute at a rate of 5% and deduct 1% of the employee’s gross salary towards EOBI. 
• Employers have to make additional contributions towards specific provincial social security funds. All of these funds are self-governed, formed under the Provincial Employees Social Security Ordinance (PESS or PSSS), 1965, on the recommendation of the International Labour Organization (ILO). Their primary income sources are Social Security Contributions from employees. they offer benefit coverage for employees in cases like injury, maternity, sickness, employment, or death

• There is the Sindh Employees Social Security Institution (SESSI) for Sindh. The workers earning wages up to Rs.5,000/- per month or Rs.200/- per day from registered establishments can be covered under the Scheme in accordance with the rules of the Social Security Ordinance.
• Punjab has Punjab Employees Social Security Institution (PESSI), which provides healthcare, financial assistance, and other benefits to workers and their dependents under the Provincial Social Security Laws. Employers eligible under the scheme contribute towards the Scheme @ 6% of their employee wages.
• The Khyber Pakhtunkhwa Employees Social Security Institution (KPESSI) also provides healthcare, financial assistance, and other benefits to workers and their dependents under the Provincial Social Security Laws. Employers eligible under the scheme contribute towards the Scheme @ 6% of their employee wages.
• The Balochistan Employees Social Security Institution (BESSI) also provides healthcare, financial assistance, and other benefits to workers and their dependents under the Provincial Social Security Laws. 

Other Mandatory Benefits

Apart from these, employers also have to provide:

• Gratuity: This is a benefit that offers a lump sum payment to employees that completed a certain number of years of service with the employer. In numerical terms gratuity is usually calculated by the following formula: 

Gross salary in last year of employment/26) x 30 x number of years worked in the company.

• In Punjab, Sindh and Islamabad Capital Territory (ICT) the minimum threshold is of 20 workers. These should be employed by an organization for it to be mandated to pay gratuity to its employees.
• In case of industrial establishments an additional condition applies which states that at least 50 employees should have been employed by the employer on any given day within the last 12 months. 

• Provident Fund provides retirement benefits to employees. It is a substitute for gratuity for many employers in Pakistan.
• For the provident fund to qualify as a substitute for gratuity the employers must match the employee’s contribution in the fund. The law does not clearly state any specific level of contribution into the provident fund. 
• However, in Sindh and KPK, the law requires that the provident fund should provide a total benefit equal to what the employee would have made if the employer had offered a gratuity instead. Such requirements are not applicable in Punjab, Balochistan or Islamabad Capital Territory (ICT). 
• Provident fund regulations also differentiate between blue collar workers (workers) and other employees. For example, workers are entitled to receive the amount present in their provident fund (including employers’ contributions) even in case they resign or are dismissed from work. 

Payslip

• Employers have to provide their employees with a payslip at the end of every pay cycle, which can be weekly, bi-monthly or monthly. 
• Pakistan’s labour law prescribes salary payments to employees via bank transfer. 
• The employment rules in Pakistan mandate employee payslips to include net salary, withheld taxes, bonuses, deductions, and the employer’s national tax number.