How to calculate severance pay in Malawi: A practical guide

Imagine working for a company for eight years, only to receive a termination letter informing you that your position has been made redundant. HR presents you with a severance package, but one question remains: how did they arrive at that figure, and is it correct?

Severance pay is an important employment entitlement in Malawi, particularly when employees lose their jobs because of redundancy, retrenchment, or other qualifying circumstances. However, calculating it is not always straightforward. The amount depends on the circumstances of termination, completed years of service, and the employee’s qualifying wages.

This guide explains how to calculate severance pay in Malawi, with practical examples and guidance for employers and employees.

What is severance pay in Malawi?

Severance pay, legally referred to as severance allowance, is a payment an employer is required to make to an eligible employee when their employment ends under circumstances recognized by Malawi’s Employment Act.

Under section 35 of the Employment Act, 2000, as amended by the Employment (Amendment) Act, 2010, employees qualify for severance allowance when their employment ends because of redundancy, retrenchment, economic difficulties, or the employer’s technical, structural or operational requirements. Employees who are unfairly dismissed also qualify. 

Importantly, section 35(1) states that severance allowance is payable in those circumstances and not in any other circumstance. This means an employee who resigns voluntarily, or whose employment ends for a reason outside the statutory list, will not automatically be entitled to statutory severance allowance.

It is also important to distinguish severance pay from other terminal benefits. An employee may also be entitled to outstanding salary, payment for accrued leave, or payment in lieu of notice, depending on the circumstances. Severance allowance is a separate entitlement. Section 35(6) specifically provides that payment of severance allowance does not affect an employee’s entitlement, if any, to payment in lieu of notice under section 30 or to a compensatory or special award under section 63. Accrued leave is a separate entitlement arising under the Act’s leave provisions.

In simple terms, severance pay recognizes an employee’s qualifying years of service and provides financial compensation when employment ends for reasons covered by the law.

Who qualifies for severance pay?

Not every employee whose employment ends is automatically entitled to severance pay. Under section 35(1), an employee qualifies for statutory severance allowance when their employment ends because of:

• Redundancy or retrenchment: when an employer reduces its workforce or eliminates positions.
• Economic difficulties: when financial challenges lead an employer to terminate employment.
• Technical, structural or operational requirements: when changes in technology, organizational structure or business operations make certain positions unnecessary.
• Unfair dismissal: when an employer terminates an employee’s contract unfairly.

Generally, an employee must have completed at least one year of continuous service to qualify under the First Schedule.

The law also provides exceptions. Under section 35(7), severance allowance is not payable where the employee:

• Is serving a probationary period provided for under section 26.
• Is fairly dismissed for a reason related to their conduct, capacity or compatibility.
• Unreasonably refuses an offer of re-employment on terms and conditions no less favourable than those applicable immediately before termination.

Section 35(5) further excludes employees whose fixed-term contract expires at the end of its term, or whose contract for a specific task ends upon completion of that task. 

The important point is that both the reason for termination and the employee’s length of service determine whether severance pay is due.

The severance pay formula

Malawi’s Employment Act provides a graduated formula for calculating statutory severance allowance. The amount an employee receives depends on their completed years of continuous service and their current wage at the time of termination.

Under Part I of the First Schedule to the Employment Act, the calculation works as follows:

The formula is:

Severance pay=total qualifying weeks×weekly wage

The calculation is cumulative, meaning that each service period is calculated using its corresponding rate.

For example, an employee who has completed 12 years of service does not receive four weeks’ wages for all 12 years. Instead, the first five years attract two weeks per year, the next five attract three weeks per year, and the remaining two years attract four weeks per year.

This gives the employee a total entitlement of 33 weeks’ wages.

Understanding these brackets is essential because applying the wrong rate can result in an employer underpaying an employee or an employee incorrectly estimating their entitlement.

Basic salary or gross salary?

One of the most common questions employees ask is whether severance pay is based on basic salary or gross salary. The distinction matters because using basic salary alone could result in an employee receiving less than their legal entitlement.

Under section 35(2), severance allowance is calculated using a specific statutory definition of wages. This includes:

• Basic salary.
• The value of housing or accommodation.
• Qualifying car allowances.
• Transport allowances for travel between home and work.
• Other cash payments.
• Qualifying benefits in kind.

However, not every payment an employee receives qualifies. The law generally excludes:

• Relocation allowances.
• Tips and gifts.
• Share incentive schemes.
• Certain discretionary payments.
• Employer pension and medical aid contributions.
• Funeral benefit contributions.
• Entertainment allowances.
• Education or schooling allowances.

These exclusions do not apply where an employment contract or collective agreement expressly provides otherwise. 

For HR professionals, this means that neither basic salary nor the entire gross salary should automatically be used. The correct approach is to review the employee’s remuneration against the statutory definition of wages before calculating severance allowance.

Worked examples

The examples below assume that the stated monthly amounts represent the employee’s qualifying statutory wages. They also use a four-week month to convert monthly pay into a weekly wage for illustration.

The First Schedule specifies the entitlement in weeks’ wages, but it does not expressly prescribe a monthly-to-weekly conversion method. Employers should therefore document the conversion method used and ensure that the wage base reflects only qualifying remuneration.

Example 1: Five years of service

An employee earns K400,000 per month and has completed five years of continuous service.

• Monthly wage: K400,000
• Assumed weekly wage: K100,000
• Severance entitlement: 5 years × 2 weeks = 10 weeks
• Total severance: 10 × K100,000 = K1,000,000

Example 2: Eight years of service

An employee earning K500,000 per month has completed eight years of service.

• Assumed weekly wage: K125,000
• First five years: 5 × 2 = 10 weeks
• Next three years: 3 × 3 = 9 weeks
• Total entitlement: 19 weeks
• Severance: 19 × K125,000 = K2,375,000

Example 3: Twelve years of service

An employee earning K600,000 per month has completed 12 years of service.

• Assumed weekly wage: K150,000
• First five years: 10 weeks
• Next five years: 15 weeks
• Final two years: 8 weeks
• Total entitlement: 33 weeks
• Severance: 33 × K150,000 = K4,950,000

What happens when severance is undercalculated?

A February 2026 judgment involving Eshani Products Limited provides a practical example of why employers must calculate severance pay correctly.

In Mwansambo and 130 Others v Eshani Products Limited (IRC Matter Number 570 of 2024) 2026 MWIRC 29, 131 employees challenged the company’s decision to change their contracts from unspecified-period employment to fixed-term contracts. The dispute also involved unfair dismissal, underpayment of severance allowance and deductions made from employees’ severance payments. 

One example involved an employee, Ductiano Mwansambo, who had completed 14 years of service and earned K117,000 per month.

Applying the graduated statutory formula, the court calculated his entitlement as 41 weeks’ wages, amounting to K1,199,250. However, he had received only K1,003,269.23, leaving a shortfall of K195,980.77.

The court found that the severance allowance had been undercalculated.

The case demonstrates why employers should not rely on estimates or simplified internal payroll calculations. They must apply the statutory formula and verify employees’ service records and qualifying wages before making terminal payments.

How employers can avoid mistakes

Calculating severance pay correctly requires more than knowing an employee’s salary and years of service. HR professionals should verify several details before preparing an employee’s final payment.

1. Maintain accurate employee records: Keep reliable records of employment start dates, contract changes and continuous service. These determine the number of completed years used in the calculation.
2. Verify the reason for termination: Establish whether the circumstances qualify for statutory severance allowance under section 35 of the Employment Act.
3. Review salary components: Identify basic salary, qualifying allowances and benefits in kind. Do not automatically use basic salary or total gross salary without checking the statutory definition of wages.
4. Apply the correct formula: Calculate each service bracket separately and ensure that only completed years are counted.
5. Document the calculation: Provide employees with a written breakdown showing their qualifying wage, completed years of service, applicable weeks and total severance amount.
6. Pay severance at termination: Section 35(1) requires payment of severance allowance at the time of termination.

Employees should also review their calculations and raise discrepancies promptly. Under section 35(8), a complaint that severance allowance has not been paid may be presented to a District Labour Officer within three months of it becoming due.

A note on pensions and gratuity

Severance allowance under Part I of the First Schedule is distinct from gratuity. Where an employer is exempt from providing pension benefits, section 35A requires the employer to pay gratuity under Part II of the First Schedule.

For organizations managing growing workforces, HR platforms such as rézoluHR can help organize employee information and streamline employee lifecycle administration, making it easier to maintain the records needed for accurate termination processes.

Understanding your entitlement

Calculating severance pay in Malawi requires understanding three important things:

• Whether the employee qualifies under section 35.
• How many years of continuous service the employee has completed.
• Which salary components count as wages under the Employment Act.

For employees, understanding these rules makes it easier to check whether their final payment is correct. For employers and HR professionals, accurate employee records and careful calculations help prevent underpayments and employment disputes.

Severance pay is more than a final payment. It is an employment entitlement that deserves to be calculated fairly, transparently, and in accordance with the law.