Hire and manage employees in Pakistan

Complying with labor and employment laws in Pakistan

Pakistan’s labor and employment laws can be intricate, with unique regulations that businesses must navigate. To remain compliant, employers need to understand wage laws, employment agreement conditions, leave entitlements, and unionization rights, among other things.If you plan to hire in Pakistan, partnering with Rippling EOR can streamline compliance processes. A reliable EOR partner offers continuous support and expertise, helping you navigate Pakistan's dynamic regulatory environment with ease.

Employment contracts in Pakistan

Pakistan requires employers to provide a written employment contract, known as an appointment letter, that outlines an employee’s terms of service, offering greater protection and clarity to both parties. The legal requirements for employment contracts are governed by several laws, including the Industrial and Commercial Employment (Standing Orders) Ordinance 1968 and the Sindh Terms of Employment (Standing Orders) Act 2015.

There are several types of employment agreements in Pakistan, which vary by purpose and duration: permanent, badli (alternate), temporary, apprentice, and contract worker. When drafting an employee’s contract, it’s important to specify their category of employment, along with: 

• Employer and employee’s names

• Start date

• Job description

• Wages

• Working hours

• Benefits and leave entitlements

• Probationary period

• Termination policies

• Confidentiality and non-compete clauses

Labor unions in Pakistan

Unionization is not common in Pakistan. The country has a fairly low rate of union membership—only 2.2% of the workforce is unionized. Trade unions, in particular, have seen a strong decline, from 25% down to just 1% as of 2023. This is due to several socioeconomic challenges, including the rise of short-term contracts and political party leanings.

Mitigating permanent establishment risk in Pakistan

In Pakistan, a permanent establishment (PE) typically arises when a foreign company operates through a fixed business location or relies on a dependent agent who regularly conducts activities on its behalf in the country. If a foreign company has a PE in Pakistan, it may have to pay corporate taxes on the income sourced there.

To avoid PE risks, employers should:

• Limit local activities: Consider how much time employees are spending in Pakistan and limit the extent and duration. 

• Track employee work records: Keep detailed records of employees' work locations and responsibilities to show that their activities do not amount to a fixed place of business.

• Seek tax and legal counsel: Consulting local legal or tax experts can provide valuable insights into Pakistan’s PE framework and guidelines.

• Set up a legal entity: If you intend to establish a long-term presence in Pakistan, setting up a local legal entity could be a beneficial step.

Probationary period in Pakistan

Most employment contracts include a probation period of up to three months. During this time, employers and employees are free to end the employment relationship without prior notice or compensation, but employers must pay employees for the time they already worked.

Local laws in Pakistan

Pakistan’s employment laws set regulations for working hours, leave entitlements, wages, as well as other employee rights. If you’re new to hiring in Pakistan, you’ll need to familiarize yourself with the local laws before growing your business there. Here are some key points to keep in mind:

• A standard workweek is 48 hours. Employees can work a maximum of nine hours per day. If they work more than 48 hours in a given week, they are entitled to overtime pay.

• Minimum wage varies by province. Every province in Pakistan, along with Islamabad Capital Territory (ICT), has a Minimum Wage Board that sets minimum wage rates for workers in different categories.

• Sick leave is paid at 50% of the employee’s regular wages. Employees can take up to 16 days for sick or medical leave, but they must acquire a medical certificate first.

Worker classification and misclassification in Pakistan: Contractors vs. employees

Determining the appropriate working relationship is essential before hiring workers in Pakistan. You’ll need to decide whether hiring contractors or full-time employees is the best fit for your business needs. Each option comes with its own legal and tax implications, so understanding the distinctions is critical.

While Pakistan’s employment laws don’t legally distinguish between independent contractors and employees, employers may still be liable for misclassification. This can lead to penalties and back payment of benefits and wages.

Worker classification in Pakistan: Key differences between contractors and employees

Consequences of misclassification in Pakistan

As in many other countries, misclassifying workers in Pakistan can lead to legal repercussions. Businesses may be required to pay retroactive employee benefits and back taxes, along with fines and penalties for violating Pakistani labor laws. Additionally, companies could face legal action from workers alleging misclassification or wrongful termination.

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Wages and payroll in Pakistan

There are several wage laws in Pakistan, including the Minimum Wages Ordinance of 1961 and the Payment of Wages Act of 1936. While the country has a national minimum wage for certain workers, each province and ICT sets its own wage regulations based on recommendations from the local Minimum Wage Board. Gaining a clear picture of local payroll practices is crucial to ensure compliance when hiring in Pakistan.

Minimum wage in Pakistan

Pakistan’s minimum wage laws are complex, with each region setting its own standards. Not only do minimum wages vary by province, but they are also dependent on the industry and skill level. For instance, Islamabad Capital Territory has a minimum wage of PKR 1,423 per day for unskilled workers and PKR 2,089 per day for skilled workers. On the other hand, the Punjab region has a different minimum wage for every industry, which is then further refined by the type of labor within each industry.

Employers will need to familiarize themselves with the wage laws of each region where they intend to hire.

Payroll frequency in Pakistan

Pakistan does not have a typical payroll frequency, meaning employers can pay employees daily, weekly, bi-weekly, or monthly—though you must pay them at least once a month. Employers should outline pay cycles in the employment agreement to ensure all parties are on the same page.

13th month pay in Pakistan

13th month pay is an additional payment given to employees, usually equivalent to one month’s salary. Unlike many countries in Latin America and Europe, Pakistan does not mandate a 13th month payment—but profitable businesses with 20 or more employees must pay their workers a bonus. The bonus can vary depending on the amount of profit and employees’ wages but typically ranges from 15-30% of the annual profit.

Run payroll compliantly in Pakistan

Managing payroll and employment for workers in Pakistan presents unique challenges, particularly when navigating the country's labor regulations. However, working with an employer of record (EOR) can simplify complex compliance requirements, including following Pakistan's minimum wage laws and calculating mandatory deductions. Rippling EOR helps employers efficiently hire and compensate employees in Pakistan and around the world.

Employer and employee taxes in Pakistan

Pakistani employers must comply with tax obligations, including withholding and remitting payroll taxes and making mandatory contributions to the Employees’ Old-Age Benefit (EOAB), Provident Fund, and Punjab Employees Social Security Institution (PESSI). Failing to comply with tax laws can result in serious consequences, especially with the Federal Board of Revenue’s recent push toward stricter tax enforcement and penalties.

Pakistan has a progressive income tax system, meaning employee income tax rates vary based on their earnings. Employers are responsible for withholding the correct amount of taxes from employees’ paychecks and submitting them on time. Here’s what to know about employer and employee tax rates and penalties in Pakistan.

Employer taxes in Pakistan

Here are the mandatory employer payroll taxes in Pakistan:

Employers are also required to offer either gratuity (known as severance pay) or Provident Fund contributions. If the employer does not offer the gratuity benefit, then their contribution to the Provident Fund must be equivalent to the annual gratuity amount. And if the employer does not contribute to the Provident Fund, then the employee doesn’t either.

Employee taxes in Pakistan

The following contribution must be deducted from employees’ paychecks as a percentage of their income:

Employers must also deduct income taxes from employees’ paychecks at the following rates:

Penalties for not paying taxes in Pakistan

The Federal Board of Revenue has taken a harsher approach to tax penalties in 2024. Employers who fail to withhold taxes on time may be subject to a penalty of 40,000 Pakistani rupees (PKR) or 10% of the outstanding income taxes (whichever amount is higher). Failing to declare tax returns on time may result in a 0.1% penalty on the tax amount for each day or PKR 1,000 per day (whichever amount is higher). The minimum penalty is PKR 10,000 and the maximum is 200% of the outstanding taxes. If the employer files their returns within three months after the due date, the penalty will be reduced.

Employee benefits in Pakistan

The employment cost in Pakistan also involves offering mandatory benefits, and attractive employee benefits are crucial for recruiting and retaining skilled talent. Certain benefits are mandatory under Pakistani law, such as EOBI contributions. Employers can also provide additional voluntary benefits, such as private health insurance and training programs, to stand out in the competitive job market. Below is an overview of both required and commonly offered optional benefits in Pakistan.

Mandatory benefits in Pakistan

The Employees' Old-Age Benefits Institution (EOBI) entitles employees to social security benefits, which employers and employees typically pay into. These benefits include:

• Invalidity and injury compensation: Employers must compensate employees for injuries or illnesses sustained in the workplace. In cases of temporary disability, the employers must pay a half-monthly payment for one year or one-third of the employee’s monthly wages for up to five years. If the injury results in permanent incapacity, the employer must pay the employee’s dependents a lump sum of PKR 200,000.

• Old-age pension: Employers and employees both pay into the old-age pension, which female employees can receive at age 55 and male employees at age 60. The minimum monthly pension is PKR 5,250.

• Survivor pension: If an employee dies as a result of an employment injury, their dependents are entitled to their minimum monthly pension.

• Death grant: This grant is paid to the families of employees who passed away while receiving Pakistan’s sickness benefit. The amount must equal 30 times the rate of the daily sickness benefit and be a minimum of PKR 1,500.

• Life insurance: Pakistani employers must offer group life insurance coverage of up to PKR 500,000 to their employees. The insurance plan must be from a reputable company.

Optional benefits in Pakistan

Optional and fringe benefits can help companies attract top talent and improve employee satisfaction. Below are some common supplementary benefits employers offer in Pakistan:

• Private health insurance: While offering healthcare is not mandatory, many employers choose to cover their employees. They typically partner with insurance companies to offer discounted group health insurance plans.

• Flexible work: Another option employers offer is flexible work arrangements, such as remote work. Hiring remote workers is becoming increasingly popular in Pakistan and can help companies attract high-quality candidates.

• Training programs: Some companies may provide training workshops, programs, or tuition reimbursements for employees seeking to improve their skill set.

Working hours, overtime, and leave in Pakistan

Pakistan’s labor laws govern working hours, overtime, and leave entitlements and are primarily regulated at the federal level, with provincial labor laws providing additional guidelines. Understanding these laws is crucial for maintaining legal compliance and establishing sustainable workplace practices.

Standard working hours in Pakistan

In Pakistan, a standard workday is nine hours, and a workweek should not exceed 48 hours—any additional hours trigger overtime requirements.

Overtime laws in Pakistan

Working overtime is not unusual in Pakistan. Depending on business needs, employees may be required to work overtime hours, which are capped at 12 hours weekly and two hours daily (up to three on some days). 

The overtime rate is double the employee’s standard hourly wage, but not all employees are eligible for overtime pay. Clerical, executive, and managerial employees do not receive additional pay for overtime hours, meaning that even if they work overtime, they will still receive their normal hourly wage. Additionally, employees in certain industries may only receive 1.25 times their regular pay for working overtime.

Rest period and break laws in Pakistan

Employees generally receive an unpaid one-hour break after every six hours of work or a 30-minute break after working five hours. If they work more than 8.5 hours, they can take two 30-minute rest breaks. Each week, employees are also entitled to a rest period of 24 hours, which typically falls on Sunday.

Leave laws in Pakistan

Pakistani employees are entitled to several types of paid leave and time off. These leave entitlements include:

• Annual leave: Employees receive 14 days of continuous paid leave annually (after completing their first year of service).

• Sick leave: Employees get 16 days of sick leave each year, paid at 50% of their normal earnings. They must show a medical certificate to be granted sick leave.

• Maternity leave: Each province has its own maternity and paternity leave regulations, meaning companies must follow the leave laws in the province where they operate. However, the federal Maternity and Paternity Leave Act of 2020 supersedes provincial laws for trans-provincial employers. So, if your business operates in multiple provinces, your employees are protected by the federal act. Under this law, expecting mothers receive 180 days of paid leave for the first child, 120 for the second, and 90 for the third. Paid leave is not available for additional children.

• Paternity leave: Under the same act, employees who work for trans-provincial companies receive up to 30 days of fully paid paternity leave for the first three children. Paid leave is also unavailable for any additional children after the third. If employees work for a company that only operates in one province, they’ll be subject to the regional paternity leave laws.

• Casual leave: Each employee also receives 10 paid days of casual leave annually. This leave can be taken for a sudden illness, incident, or other emergency situation. 

• Public holidays: Pakistan typically celebrates 10 public holidays, including Eid al-Fitr, Ashura, and Independence Day. This number may vary because Islamic holidays are based on the lunar calendar.  If an employee must work on a public holiday, their employer must pay them three times their normal rate of pay. Some employees may also be entitled to a substitute holiday and a compensatory holiday.

Work permits in Pakistan

Before a new team member can begin working in Pakistan, it's crucial to ensure they have the legal right to do so. Foreign nationals typically need an appropriate work permit to work legally in the country. 

Who needs a work visa in Pakistan?

Any foreign national who is not a Pakistani resident or citizen must obtain a work visa to legally work in the country. To apply for a work visa, the individual must have a valid job offer from a company in Pakistan.

How long does it take to get a work visa in Pakistan?

The Government of Pakistan typically takes four weeks to process work visa applications. If the application is sent back to the applicant for review, the processing time will restart from the resubmission date—that’s why it’s crucial to double-check all of the criteria and information before submitting.

Types of work visas in Pakistan

Pakistan offers a few work visas, the most common one being the General Work Visa for foreign citizens. This visa is valid for up to two years and can be extended if the employee already has a valid Pakistani visa and resides in Pakistan.

Termination and redundancy in Pakistan

When hiring your first employee in Pakistan, termination policies might not be your immediate concern. However, lacking a clear understanding of the basics of offboarding employees in Pakistan could lead to challenges when it comes time to end an employment relationship.

Does at-will employment exist in Pakistan?

At-will employment is a legal concept that permits employers and employees to terminate their working relationship at any time and for any reason—or no reason at all—provided the termination does not violate laws prohibiting discrimination or other unlawful practices.

In Pakistan, at-will employment does not exist. Employers must explicitly state the reason for termination and follow lawful procedures when terminating an employee. Some acceptable grounds for dismissal include misconduct, serious illness, inefficient job performance, and operational constraints.

Notice periods in Pakistan

Either the employer or employee may terminate an employment relationship after giving one month of notice. If the employer fails to provide the proper notice, they’ll be required to pay one month’s worth of wages to the employee in lieu.

Severance pay in Pakistan

Employers must pay severance or “gratuity” to terminated employees as long as the reason for their termination isn’t misconduct. Employees typically receive 30 days’ wages for every year of service or any part thereof in excess of six months. For instance, six years and nine months count as seven years when calculating severance pay.

How to terminate employees compliantly in Pakistan

Managing termination requirements for a global workforce can be challenging. Employers must navigate varying regulations, including just-cause standards, probationary and notice periods, and severance pay laws, which can differ both within and across countries. A simpler option is to work with an EOR, which handles these complexities for you, ensuring you onboard and offboard employees in full compliance with local laws.