How do you terminate an employee in Pakistan in 2026?
Pakistan requires 30 days of wages per completed year of service as mandatory gratuity from the first year of employment, with no statutory ceiling on the total amount owed. That is the termination cost you need to price before day one.
· Pakistan guide
Illustration · Karachi, Pakistan
Pakistan termination law requires 4 weeks notice for permanent workers. You can pay it out instead of having the worker serve it. Notice is flat. It does not grow with tenure. (Industrial and Commercial Employment (Standing Orders) Ordinance, 1968)
Gratuity is mandatory from year one. Any permanent worker with at least 1 year of service is owed 30 days of wages per completed year. The law uses last drawn basic salary. A part year over six months counts as a full year. There is no cap on the total amount.
Workers on probation get no notice and no gratuity. Probation lasts up to 3 months by law, and up to 6 months in common practice. All final wages must be paid within 2 days of the termination date. (Payment of Wages Act, 1936)
How much notice must you give in Pakistan?
Pakistan notice is flat. The required period is 4 weeks for any permanent worker, regardless of how long they have worked. You can pay it out rather than require the worker to serve it. (Standing Order 12(1))
The worker must also give 30 days if they resign. The rule works the same way in both directions.
| Worker category | Employer notice required | Employee resignation notice |
|---|---|---|
| Permanent worker (post-probation) | 4 weeks | 30 days |
| Worker in probation | 0 days (no notice required) | No statutory minimum |
| Temporary or badli worker | No statutory minimum | No statutory minimum |
The one-month notice period applies only to permanent workers: those who have satisfactorily completed probation under Standing Order 1(b). Temporary workers, probationers, and badlis (substitute workers) are excluded from the notice regime entirely.
Pay in lieu and misconduct exception
Employers may pay one month of wages instead of requiring the worker to serve out the notice period. This is common practice. For misconduct dismissals (Standing Order 15), notice is not required, but the employer must follow the domestic inquiry procedure before dismissal takes effect. Bypassing the inquiry for a misconduct case converts a potentially valid dismissal into a wrongful one.
What procedure must you follow to dismiss in Pakistan?
To dismiss for misconduct, you must run a domestic inquiry first. The worker receives a written list of charges. They get a chance to respond. A designated officer runs the hearing. Skipping this step makes the dismissal wrongful. (Standing Order 15)
Workers get full unfair-dismissal protection after 3 months of service. During probation, you can end employment without cause and without notice.
Pakistan distinguishes between two types of termination: no-fault dismissal (retrenchment or termination for non-misconduct reasons) and misconduct dismissal. Each carries a different procedure.
No-fault termination (retrenchment or operational reasons)
Give 4 weeks written notice or pay wages in lieu. Gratuity is owed from year one. No domestic inquiry required. Courts will still examine whether the termination was genuine or pretext for victimisation.
Misconduct dismissal
- Issue a charge sheet setting out the specific misconduct in writing.
- Allow a written response from the worker, with reasonable time to prepare.
- Hold the domestic inquiry, chaired by a responsible officer, with the worker present.
- Record findings in writing and communicate the decision to the worker.
- Issue the dismissal order only after the inquiry is concluded and misconduct found.
Skipping the domestic inquiry for a misconduct dismissal is the single biggest procedural error in Pakistan. Labour courts routinely order reinstatement with full back wages when the inquiry is absent or defective, even where the underlying conduct was genuine. No notice or gratuity is owed on a valid misconduct dismissal.
Protected categories
The Industrial Relations Act, 2012 prohibits dismissal on grounds of union membership or activity, including serving as a union officer. Terminating a trade-union official requires prior Labour Court approval in practice. Dismissal of a pregnant worker may constitute unfair dismissal. Workers may refer wrongful termination disputes to Labour Courts under the Industrial Relations Act, 2012; remedies include reinstatement with back wages or compensation at the court's discretion.
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Decide the termination ground
Determine whether the basis is no-fault retrenchment or misconduct. The choice drives everything: procedure, notice obligation, and whether gratuity is owed.
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Issue written notice or charge sheet
For retrenchment, serve written notice of the required period or offer wages in lieu. For misconduct, serve a written charge sheet specifying the conduct alleged.
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Conduct the domestic inquiry
Misconduct cases require an internal inquiry with a designated officer, written charges, and an opportunity for the worker to respond. Skip this step and a misconduct dismissal becomes wrongful.
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Document and communicate the decision
Confirm the termination decision in writing, state the effective date, and record the inquiry outcome for misconduct cases. Written confirmation protects the employer at Labour Court.
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Calculate and pay all final entitlements
Compute gratuity on last drawn basic salary, add notice pay and accrued leave encashment, and settle all amounts within the statutory deadline after the termination date.
How is Pakistan gratuity calculated?
Gratuity is 30 days of wages per completed year of service. It starts after 1 year. A part year over six months counts as a full year. The law uses last drawn basic salary. (Standing Order 12(6))
There is no cap on the total amount. A worker with ten years of service is owed ten months of basic salary.
The gratuity formula is calculated on the worker's last drawn basic salary, divided by 26 working days to derive the daily rate, then multiplied by 30 for each qualifying year. The distinction between basic salary and gross salary matters: allowances, bonuses, and benefits are excluded from the gratuity base unless the contract specifies otherwise.
Gratuity calculation example
A worker on a basic salary of PKR 80,000 per month with five completed years of service:
- Daily rate: PKR 80,000 divided by 26 = PKR 3,077 per day
- Gratuity per year: PKR 3,077 times 30 days = PKR 92,308
- Total gratuity for five years: PKR 92,308 times five = PKR 461,538
No statutory ceiling applies to the total. Employers who maintain a qualifying provident fund or employer-funded pension scheme may offset the gratuity obligation against those contributions, subject to the terms of the fund.
When gratuity is not owed
Gratuity is forfeited on a valid misconduct dismissal under Standing Order 15 where the domestic inquiry finds the worker guilty. It is not forfeited on voluntary resignation, retrenchment, or no-fault termination. Unused annual leave is encashable at termination under the Factories Act, 1934 and forms part of the final-pay settlement alongside gratuity.
What rules apply to collective terminations in Pakistan?
Pakistan has no collective redundancy consultation law. Each affected permanent worker receives 4 weeks notice and full gratuity individually. There is no fixed consultation period and no protective award.
Where a trade union is recognised, you should consult them before large-scale retrenchments. The law sets no penalty for skipping it. (Industrial Relations Act, 2012)
Every retrenched permanent worker is owed 4 weeks notice (or wages in lieu) and gratuity of 30 days of wages per year of service, with no cap on total amount. Final wages must be settled within 2 days of termination under the Payment of Wages Act, 1936.
Source: Industrial and Commercial Employment (Standing Orders) Ordinance, 1968
Retrenchment affecting a large workforce is practically significant because the gratuity obligation scales with tenure and has no ceiling. Ten long-tenured workers dismissed simultaneously may generate gratuity liability equivalent to ten or more months of combined salary. This is the collective cost that Pakistan employers most commonly underestimate.
Selection and last-in-first-out practice
Pakistan courts expect employers to apply a principled selection process for retrenchment. Seniority-based selection (last in, first out) is the recognised market norm, though not codified as a statutory requirement. Selecting workers based on union membership or protected characteristics risks a discrimination or unfair-dismissal finding in the Labour Court.
Re-employment obligation
Retrenched workers have a recognised right of first refusal if the employer re-hires for the same category of work within a reasonable period after retrenchment. This is not a fixed statutory window but is a well-established principle in Pakistan labour jurisprudence and should be factored into workforce planning.
Can you settle a Pakistan termination by mutual agreement?
Pakistan has no formal mutual-termination law. But employers and workers can agree to end employment on agreed terms and put them in a separation agreement.
A separation agreement that covers gratuity, notice pay, leave encashment, and a full-and-final settlement clause will generally be upheld. The worker must have signed with full knowledge of their rights.
Separation agreements in Pakistan are common in white-collar and multinational contexts. The typical structure includes:
- Gratuity payment at the Standing Order formula or enhanced by agreement
- Notice pay for the 4 weeks contractual period (or enhanced)
- Leave encashment, statutory annual leave accrued and not taken, paid at full rate
- Final salary, all wages to date including any outstanding variable pay
- Full-and-final settlement clause releasing all claims under the Standing Orders, Payment of Wages Act, and Industrial Relations Act
- Reference letter, agreed wording
- Non-disparagement and confidentiality
Labour Courts in Pakistan will scrutinise separation agreements where the worker was under duress or did not have full information. An employer who pressures a worker into resigning without paying statutory entitlements risks a "constructive dismissal" finding and a compensation order for back wages and gratuity.
Final pay timeline
All wages owed must be settled within 2 days of the termination date under Section 5 of the Payment of Wages Act, 1936. This is a hard statutory deadline; late payment exposes the employer to a payment-of-wages complaint before the Authority under the Act, separate from any Labour Court claim.
How Teamed runs Pakistan terminations
Teamed becomes your legal employer of record in Pakistan for from $599 per employee per month, with zero FX mark-up on PKR payments. Teamed's partner entity runs the termination under Pakistan law, including the domestic inquiry for misconduct cases.
We handle notice, gratuity, leave encashment, and final pay on one platform. The decision to dismiss, on what grounds, and on what terms stays with you.
Real HR and legal experts handle your Pakistan hires, from the offer letter through every payroll run and EOBI submission. An actual person, not a pooled queue or a chatbot. There is no setup fee and no exit fee, and employer cost passes through at cost, itemised on every invoice.
The split of responsibilities under EOR for Pakistan terminations:
| What Teamed handles | What the client decides |
|---|---|
| Notice period calculation and pay-in-lieu processing | Whether to dismiss, on what grounds, and when |
| Domestic inquiry support and documentation for misconduct cases | Performance standards and the conduct standard alleged to be breached |
| Gratuity calculation on last drawn basic salary, no cap check needed | Whether to enhance above the statutory gratuity formula |
| Leave encashment calculation and final salary reconciliation | Any ex gratia payment above statutory minimums |
| Final-pay disbursement within the 2 days statutory deadline | Communication with the departing worker and wider team |
| Labour Court coordination if a wrongful-dismissal complaint is filed | Settlement vs defence strategy on contested claims |
Real HR and legal experts carry the procedural complexity, including the domestic-inquiry requirement that catches many first-time Pakistan employers off guard. The gratuity obligation has no cap, so the liability scales directly with tenure: Teamed tracks accruing gratuity for every worker from the end of their first year, so you always know the exit cost before you need it.
EOR, contractor onboarding, and entity setup all live on one platform. A Pakistan contractor who converts to payroll keeps their record, and that same employee can graduate from EOR to your own Pakistan entity without switching systems. Run the Crossover Calculator to see the month the model flips. EOR is the right model for a first Pakistan hire, until it isn't. Start from the Pakistan hiring overview.
Frequently asked questions
How much notice must you give when terminating an employee in Pakistan?
Under Standing Order 12(1) of the Industrial and Commercial Employment (Standing Orders) Ordinance, 1968, the statutory minimum is 4 weeks for a permanent worker. Notice is flat and does not scale with tenure. The employer may pay wages in lieu of notice. No notice is required during probation or for misconduct dismissal following a valid domestic inquiry.
When does an employee become entitled to gratuity in Pakistan?
A permanent worker is entitled to gratuity after completing 1 year of continuous service. The rate is 30 days of last drawn basic salary per completed year. A part year in excess of six months counts as a full year. There is no statutory ceiling on the total amount. Gratuity is forfeited only on a valid misconduct dismissal following a proper domestic inquiry.
What is a domestic inquiry and when is it required?
A domestic inquiry is the employer's internal disciplinary hearing required before any misconduct dismissal under Standing Order 15. The worker must receive a written charge sheet, have the opportunity to respond, and appear before a designated inquiry officer. Skipping the inquiry converts a misconduct dismissal into a wrongful termination, exposing the employer to a Labour Court order for reinstatement with full back wages.
When must final pay be settled after termination in Pakistan?
Section 5 of the Payment of Wages Act, 1936 requires all wages owed to a terminated worker to be paid before the expiry of 2 days of the termination date. Final pay includes last salary, gratuity, accrued annual leave encashment, and any notice pay. Late payment is a separate statutory offence under the Act.
Does Pakistan have collective redundancy rules?
Pakistan has no codified collective redundancy consultation law with fixed notice periods or protective awards equivalent to EU frameworks. Each retrenched permanent worker is entitled to 4 weeks notice and full gratuity individually. Where a trade union is recognised under the Industrial Relations Act, 2012, consultation with the union is expected before large-scale retrenchments, though no statutory penalty is prescribed for bypassing it.
Pakistan gratuity has no ceiling. A worker dismissed after twelve years is owed twelve months of basic salary. Most employers price that correctly for senior staff but miss it entirely on long-service junior roles where the liability has quietly compounded.
Pakistan gratuity accrues from year one with no statutory cap. The longer the tenure, the larger the exit cost.
The domestic inquiry requirement for misconduct dismissal is the step Pakistan employers most often skip. Labour courts most often use it to order reinstatement.
Get the procedure right from the first hire, not the first claim.
