Ethiopia payroll and benefits guide
What global businesses need to know about payroll in Ethiopia
Did you know that nearly half of Ethiopia’s population is under the age of 18? And that it’s one of the fastest-growing economies in the world, with real-terms GDP growth of more than 6% a year?
Ethiopia’s standing is rising fast—some may even say too fast, given the huge numbers of well-educated, qualified younger workers that often struggle to find employment in the country. But this in turn makes Ethiopia a stand-out opportunity for foreign investment, with a motivated and skilled workforce that is keen to work hard and drive themselves forward.
Ethiopia’s economy is a fairly even mix of industry, services and agriculture. But it has to be remembered that Ethiopia is a relatively poor country: while qualified workers may earn much more than unskilled counterparts, the average monthly salary is only 7,052 Birr (approximately £40; $55; €45). This means it has some payroll and employment specifics that incoming businesses should bear in mind. This guide gives you all the key facts around running payroll in Ethiopia.
Getting started
Ethiopia is relatively welcoming to foreign investment, and foreign nationals are able to set up businesses in the country. However, there are a range of industries that are restricted to domestic investors and Ethiopian nationals—it’s important to check this list closely before starting any expansion project.
Most incoming businesses tend to set up as private limited companies. This involves reserving a business name with the Ethiopian Investment Commission; drafting Memorandums of Associating, registering with the tax and social security authorities (ERCA and ESSA), and obtaining environmental and health permits. You will also need to obtain a license for operating in your chosen sector, and open an Ethiopian business bank account.
The whole process should take between two and four weeks, and the overall costs of the process are fairly small, but there is a risk of bureaucracy and red tape causing delays along the way.
Employment considerations in Ethiopia
Written contracts aren’t expressly mandated in Ethiopia, but as in most countries, they are strongly recommended to avoid any ambiguity. Contracts should include employee details, location of their work, agreed hours, wages and benefits, and also when and how often the employee will be paid.
English is spoken by many people in Ethiopia, especially in bigger cities such as the capital, Addis Ababa. However, for many employees, it may not be their first language (the official language of Ethiopia is Amharic) and so they may not be completely fluent in English. Having access to Amharic speakers and/or translators is therefore recommended to help smooth out any difficulties.
The standard working week in Ethiopia is relatively long at 48 hours, spread over six shifts of eight hours each. Overtime is limited to a maximum of two hours a day, 20 hours a month and 100 hours per year; it should be paid at 125% of normal salary, rising to 150% for work between 10pm and 6am, 200% at weekends, and 250% on public holidays.
Probation periods in Ethiopia generally run for 60 days. Notice periods start at one month after the completion of probation, rising to two months after one year’s service and three months after nine years’ service. Employees have the right to resign at any point, giving 15 days’ notice.
Compensation, bonuses and severance in Ethiopia
Ethiopia doesn’t mandate a national minimum wage in the private sector. Public-sector organizations set minimum wage rates on an individual basis, which are usually at least ETB 420 per month (approx. £2.35; $3.15; €2.75).
Generally speaking, employees are paid on a monthly basis. Making salary payments in cash is still commonplace, and many employers offer benefits on top of salary, including allowances for transport, housing, meals, life insurance and mobile phones. Discretionary bonuses for good performance are also common.
Severance pay is 30 days’ salary for the first year of service, plus ten days’ salary for every additional year worked. Total severance pay is capped at one year’s salary.
Tax and withholding considerations in Ethiopia
Like many countries, Ethiopia levies income tax on a progressive scale, with seven different bands in total. The first ETB 600 earned per month (approx. £3.40; $4.50; €4.00) is exempt, after which a rate of 10% kicks in. Rates then continue to increase at 5% increments; the top rate of 35% applies to all earnings over ETB 10,900 per month (approx. £60; $80; €70).
The only social security contribution required in Ethiopia is to the pension fund: this is mandatory for Ethiopian citizens, optional for foreign citizens of Ethiopian ancestry, and prohibited for other foreign citizens. Employers make contributions at 11% of an employee’s basic salary, while employees contribute 7%.
VAT in Ethiopia is levied at 15%, while corporation tax is relatively high at 30%.
Holiday and leave considerations in Ethiopia
Ethiopia passed new legislation in 2024 regarding public holidays. Employees are entitled to paid leave on the seven days of ‘National Holidays’ each year. Furthermore, there are a selection of ‘Religious Holidays’ across the Christian and Muslim faiths; employers are required to grant paid leave or adjust working hours as appropriate for employees observing these holidays.
Annual leave entitlement starts at 16 days after one year’s service, increasing by one day after every further two years of completed service. Unused leave can be carried over for a maximum of two years by mutual consent between employee and employer.
Sick leave entitlement is a maximum of six months for medically certified absences. Employers pick up the tab at full pay for the first month, and half pay for the second and third month. Any sick leave beyond three months is unpaid.
Maternity leave entitlement is 120 days, paid in full by employers, and starts 30 days before the expected due date. Paternity leave is three working days, also paid by employers at the employee’s normal rate. Employees are also entitled to three days’ paid leave when they get married.
Payroll in Ethiopia: A summary
As this guide demonstrates, the rules and requirements around payroll in Ethiopia aren’t too complicated. However, as a developing country with a rapidly growing economy, it’s important to stay abreast of any changes in the future and be able to respond to them effectively to maintain compliance. If you’re looking at expanding into Ethiopia and other countries around Africa, a global payroll partner with region-specific expertise can be invaluable in keeping your payroll on track, whatever the future may hold.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.
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