Seniority Indemnity under Cambodian Labour Law (Jan, 2023)

1. Introduction

With the amendment to the Labour Law in 2018, seniority indemnity was introduced as a replacement for the previous regime of dismissal indemnity. Seniority Indemnity is the financial entitlement of workers under Undetermined Duration Contracts (“UDC”s). The Prakas on the Payment of Seniority Indemnity later in 2018 further defined the entitlements of employees and the requirements from employers. This newsletter will outline those entitlements and employers’ liabilities, in addition to the benefits of employees under Fixed Duration Contracts (“FDC”s).

2. Entitlements

The term seniority indemnity only applies to contracts of an undetermined length. Employees are entitled to fifteen (15) days of their wages for each one (1) year of employment.

This indemnity shall be paid to workers twice per year, as follows:

• 7.5 (seven and a half) days in June of each year; and
• 7.5 (seven and a half) days in December of each year.

During the first calendar year of employment, an employee is entitled to 7.5 (seven and a half) days of seniority indemnity should they have worked consecutively from one (1) to six (6) months.
Should an employee’s employment be terminated by the employer, they are still be entitled to seniority indemnity as follows:

• The payment of seniority indemnity in any 6-month period that the employee is terminated, which equals to 7 days of wages and other benefits, if the employee has worked during that period from 1 month to below 6 months.
• The total payment of pre-2019 seniority indemnity which the employer has not paid.

If an employee is terminated due to serious misconduct, no seniority indemnity will be paid upon that termination.

3. Payment of Seniority Indemnity

3.1. Seniority Indemnity prior to 2019 and the Requirement for Back Payment

The Prakas also provide for seniority indemnity to be paid to employees for the years worked preceding the introduction of the regulations. The Prakas stated that the total amount of seniority indemnity days owed prior to 2019 should be paid back in the following manner:

According to Instruction No. 042, the backpay of seniority indemnity before 2019 before the sectors outsides textile, garment and footwear shall delay to the end of 2021.

The maximum seniority indemnity to be paid shall not exceed 6 (six) months of the average net wages of each year that shall be back paid.

However, should an employee resign, they will not receive the back payment of seniority indemnity.

3.2. Seniority Indemnity from 2019 onwards

From 2019, the seniority of workers/employees for receiving seniority indemnity shall be calculated once per semester (6 months): the first semester is from January to June and the second semester is from July to December. After-probation workers/employees who have worked in each semester from 1 month to 6 months and have worked until the end of each semester: June and December, the workers/employees can receive a seniority indemnity that is equal to average wage and benefits of 7.5 days in each semester.

4. Exceptions

According to Instruction No. 044/19, the Ministry of Labour and Vocational Training informed the heads and staffs of foreign diplomatic representatives, agencies of the United Nations and International Organizations in Cambodia that all staff who is working for foreign diplomatic representatives, agencies of the United Nations and International Organizations in Cambodia shall be exempted from the implementation of the Prakas No. 443 dated 21 September 2018 on the Payment of Seniority Indemnity.

5. Seniority Indemnity During COVID-19

Whilst the requirement for back payment was established in the 2018 Prakas, a subsequent Notification from the Ministry of Labour delayed the implementation of this to 2021, to enable employers, especially in the context of the COVID-19 pandemic, to ensure that they had adequate liquidity to be able to furnish employees with the indemnity. However, in 2021, MoLVT issued another notification to owners of factories/establishments to begin repayments of seniority indemnity including the seniority indemnity which was unpaid during the postponement.

6. Termination

Should an employee’s employment be terminated by the employer, they are still be entitled to seniority indemnity as follows:

• The payment of seniority indemnity in any semester that the employee is terminated, which is equal to 7 days of wages and other benefits if the employee still has seniority from 1 month to below 6 months.
• The total payment of pre-2019 seniority indemnity which the employer has not paid.

7. Taxation

Based on Circular No. 003 on Tax Exemption on Pre-2019 Payment of Seniority Indemnity and Payment of Seniority Indemnity from 2019 onward, dated 11 April 2019, the tax on salary applicable to the back payment of seniority indemnity is as follows:

• Exemption for back payment of seniority indemnity prior to 2019.
• Allow the payment of seniority indemnity as a deductible expense for the purposes of income tax for that financial year.

For the tax on salary applicable to seniority indemnity from 2020 onwards, Circular No. 002 on Tax Exemption on Payment of Seniority Indemnity from 2020, dated 24 March 2020 was issued. This states the following:

• Exemption on salary tax for seniority indemnity payments under 4,000,000 KHR (approximately US$ 1,000).
• or seniority indemnity amounting to 4,000,000 KHR or above, salary tax is applicable.
• Allow the payment of seniority indemnity as a deductible expense for the purposes of income tax for that financial year.

8. Fixed Duration Contracts (“FDC”)

Seniority indemnity does not to apply to contracts that are of a fixed duration. Workers under a FDC are instead entitled to severance pay at the expiration of the fixed duration contract. The severance pay shall be at least equal to five percent (5%) of the total wages paid to the employee for the full duration of the contract.

9. Conclusion

The introduction of seniority indemnity has been a welcome benefit for employees in Cambodia, and the instructions from the Ministry of Labour have been clear. Implementation up to this date has not been as strong as it may have been, and more needs to be done by employers to ensure they are fully compliant.