Severance pay is a statutory employment claim which represents the consideration for the period of service the employee has spent with the same employer, which arises when the employment contract comes to an end in one of the ways prescribed by the statute, and which must be paid by the employer in a lump sum. It is a right to compensation that accrues over time with length of service and is continuous in character, yet becomes due only when the employment relationship ends.
The greater part of the disputes seen in practice concentrates on the employer either failing to pay the compensation at all or paying it on an incomplete calculation. Below we examine in detail the conditions under which the right to severance pay arises, how it is calculated, and the mediation and litigation route to be followed in the event of a disagreement.
Those who wish to calculate the amount on both a net and a gross wage basis may consult our note entitled Calculating Severance and Notice Pay.
The Legal Nature of the Severance Pay Claim
The basis of severance pay is Article 14 of the repealed Labour Act No. 1475, which remains in force. That provision governs one of the principal claims payable to the employee where the employment contract comes to an end in the ways indicated in the statute. Once the conditions required by the article are met, the employer’s obligation to pay arises.
In terms of its legal nature, severance pay is an employment claim and represents the consideration for the period of service the employee has spent with the workplace. It cannot be claimed while employment continues; it becomes due, and thus an enforceable debt, only when the employment contract comes to an end.
Although the employee’s wage is taken as the basis of the calculation, severance pay is not a wage in the classical sense; it is a claim of its own kind in which the character of compensation predominates. In this respect it is a mandatory right arising directly from the statute, which the employer is obliged to pay, as the consideration for the employee’s period of service and loyalty.
Conditions for Entitlement
The right to severance pay arises where the conditions required by the statute are met together. The first of these conditions is the completion of a certain period of service, and the second is that the employment contract has come to an end in a manner that allows compensation. Unless these are satisfied, no compensation may be claimed however long the period worked.
The One-Year Service Requirement
The first condition required for the right to arise is that the service with the same employer has completed one year. The one-year period of service is determined by reference to the time between the date on which the contract actually began and the date on which it ended. As a rule, no right to compensation arises in employment relationships that end before one year has been completed.
In calculating the period of service, the employee’s service with a single workplace of the same employer or with several workplaces is taken into account together. A change of hands of the workplace, a change of trade name or transformations in the employer’s legal structure do not interrupt the period of service.
Termination of the Contract in a Manner Giving Rise to Entitlement
The completion of one year of service does not by itself produce a result. In addition, the employment relationship must have come to an end in one of the forms indicated in Art. 14 of Act No. 1475 which allow compensation.
Put another way, the right is tied not only to the “period worked” but, together with that period, to the “reason for the termination”. If the ground of termination does not give rise to entitlement, the employee may make no claim even where their service far exceeds one year.
Termination by the employer. Termination of the contract by the employer as a rule gives rise to a right to compensation. The critical exception here is the cases of breach of the rules of morality and good faith under sub-paragraph 25(II). Where termination for just cause has been effected on a ground falling within that sub-paragraph, such as absenteeism, abuse of trust or theft, no compensation is payable. In terminations outside that scope — termination for valid reason, termination on operational grounds, inadequate performance and the like — the right to compensation arises.
Termination by the employee for just cause (Art. 24). Where termination is effected on one of the grounds set out in that article, namely compelling reasons, health-related grounds or breach of the rules of morality and good faith, the employee becomes entitled to compensation. Non-payment of wages, mobbing, insulting conduct by the employer or the aggravation of working conditions are examples of such grounds. In such a case there is no resignation but a termination based on just cause, and compensation may therefore be claimed.
Termination on account of military service. An employee who ends the contract in order to perform compulsory military service is among the special cases enumerated in Art. 14 of Act No. 1475 as giving rise to entitlement. Although the termination rests on the employee’s unilateral will, it is not characterised as a “resignation”; it is a termination for just cause arising from the statute. For the right to arise, there must be a reasonable interval between the termination and the military service, and the position must be evidenced by a call-up or enlistment document. The employer’s approval is not required for this termination; once the conditions are met, the obligation to pay arises directly from the statute.
Retirement, old age and completion of the number of premium days. An employee who ends the contract having become entitled to a retirement, invalidity or old-age pension is likewise among the statutory forms of termination. Even though the termination comes from the employee, the right to compensation is not lost, since it amounts to the exercise of a social security right. In addition, the right also arises where the employee has completed the period of insured employment and the number of premium days and is merely awaiting the age condition. In that event, a letter from the Institution bearing the words “may receive severance pay” must be obtained and the contract terminated thereafter; in practice this termination is accepted as a retirement termination and compensation may be claimed.
Termination by a female employee on account of marriage. Under the same article, a female employee who ends the contract of her own will within one year following the date of her marriage becomes entitled to compensation. This is an exceptional right attached to the person and granted to female employees. No further just cause need be shown in a termination on the ground of marriage; the termination must, however, be effected before the expiry of the one-year preclusive period, which begins to run on the date of the marriage. Where that period is missed, no compensation may be claimed.
Death of the employee. Where the contract comes to an end through the death of the employee, a right to compensation likewise arises under Art. 14 of Act No. 1475. In that case the claim ceases to be strictly personal and takes on the character of a claim forming part of the estate. The compensation is accordingly paid to the statutory heirs in proportion to their shares. Neither fault on the part of the employer nor an intention to terminate is required here; the obligation arises directly from the statute.
Forms of Termination That Give Rise to No Entitlement
The right is confined to the forms of termination enumerated in the statute. Not every termination therefore gives rise to compensation. As a rule, no claim may be made in the situations set out below.
Resignation by the employee. No right to compensation arises for an employee who ends the contract of their own will without just cause. The termination rests on a unilateral will and is not among the cases in which the statute allows compensation. The distinction between “resignation” and “termination for just cause” is decisive here, however: even where a letter of resignation has apparently been submitted, the right is not lost if the termination in fact rests on a ground falling within Art. 24, such as mobbing, harsh working conditions or non-payment of wages. In the event of a dispute, proof of the ground of termination determines the outcome.
Termination by the employer for just cause (Art. 25(II)). No right to compensation arises where the contract is terminated under Art. 25(II) on the ground of conduct by the employee incompatible with the rules of morality and good faith. Theft, abuse of trust, insults directed at the employer, absenteeism and conduct incompatible with honesty and loyalty may be assessed within this scope. The burden of proving that the conditions for termination for just cause were met in the particular case lies with the employer. If that burden is not discharged, the termination is regarded as unjustified and the employee becomes entitled to severance pay.
How Is Severance Pay Calculated?
The calculation is built on 30 days’ gross wage for each completed year of service. For residual periods exceeding a full year, a pro rata temporis, that is to say a proportionate, calculation is applied at the same rate.
The formula itself is straightforward:
Severance Pay = (Gross Wage Including Fringe Benefits × Period of Service)
The controversies encountered in practice arise not from the formula but from two questions: which wage is to be taken as the basis of the calculation, and how is the period of service to be determined?
The Final Gross Wage Criterion
The amount to be taken as the basis of the calculation is the final gross wage in force at the date of termination.
The qualification “gross” is decisive here; the calculation is carried out not on the net wage but on the gross amount, without any deduction other than stamp duty.
Ordinary increases made to the wage in the period close to the date of termination are taken into account. Increases effected in bad faith, artificially or by way of simulation, by contrast, are subject to judicial scrutiny.
The Concept of the Wage Including Fringe Benefits
The calculation takes into account not only the bare salary but every benefit which is measurable in money and continuous in nature. The amount taken as the basis is therefore the gross wage including fringe benefits.
The payments included in the calculation, provided that they are continuous, are as follows:
- Travel allowance
- Meal allowance
- Regularly paid bonuses
- Gratuities
- Continuous social benefits such as fuel and rent allowances
One-off, that is to say incidental, payments are not taken into account. The criterion for the distinction is whether the payment is continuous in nature.
Determining the Period of Service
The period of service is to be understood as the total working time spent with the same employer. In determining that period, spells spent at different workplaces belonging to the same employer are aggregated; a transfer of the workplace does not interrupt the period; periods of suspension such as unpaid leave count towards service under certain conditions; and the probationary period is likewise included in the calculation.
A proportion is applied for residual periods exceeding a full year. For a service of five years and six months, for example, the calculation is carried out on the basis of five and a half years of service.
The Severance Pay Ceiling
The amount payable is limited by the severance pay ceiling announced each year by the Ministry of Treasury and Finance. Even where the employee’s gross wage exceeds that ceiling, the amount payable for each year of service may not exceed the ceiling. It is, however, possible for a higher payment to be agreed in favour of the employee by collective labour agreement.
Interest and the Statute of Limitations
A severance pay claim does not consist of the principal alone. Interest runs on an amount not paid in time, and the claim is subject to a particular statute of limitations. The two points on which mistakes are most often made in practice are the type of interest and the date from which it runs.
The Type of Interest Applicable
The type of interest is determined in a special manner in Art. 14 of Act No. 1475. Under that provision, the highest rate of interest applied by banks to deposits runs on an amount not paid in time.
That interest is not the ordinary statutory rate; it is a special type prescribed in the employee’s favour. In practice it is referred to as the “highest bank deposit interest rate”, and it is adopted as such in the case law of the Court of Cassation.
In fixing the rate, the highest deposit interest rate actually in force at the banks during the period in which payment was not made is taken as the measure. In this respect the interest on severance pay differs from that on other employment claims.
The Date From Which Interest Runs
Interest runs from the day on which the employment relationship ended, since it is precisely at that moment that the claim becomes due.
There is no further need to place the employer in default. If payment has not been made on the day of termination, interest begins to run of its own accord.
Given, however, that different claims may be raised at the mediation or litigation stage, it is important that the date from which interest runs be expressly stated in the statement of claim.
The Limitation Period
The claim is subject to a five-year statute of limitations under the Labour Courts Act No. 7036 and the other relevant provisions.
The period begins to run on the date on which the employment contract came to an end. If no application for mediation is made and no action is brought within those five years, the claim becomes time-barred; where the employer raises that plea, the claim may be dismissed.
For that reason it is critical, in order to eliminate the risk of losing the right, that an employee whose employment relationship has ended should make a claim without delay and set the process in motion.
The Severance Pay Action
In disputes in this field, recourse to mandatory mediation before the action, the correct identification of the court with subject-matter and territorial jurisdiction, the sound framing of the legal character of the action and the effective management of the burden of proof all bear directly on the outcome.
Mediation as a Procedural Requirement
Under Art. 3 of Act No. 7036, having gone to a mediator is a procedural requirement in claims of this kind. An action brought before that process has been completed is dismissed on procedural grounds for want of that requirement.
The application made suspends the statute of limitations and also prevents preclusive periods from running. If the parties reach an agreement, the document drawn up has the quality of a court judgment and may be enforced directly. Where no agreement is reached, the action is brought on the basis of the final minutes drawn up.
The Courts With Subject-Matter and Territorial Jurisdiction
Subject-matter jurisdiction lies with the Labour Court under Art. 5 of Act No. 7036. In places where there is no labour court, the file is dealt with by the civil court of first instance sitting as a labour court.
As regards territorial jurisdiction, Art. 6 of the Code of Civil Procedure No. 6100 and Art. 6 of Act No. 7036 apply. The action may be brought either before the court of the place where the work is performed or before the court of the respondent’s domicile; the employee thus has an optional head of jurisdiction.
The Distinction Between the Action for an Indeterminate Claim and the Partial Action
Whether the claimant is able, at the date of the action, to determine the claim fully and precisely in amount or value governs which type of action is to be chosen. That choice has significant procedural consequences in terms of the statute of limitations and the increase of the claim.
Action for an indeterminate claim (Art. 107 of the Code of Civil Procedure). The said article of Act No. 6100 permits recourse to this route where the amount or value of the claim cannot objectively be determined by the claimant at the time of the action. The criterion is not the claimant’s personal want of knowledge but whether determination is objectively possible given the nature of the claim. Severance pay is of an indeterminate character in most files, since it requires the identification of the items making up the wage including fringe benefits, the determination of the period of service, the examination of the employer’s records and a technical calculation by a court-appointed expert. While claiming the whole of the sum due, the claimant is not obliged to state a precise figure at the outset. Once the amount is clarified during the proceedings through the expert examination, the relief sought may be increased without any need for amendment of the pleadings. The statute of limitations is, moreover, interrupted in respect of the whole of the claim. In these respects the method both serves procedural economy and affords the claimant stronger protection.
Partial action (Art. 109 of the Code of Civil Procedure). Where the amount is determinable by the claimant, an action for an indeterminate claim is not available; a partial action is preferred in that case. The claimant claims only part of the sum due; for the remainder, recourse must subsequently be had to amendment of the pleadings or a further action must be brought. In a partial action the statute of limitations is interrupted only in respect of the amount made the subject of the action; it continues to run in respect of the balance left outside the claim. The choice of a partial action must therefore be weighed carefully, particularly in files where there is a risk of limitation.
The position in practice. An action for an indeterminate claim may be brought in files where sufficient documentation as to wage items, gratuities, bonuses and the period of service is not to hand. Where the wage, the period of service and the amount of the claim can be clearly determined, by contrast, an action for an indeterminate claim may be dismissed for want of legal interest. In practice the majority of severance pay actions are brought as actions for an indeterminate claim; that route affords the claimant a more effective procedural advantage in terms of interrupting the statute of limitations and allowing the claim to be increased subsequently.
The Burden of Proof and the Evidence
As a rule, in these actions the burden of proof lies with the employee. The employee must establish how long they worked at the workplace, the amount of their wage and that the contract came to an end in a manner giving rise to entitlement. The employer, by contrast, is obliged to prove its case where it argues that the compensation was paid or that it terminated the contract for just cause.
The types of evidence most frequently relied on in practice are the following:
Witness statements. These serve an important function in establishing the period of service, the amount of the wage, the working conditions and the ground of termination. In files where no written document exists, witness accounts may determine the outcome.
Payslips and workplace records. Signed payslips constitute strong evidence in determining the wage and the payment items. Where the employee has signed the payslip without entering a reservation, it becomes difficult to prove the contrary of its content. It may nevertheless be argued by any and all evidence that the payslip does not reflect the truth.
SGK service record. The records of the Institution have the character of an official document establishing the range of dates over which the employment continued, and they form the principal basis for determining the period of service.
Bank records and written documents. Bank movements relating to wage payments, bonuses and other entitlements, as well as workplace correspondence, may also be assessed as evidence.
Court Fees and Litigation Costs
Since these actions concern a monetary claim, they are subject to a proportional fee. At the filing stage an advance fee is paid on the amount claimed; at the end of the proceedings the unsuccessful party bears the attorney’s fees and the costs.
In files brought as an action for an indeterminate claim, a fixed fee is collected at the outset; once the amount is clarified, the proportional fee is completed.
The heads of cost consist of the court-appointed expert’s fee and the expenditure on on-site examination, service of process and postage; as a rule these are charged to the party who loses the action.
An employee whose financial circumstances are not favourable may request legal aid under Art. 334 et seq. of the Code of Civil Procedure. Where the request is granted, the litigation costs are borne provisionally by the State.
***Warning: This text is intended as general information and does not constitute legal advice or an opinion on a specific matter. Every dispute must be assessed within its own circumstances. It is therefore recommended that a lawyer be consulted before any decision is taken as to your rights and obligations, so that a legal assessment specific to your situation may be made.*
Independent Legal Assessment
In severance pay files the element that determines the outcome is most often not the existence of the right but how the amount is calculated. The difference between the bare wage appearing on the payslip and the wage including fringe benefits actually paid is the source of a significant proportion of disputes. Whether travel and meal allowances and regular bonuses have been taken into account changes the amount claimed appreciably in most files.
The second critical heading is timing. Since the five-year limitation period begins to run on the date of termination, setting the process in motion early by an application for mediation both suspends the running of time and ensures that interest is claimed from the correct date.
In a particular file we recommend that the following heads be observed:
- Establishing at the outset which of the cases giving rise to entitlement the ground of termination falls within
- Documenting the items making up the wage including fringe benefits by reference to the criterion of continuity
- Identifying, before the action, any discrepancies between the SGK service record and the actual period of employment
- Calculating in advance the effect of the ceiling on the amount claimed in the case of highly paid employees
- Deciding, according to the documents to hand, whether the action is to be brought as an action for an indeterminate claim or as a partial action
- Expressly stating in the pleadings that the type of interest is the highest bank deposit interest rate and that the starting date is the day of termination
Independent Legal advises and represents both employers and employees in disputes concerning severance pay and other employment claims, from the mediation stage through to the conclusion of the litigation process.