Severance pay is a one-off payment made by an employer to an employee on termination of employment, but the Employment Relations Act (hereinafter: “ZDR-1”) sets out the cases in which an employee is entitled to this right.

Where an employer gives a regular notice of termination of an employee’s contract of employment for business reasons or for reasons of incompetence, the employee is entitled to a severance payment. However, the worker is also entitled to severance pay if his fixed-term contract of employment is terminated, i.e. after the expiry of that period, or if the worker retires, or, lastly, if the worker gives notice of dismissal for reasons attributable to the employer, as set out in Article 111 of the ZDR-1.

Article 108 of the ZDR-1 provides that the basis for calculating the amount of the severance payment is the average monthly salary of the employee during the last three months before the termination of the employment contract. It should be noted that the amount of the severance payment may not exceed 10 times the aforementioned base, unless otherwise provided for in a collective agreement at the level of the industry. The severance payment is therefore normally paid at the employee’s last salary. It is also worth noting that an employee is entitled to severance pay under the ZDR-1 if he has been employed by the employer for more than one year, including employment with the employer’s legal predecessors.

You are entitled to severance pay if you receive a written notice of termination (e.g. for business reasons), which must be duly justified by the employer. Termination for business reasons¹ is only permitted where the need to perform a particular job has ceased permanently.

However, in the case of dismissal on grounds of incompetence, a severance payment shall be made to the employee when he/she does not perform as expected or does not fulfil the conditions for the performance of the job as laid down by law or other relevant regulation in force.

However, where an employee has a fixed-term contract with an employer, a distinction must be made between two situations, i) when the period of the contract expires, and ii) when the contract is terminated. In the case of a contract of employment of one year or less, the severance payment shall be 1/5 of a base representing the average monthly salary of the worker in the three months preceding the termination of the contract. However, the ZDR-1 also provides for cases in which the employee is not entitled to this right, i.e. severance pay, even if he or she has a fixed-term contract. Such cases are i) when the contract is concluded for the purpose of replacing a temporarily absent worker, ii) when the contract is for seasonal work lasting less than three months in a calendar year, iii) when the contract is concluded for the purpose of carrying out public works, and iv) when the contract is concluded for the purpose of being included in active employment policy measures under the law. iii) when the contract is concluded for the purpose of carrying out public works, and iv) when the contract is concluded for the purpose of being included in active employment policy measures under the law. In the latter cases, the worker is therefore not entitled to severance pay.

However, where an employee has a fixed-term contract with an employer, a distinction must be made between two situations, i) when the period of the contract expires, and ii) when the contract is terminated. In the case of a contract of employment of one year or less, the severance payment shall be 1/5 of a base representing the average monthly salary of the worker in the three months preceding the termination of the contract. However, the ZDR-1 also provides for cases in which the employee is not entitled to this right, i.e. severance pay, even if he or she has a fixed-term contract. Such cases are i) when the contract is concluded for the purpose of replacing a temporarily absent worker, ii) when the contract is for seasonal work lasting less than three months in a calendar year, iii) when the contract is concluded for the purpose of carrying out public works, and iv) when the contract is concluded for the purpose of being included in active employment policy measures under the law. iii) when the contract is concluded for the purpose of carrying out public works, and iv) when the contract is concluded for the purpose of being included in active employment policy measures under the law. In the latter cases, the worker is therefore not entitled to severance pay.

In view of all the above, a worker is entitled to severance pay in a number of cases: when the employer gives the worker a regular notice of dismissal for business or incompetence reasons, when the worker’s contract is terminated after the expiry of the period for which it was concluded, in the event of the worker’s retirement, and in the event of an extraordinary notice of dismissal, for reasons for which the employer is responsible for the termination of the contract.

[1] VDSS Decision Pdp 47/2011, dated 22.4.2011.