Content
- What is severance pay?
- Who is entitled to severance pay?
- Severance pay for technological redundancy
- What is the statutory severance pay?
- How is severance pay calculated?
- Does total length of service count?
- When must severance pay be paid?
- Severance pay in case of mutual termination of the employment contract
- What is incentive severance pay?
- Severance pay and illegal dismissal – what’s the difference?
- Is tax paid on severance pay?
- Practical examples
- FAQ – most frequently asked questions
- Conclusion
Termination of employment often raises a question that is important to both employees and employers: does the employee have the right to severance pay and how much is the severance pay?
The answer depends on the reason for the termination of employment.
Contrary to popular belief, an employee does not have the right to severance pay every time the employer cancels his employment contract. The legal obligation to pay severance pay exists especially when the employee’s employment relationship ends because, due to technological, economic or organizational changes, the need for his work has ceased.
On the other hand, in the case of mutual termination of the employment relationship, it is possible to contract a significantly higher amount, the so-called incentive severance pay.
Therefore, before the termination of the employment relationship, it is important to distinguish between statutory severance pay, voluntarily agreed compensation and compensation for damages due to illegal dismissal.
1. What is severance pay?
Severance pay is a monetary benefit that the employee, under certain conditions, receives upon termination of the employment relationship.
However, the term “severance pay” in everyday speech is used much more broadly than is legally justified.
If an employee is fired due to a violation of work obligations, non-compliance with work discipline or another reason on his part, the fact that the employer has canceled his contract does not in itself create the right to severance pay.
The most significant case in which the employer is obliged to pay severance pay is the termination of the employee’s need for work due to technological, economic or organizational changes.
2. Who is entitled to severance pay?
When we talk about severance pay due to dismissal, the right to legal severance pay is granted to an employee whose contract is terminated by the employer because:
- the need to perform a certain job has ceased;
- there was a reduction in the volume of work;
- implemented technological change;
- there were economic or organizational changes due to which the employee became redundant.
In practice, the term technological redundancy is most often used for this situation, although the reason does not have to be exclusively technological in nature.
It is important that severance pay for technological redundancy is not a matter of goodwill of the employer. When there are legal conditions for its payment, it is an obligation of the employer.
3. Severance pay for technological redundancy
One of the most common questions is: does the employer have to pay severance pay before giving the employee a notice of termination as a technological redundancy?
Yes.
With this basis for termination of the employment relationship, the severance pay must be paid before the termination of the employment contract.
This is an important difference compared to other claims of the employee that can be paid after the termination of the employment relationship.
That’s why an employer who wants to declare an employee as technological, economic or organizational surplus should correctly determine the amount of severance pay and make the payment before the dismissal produces the appropriate legal effect.
4. What is the statutory severance pay?
The amount of severance pay can be adjusted:
- collective agreement;
- work regulations;
- employment contract.
The employer can provide a more favorable severance pay than the legal minimum.
However, the severance pay cannot be lower than one third of the employee’s relevant salary for each completed year of work at the employer for which he is entitled to severance pay.
That’s why the question “how much is the severance pay per year of service?” there is not the same answer for every employee. The amount depends on the salary of the employee and the number of completed years that are taken into account.
5. How is severance pay calculated?
The calculation is based on the employee’s average monthly salary paid for the last three months preceding the month in which the severance pay is paid.
A simplified formula for the legal minimum can be shown as follows:
1/3 of the average monthly salary × the number of completed years of work included in the calculation.
A practical example
The employee spent 9 completed years with the employer, and the relevant average monthly salary for calculation is 150,000 dinars.
One third is RSD 50,000.
The legal minimum in this simplified example would be:
50,000 × 9 = 450,000 dinars.
The employer can provide for a higher amount by internal act or contract.
6. Does the employee’s total length of service count?
Not necessarily.
One of the most common mistakes is the assumption that severance pay per year of service is always calculated according to the employee’s entire working life.
In the case of severance pay due to technological redundancy according to the Labor Law, it is primarily based on the time spent in the employment relationship with the employer where the employee is entitled to severance pay.
In certain situations, the calculation includes the time spent with the previous employer due to status changes or changes of employer, as well as certain periods of work with related parties.
For this reason, with longer service years and changes in the company’s structure, it is necessary to carefully check which period is included in the calculation.
7. Is severance paid in two monthly salaries?
This is a common search, but also a common confusion.
There is no general rule that an employee receives two monthly salaries for every dismissal.
The rule of at least two average earnings applies to severance pay upon retirement, which is a different legal situation.
In the case of technological redundancy, the minimum severance pay is calculated according to the number of completed years of work and the relevant salary of the employee.
That’s why the terms “severance pay in two months’ salary” and “severance pay upon retirement” should not be equated.
8. Severance pay in case of mutual termination of the employment contract
In the case of mutual termination of the employment contract, there is no automatic rule that the employer must pay the employee severance pay just because the parties have agreed to terminate the employment relationship.
However, the employee and the employer can agree on monetary compensation.
It is precisely here that the so-called incentive severance pay.
For example, an employer wants to reduce the number of employees without conducting a conflictual dismissal procedure and offers the employee three, six or more wages in order to agree to an amicable termination of the employment relationship.
If the employee accepts the offer, the amount, payment term and other conditions should be clearly stated in the agreement.
9. What is incentive severance pay?
Incentive severance pay is not a special universal amount prescribed by the Labor Law.
In practice, this term refers to the amount that the employer offers to the employee as an incentive to voluntarily accept a certain model of termination of the employment relationship.
Such an offer may include, for example:
- several monthly earnings;
- additional compensation for the years spent with the employer;
- payment of certain benefits;
- a combination of monetary compensation and other benefits.
Before accepting such an offer, it is important for the employee to consider not only the amount, but also the consequences of the agreed termination of the employment relationship and the rights that may be waived.
10. Severance pay as compensation for illegal dismissal – is it the same?
No.
These are two different legal institutes.
Severance pay is paid when there is an appropriate basis for it, such as the termination of the employee’s need for work.
Compensation for damages due to illegal dismissal can arise only if the employee’s employment has been illegally terminated and if the conditions for compensation for damages are determined in the appropriate procedure.
That’s why the wording “severance pay as damages for illegal dismissal”, although often searched, is not completely legally precise.
An employee whose employment relationship has been illegally terminated may, depending on the case and request, exercise the right to return to work, lost earnings, or certain monetary compensation. It is not the same as statutory redundancy pay.
11. Tax on severance pay – is severance pay gross or net?
The tax treatment depends on the legal basis of the payment.
In the case of legal severance pay to an employee whose work has ceased to be necessary, there is a tax exemption up to the amount of the legal minimum. If the employer pays a larger amount, the tax treatment of the difference should be calculated separately.
Therefore, the question “whether severance pay is paid in gross or net amount” does not have a universal answer without determining the basis of payment.
In particular, you should be careful with incentive compensation and payments agreed upon upon mutual termination of the employment relationship, because their tax treatment does not have to be the same as with legal severance pay for technological redundancy.
It is therefore important for the employer to check not only the labor law but also the tax consequences of the agreed payment before agreeing on the amount.
12. The decision on the payment of severance pay – what should it contain?
The employer’s documentation should clearly determine the basis and method of calculating the severance pay.
The document may contain:
- employee data;
- legal basis of payment;
- the number of completed years that are taken into account;
- relevant average earnings;
- method of calculation;
- the total amount of severance pay;
- payment date.
A simplified example
Subject: Calculation and payment of severance pay
Employee __________, due to the cessation of the need for his work due to technological, economic or organizational changes, is entitled to severance pay in the amount of __________ dinars.
The amount is determined according to the employee’s average monthly salary relevant for the calculation and for _____ completed years of work that are taken into account.
The severance pay will be paid before the termination of employment.
In the specific case, the content of the documentation should be harmonized with the grounds for termination of the employment relationship and the acts of the employer.
13. FAQ – most frequently asked questions
Does an employee have the right to severance pay every time they are fired?
No. The right to severance pay depends on the reason for termination of employment.
Who is entitled to redundancy pay?
An employee whose employment relationship ends because the need for his work has ceased due to technological, economic or organizational changes.
What is the severance pay per year of service?
The legal minimum for technological redundancy is one third of the relevant average monthly salary for each completed year of work that is counted for severance pay.
Does the employer have to pay severance pay before dismissal?
In the case of dismissal due to the termination of the employee’s need for work – yes.
Does the entire length of service count?
Not automatically. The key is the time spent with the employer where the employee exercises the right, with certain legal cases in which other periods are also counted.
Is there severance pay in case of mutual termination of the employment contract?
It can exist if it is agreed between the employee and the employer, but it is not an automatic consequence of every mutual termination.
What does incentive severance pay mean?
In practice, it is an additional fee with which the employer encourages the employee to accept a certain model of termination of the employment relationship.
Is severance pay the same as severance pay?
No. It is about different legal bases and different rights of the employee.
14. Conclusion
The right to severance pay does not exist with every termination of the employment relationship, which is why it is most important to determine the basis on which the employment relationship is terminated before payment or acceptance of the offer.
In case of technological, economic or organizational redundancy, the law guarantees the employee a minimum severance pay that is linked to his earnings and completed years of work that are included in the calculation. The employer can also foresee more favorable conditions.
In the case of mutual termination, the situation is different. The parties can negotiate additional or incentive severance pay, but then the amount, payment period and tax treatment should be carefully arranged.
It is therefore important for the employee to know before signing the documents what is already due to him by law, and what is an additional offer from the employer. For the employer, the correct determination and timely payment of severance pay is an important part of the legal termination of the employment relationship and one of the best ways to reduce the risk of a later dispute.
Note: This text is informative and does not represent legal advice for a specific case. The right to severance pay, the method of calculation and the tax treatment depend on the basis of the termination of the employment relationship, the acts of the employer and the circumstances of the specific case.
For specific questions and legal support, please contact the Dvornić law office.
