What financial compensation is required under law or custom to terminate the employment relationship? How do employers usually decide how much compensation is to be paid?
Employment & Labour Law
Save for salary in lieu of notice which is discussed above and any amounts that have vested in the employee prior to the termination of the employment relationship, there is no specific financial compensation required under law to terminate the employment relationship. The financial compensation payable would depend on the terms of the employment agreement and prevailing norms.
Where an employee’s service is terminated due to redundancy or reorganisation, the Tripartite Retrenchment Guidelines state that:
“The prevailing norm is to pay a retrenchment benefit varying between 2 weeks to 1 month salary per year of service, depending on the financial position of the company and taking into consideration the industry norm. However, in unionised companies where the quantum of retrenchment benefit is stipulated in the collective agreement, the norm is one month’s salary for each year of service.”
Except as otherwise provided in an employment contract or collective bargaining agreement, employers need not make severance payments to terminated employees. However, employers often offer severance payments as consideration for an agreement made between the employer and employee at the time of termination to waive any potential claims arising out of the employment relationship. Although there is no “customary” amount of payment, severance payment is typically premised on the length of the employment relationship – for example, two weeks’ salary for each year worked. Larger employers commonly establish severance plans to facilitate consistent treatment of exiting employees.
In case of disciplinary dismissals, employees will not be entitled to any termination severance unless the dismissal is declared as unfair. In this latter case, and for employment contracts entered into after 12th February, 2012, the employee will be entitled to the statutory unfair dismissal severance equivalent to 33 days of salary per worked year with a cap of 24 monthly installments.
In case of employment contracts entered into before 12th February, 2012, the unfair dismissal severance shall amount to 45 days of salary per worked year for the time of services rendered before 12th February 2012, and 33 days of salary per worked year for the time of services rendered afterwards. The severance amount shall not exceed 720 days of salary, unless the calculation for the period worked prior to 12th February 2012 resulted in a higher number, in that case that number shall be used as upper limit, and said number shall not be higher than 42 months, in any case.
The employee affected by this type of dismissal will be entitled to the redundancy termination severance equivalent to 20 days of salary per worked year, with a cap of 12 monthly salaries. However, if the Company cannot prove the said grounds, the affected employees will be entitled to the unfair dismissal severance above mentioned.
In relation to collective layoff, please take into consideration that a termination severance exceeding the statutory redundancy one could be unilaterally offered by the Company or negotiated with the workers’ legal representatives during the consultation period. In fact, it is under the obligation of negotiating in good faith with a view of achieving an agreement, but submitted to the economic, productive, technical or organizational situation of the companies as well to the conditions of the corporate sector, to pay additional indemnities to the ones stated by law to the affected employees.
The statutory redundancy package for an employee in the event of termination with notice consists of the following:
- Payment of the outstanding wages of the employee for the worked period,
- Payment of seniority compensation, corresponding to 30 days' pay for each year of service, up to the statutory ceiling of TRY 4,426.16 (for the first half of 2017). The basis for seniority compensation is the employee's last gross wage including all kinds of additional benefits,
- Payment for unused annual leave, extra hours, and prorated portion of the regular premium as well as any other salary the employee was entitled to for the period of work,
- Payment in lieu of notice for the required period (please Question 4 for notice periods), in the event notice periods are not observed.
According to Colombian Law, Employees being terminated without just cause are entitled to receive the payment of severance (indemnification) which amount is calculated as follows:
a. For agreements entered into for an indefinite term, indemnification rules apply as follows:
- For employees with a salary equivalent to less than ten (10) minimum legal wages: Thirty days of salary for the first year of services plus twenty additional days of salary for each of the years following the first year and proportionally for each fraction of year.
- For employees with a salary equivalent to ten minimum legal wages or more: Twenty days of salary for the first year of services plus fifteen additional days of salary for each of the years following the first year and proportionally for each fraction of year.
- Employees who had ten or more years of continuous service on December 27, 2002 have the right to an indemnification equivalent to forty five days of salary for the first year of service and forty additional days of salary for each year following the first year and proportionally for each fraction of year.
b. For contracts entered into for a fixed term or for the duration of a specific job, the indemnification is equivalent to the salaries corresponding to the remaining period of the contract, but in no event less than fifteen days’ salary.
Additionally, upon termination the employer must pay to the employee all the labor rights (salaries, severance pay – auxilio de cesantías, interest on severance pay, semester bonus, vacation, extra-legal benefits agreed, among others) caused until the termination date.
Swiss labour law basically only requires an employer to pay the employee’s salary during the notice period. There is – subject to severance payments agreed by employment contract – principally no need for any additional payment, however. For certain categories of listed stock corporations’ executives, severance payments are even prohibited by the Ordinance Against Excessive Remunerations in Listed Stock Corporations.
Additional payments other than those foreseen in an employment contract are only customary if the employer wishes to terminate the employment by mutual consent (for example in order to avoid the observance of the applicable notice period or an imminent prolongation of the employment due to the employee’s incapacity to work because of illness). This is due to the fact that respective termination agreements must not be concluded in order to circumvent provisions which safeguard the interests of the employee, must comply with mandatory provisions of labour law and collective agreements and are therefore deemed null and void if there is no adequate balance of the employer’s and the employee’s (particularly financial) interests.
If an employer has reasonable grounds to dismiss an employee as required under the Labour Contract Act, the employer does not have any legal obligation to compensate the employee for the termination. However, as it is very difficult to meet the legal requirements for dismissal, employers typically solicit the voluntary resignation of employees by offering financial compensation.
There is no statutory requirement or guideline regarding the financial compensation to be offered in such a situation. The amount offered is usually determined based on such factors as the reason for the termination, the employer's size and financial conditions, the employee’s performance level, length of service years, age and salary. Severance pay within the range of three to 18 months of the employee's monthly base salary would be considered standard practice in Japan.
Under Thai laws, the following financial compensations are required to be paid in order to terminate the employment contract.
- Notice (Please also see our comment in Q4-5)
Under the LPA, unless a longer notice period is provided for in an employment agreement, an employee is generally entitled to receive one full pay period’s advance notice of termination. In Thailand this is usually a one month period.
The employer may pay wages for the notice period in lieu of having the employee serve out the notice period, but wages paid in lieu of service are in addition to the required severance pay.
Advance notice is not required where there has been serious wrongdoing by the employee.
- Accrued Wages and Benefits
The LPA requires that wages, overtime pay, holiday pay, holiday overtime pay and a payment in lieu of unused annual holiday be paid to an employee within three days from the date of termination of employment.
- Severance pay
Except in cases of serious wrongdoing, any employee that is terminated in Thailand is entitled under the Act to receive severance pay.
The amount required to be paid is based on the duration of employment, as follows:
|Length of Service||Severance Pay Entitlement
(determined using current salary rate)
|120 days or more but less than one year||30 days|
|1 year or more but less than 3 years||90 days|
|3 years or more but less than 6 years||180 days|
|6 years or more but less than 10 years||240 days|
|10 years upwards||300 days|
An employer has an obligation, under the LPA, to pay special severance pay to an employee if the termination of employment is made because of (i) relocation of the employer’s establishment in accordance with Section 120 of the LPA; or (ii) replacement of machinery or technology advancement in accordance with Section 121 of the LPA.
Financial compensation in connection with termination of employment includes payment of all contractual dues and statutory dues.
The contractual dues would include the amounts payable in accordance with the contract of employment and policies of the company such as superannuation, incentive payments, any reimbursement etc.
The statutory dues typically include (depending on the applicability as per each labour legislation) leave encashment of unutilised and accrued privileged leave; provident fund; gratuity; bonus and salary up to the last date of employment.
All of the aforesaid statutory payments are required to be paid in the manner prescribed under the relevant legislations.
In addition to the contractual and statutory dues, a gratis amount is paid to the employee as a goodwill gesture. Such additional payments assists in amenable exits.
Financial compensation for termination of employment includes the payment of all legal obligations and also could include contractual obligations when stipulated in the employment agreement or companies’ policies.
The law establishes that dismissal indemnity consists on an amount equal to one month remuneration (salary plus other benefits) for each year or fraction of work at the company, with a maximum of 6 years. It is good and common practice that the employers pay the compensation according to the legal provisions.
There could also be contractual obligations which include the amounts payable in accordance with the employment agreement and policies of the company such as incentives, retirement policies, compensations, etc.
Provided an employee has completed at least one year of service with his employer, he is entitled to an end of service gratuity upon termination of his employment contract. Such gratuity is calculated as follows: 21 days’ pay for each of the first five years of employment and 30 days’ pay for each year thereafter (subject to a maximum of two years’ salary). It will be calculated excluding any payments made to the employee such as housing or travel allowances, overtime pay and any other similar allowances.
If an employee terminates his unlimited duration contract, he will be entitled to the following gratuity: (i) one-third if he terminates during years one and three of his employment, (ii) two-thirds if he terminates during years three and five, and (iii) full gratuity if he terminates after year five.
If the employee has a fixed duration contract, he will only be entitled to be paid the gratuity if he terminates his contract after five years of service.
If either the employer or employee terminates the contract in breach of the Labour Law, he will liable to pay the other party compensation as follows:
- In the case of the employer being in breach, compensation will be the lesser of three months’ salary or the salary that would have been paid for the remainder of the contract (unless the employment contract provides for a higher amount); and
- In the case of the employee being in breach, compensation will be capped at one-half the amount that would be paid by the employer if the employer was in breach.
The employer will be liable to pay the costs of repatriating the employee to his home country, unless such employee takes up new employment in the UAE or if he resigns and can pay for repatriation himself.
According to LCL, the financial compensation employers shall pay to the employees under the termination of employment relationships can be categorized as two types: the first is economic compensation paid to employees based upon the different scenarios of the termination; the second is other financial compensation paid to special types of employees.
As to the economic compensation, according to the LCL, the economic compensation shall be paid under statutory circumstances, which can be generally divided into five groups.
A. When the employer is at fault first such as failure of paying the labour remunerations in time and in full, etc., employees are entitled to terminate the employment relationship unilaterally and get the economic compensation from the employer.
B. The employer proposes to terminate employment contract and finally terminates through both parties’ agreement following negotiation.
C. The employer has the legal reasons to unilaterally terminate (see question 1&2) without employees’ fault.
D. The unilateral termination is made by employers due to the employer’s reasons such as being declared bankrupt, business license being revoked, closing down, dissolving its business entity, liquidating its business entity, etc.
E. The employer terminates a fixed-term employment contract due to the expiration of contract term, unless the employee refuses to renew the contract even though the conditions offered by the employer are the same as or better than those stipulated in the current contract.
The calculation of economic compensation is based on the number of years the employee has worked for the employer and at the rate of one month's wage for each full year the employee worked. Any period of not less than six months but less than one year shall be counted as one year. The economic compensation payable to an employee for any period of less than six months shall be one-half of his monthly wages.
Meanwhile, the LCL sets a limitation on compensation for the termination for high-income employees. If the monthly wage of an employee is higher than three times the local average monthly wage of employees (hereafter refers to capped number), the rate for the economic compensations to be paid to him shall be the capped number and shall be for no more than 12 years of his work.
The term of ‘monthly wage’ refers to the employee's average monthly wage for the 12 months prior to the termination of his employment contract.
For the second group of financial compensation, they are required to be paid to employees in certain limited circumstances, such as extra medical treatment subsidy related to sickness, lump-sum disability subsidy for re-employment related to industrial injuries, etc.
There are no statutory provisions regarding severance pay. However, an employee may be entitled to severance pay in accordance with an employment agreement, a collective agreement or a compromise agreement. If an employment is terminated through an compromise agreement, the employee normally agrees to end his employment against some extra compensation in addition to the notice period. The extra compensation is normally paid due to the fact that the employer lacks an objective ground to terminate the employment. Decisive factors for the compensation are normally the length of the employment and the possibilities for the employee to find a new job. However, please note that this is decided through negotiations between the employer, the employee and potentially the employee’s union.
Once an employee has been employed for 1 complete year, the Employee Retirement Benefit Security Act (the “ERBSA”) requires an employer to pay a lump sum severance payment equating to 30 days’ of the employee’s ‘average wage’ for each consecutive year of service. The obligation to pay this severance payment arises in respect of any termination of the employment relationship, whether by resignation, retirement or dismissal with just cause, including where the employee has committed a fundamental breach of employment contract such as theft, embezzlement and disclosure of trade secret.
In order to calculate the appropriate severance payment, an employer must ascertain the departing employee’s ‘wage’ and ‘average wage’ in accordance with the LSA standards. The LSA defines ‘wage’ as all monies paid to an employee by the employer, in the form of wage, salary or any other monies for services rendered to the employer by the employee. ‘Wage’ generally includes basic salary, fixed and regular bonuses, fixed and regular allowances (e.g., monthly meal or transportation allowances), overtime pay and pay in lieu of unused leave. Wages generally exclude gratuitous payments or welfare payments (e.g., congratulatory payments for marriage), employee loans or advances, and reimbursement of expenses. ‘Average wage’ is defined in the LSA as the total wage paid to an employee during the three-month period prior to the date when the employment relationship was terminated, divided by the total number of days during that period. The ‘total wage paid to the employee’ refers to the total wage paid or to be paid for the work performed during the relevant period.
The above severance payment is a minimum requirement under the ERBSA. If an individual employment contract, collective agreement or company policies provides for a severance formula which is more generous than the ERBSA minimum, such will be binding and effective.
Under the ERBSA, a company may adopt a retirement pension system in lieu of the lump sum severance payment system. The ERBSA provides for two basic types of pension systems. Under the defined payment systems (‘DB-type Pension’), the total amount of pension to be received by the retired employee is fixed in advance and the amount to be paid by the employer varies based on the performance of the reserved funds. Under the defined contribution systems (‘DC-type Pension’), on the other hand, the amount of pension to be received by the retired employee varies based on the performance of the reserved funds, while the amount to be paid by the employer is fixed in advance. For the DB-type Pension, the benefits level must be equal to or more than, the relevant employee’s 30 days’ average wage for each year of consecutive service, which should be used in the pension payment calculation. For the DC-type Pension, the employer is required to make cash payment of at least 1/12 of the total annual wage of the employee at least once a year.
In addition to the statutory severance pay, the employer often provides ex-gratia to induce employees to reach an agreement on separation from and release from certain liabilities of the employer.
In the event of dismissal, the severance indemnity is defined by the collective bargaining agreement. It amounts to a minimum of 1/5 of a monthly salary per year of service plus 2/15 over ten years for all employees having at least one year of seniority.
In the event of a mutually agreed termination, the same indemnity applies and may be topped-up to reach a consensus.
With respect to financial compensation, Austrian law provides for two different systems depending on the date of the conclusion of the employment contract. The former severance pay system regulated by law only applies to employment contracts which were concluded before 1 January 2003, where the legal obligation to make severance payments in case of termination of employment is prescribed on the part of the employer. The new system regulating severance pay applies to all employees who have concluded a new contract of employment as of 1 January 2003, under which system employers must pay contributions to a staff provision fund for all employees subject to the new system, at a rate of 1.53 per cent of their gross monthly salary. The advantage of the new system is that the employee is fully entitled to severance pay even if he himself terminated the employment relationship. On termination, the employee has two options: either have this amount paid out in cash (after 3 years) or the acquired severance pay is carried over for future reimbursement. Severance payments depend on the length of continuous service, between two monthly salaries (for three years of service) and 12 monthly salaries (for 25 years of service).
Besides, a (voluntary) financial compensation may be mutually agreed upon to waive a right to contest the termination of the employment. The amount of such compensation typically varies between 1-9 months, and in certain cases may also exceed such. The amount of compensation strongly depends on the status of the granted protection and/or contestability.
As described in Question 4, an employer that terminates an employee without cause must provide statutory notice (or pay in lieu) and/or statutory severance pay. In addition, employers are, at common law, required to provide an employee with ‘reasonable’ notice of termination or pay in lieu of notice unless there is a clear and enforceable agreement specifying a period of notice that complies with applicable minimum standards legislation. Based on these requirements, there are a number of ways in which a termination may be handled, each of which impact the financial compensation required by law.
In order to determine the compensation to be provided to an employee upon termination, it is important to review any termination provisions in the employee’s contract to determine the employee’s entitlements under the contract. Employers must also consider any applicable qualifications to the right to terminate employees without cause that apply in their jurisdiction (see Question 1).
As a general proposition, an employee is entitled to receive the total compensation and benefits (for example salary, projected incentive compensation, and the monetary value of benefits) that the employee would otherwise have received during the applicable notice period (for a discussion of applicable notice, see Questions 2 and 4). If an employee rejects a separation package and commences litigation for wrongful dismissal, the court may award additional damages to the extent that the employer did not offer items in the package which the employee would have earned or received during the notice period. The issue of whether an employee would have received certain items – including bonuses, stock option vesting, and other incentive compensation – during the applicable notice period, and is therefore entitled to receive those items upon termination, is the subject of a complex and growing body of case law.
Methods of Handling Termination
Having regard to an employee’s termination entitlements, three methods of handling termination are often used by employers:
- Working notice: The employer may give notice to the employee and require the employee to work the notice period, but perhaps with reasonable time off to attend job interviews. However, it is often undesirable to have employees working under notice for practical reasons. In addition, working notice cannot be provided instead of the statutory severance pay to which Ontario and federal employees may be entitled.
- Lump Sum Payment: The employer may terminate the employee immediately and provide a lump sum payment. This lump sum payment may be somewhat less than the employee would receive working under notice, based on the rationale that the employee may succeed in obtaining employment within the proper notice period and receive the benefit of a lump sum payment in advance. It is generally advisable to obtain a release from the employee prior to paying any amount beyond the statutory requirements.
- Salary Continuance: The employer may terminate the employee immediately but continue the employee’s salary payments for the duration of the reasonable notice period. These payments are usually paid on the basis that they will stop when the employee finds other employment, or after the specified period of time, whichever occurs first. Usually there is an incentive, based upon a percentage of the outstanding payments payable to the employee once the employee finds a job, to encourage the employee to exert best efforts to find a job quickly. These arrangements are typically memorialised in a written agreement that includes a release.
The three methods outlined above are the most common, but there are other methods as well as variations of these three methods.
No financial compensation is required if the employment relationship is terminated by serving notice on the worker, as the worker continues working up until the end of the notice period.
If the employment relationship is terminated with immediate effect, the worker will be entitled to a severance allowance equal to the remuneration that would have been paid during the applicable notice period. The remuneration taken into account includes the worker’s monthly salary and the value of the extra-legal benefits to which the worker was entitled at the moment when the employment contract was terminated.
Whether the employment relationship is terminated upon notice or upon payment of a severance allowance, the worker is entitled to (i) the statutory vacation pay upon departure (only for white collar workers), (ii) the pro-rated year end premium and/or bonus as well as (iii) the salary for public holidays falling within 30 days following the termination of the employment relationship.
In the event of dismissal for justified reason or collective redundancy, the employees are entitled to the notice period or to the relevant indemnity in lieu.
In addition, in each case of termination the employer must pay:
- the indemnity in lieu of holidays and time off not accrued but not used;
- the severance pay (the “Trattamento di Fine Rapporto”, also known as TFR),
that for the sake of clarity corresponds to about 7.41% of the overall remuneration earned from time to time by the employee during the employment relationship and that therefore should not be considered as a “real” cost as it should have been already been put aside year by year by the Company in the balance sheet of the Company (unless the employee opted for the transfer of the relevant amount to a specific complementary pension fund).
Dismissed employees on the basis of a personal/professional ground or on the basis of an economic reason are entitled to a notice pay and a severance pay.
Notice pay is the pay relating to the period of notice and which depends on the length of service of the terminated employee. The notice pay is paid in the same way as a salary, at the end of each month. The employer is required to withhold taxes and social security contributions.
After at least five years of seniority, dismissed employees are also entitled to severance pay:
|Years of service||Months of salary|
|More than 30||12|
The severance pay is determined on the basis of the average gross salary effectively paid to the employee over the 12 months preceding the dismissal. The sickness benefits, bonus and any recurrent payments are computed, but overtime compensation, premium paid on a discretionary basis and reimbursement of expenses are excluded.
Generally no compensation is to be paid for a valid dismissal. However, if the employment relationship is terminated by a mutual agreement or before court by a settlement agreement severance pay is common practise. A usual formula is: factor of 0.5 * monthly gross salary * seniority. However, the factor can vary, depending on the area of business, the economic performance of the company, and the prospects of success of the dismissal.
Also, a social plan in cases of operational changes regularly contains a formula according to which the compensation for each employee who leaves the company is calculated.
Statutory severance in the FLL for wrongful termination or unjustified dismissal is a fixed formula comprising the following elements:
- 3 months of consolidated salary (base salary plus benefits in kind and in cash);
- 20 days of consolidated salary per year of services rendered;
- 12 days of salary per year of services, capped to two times the minimum wage (currently 80.04 Mexican pesos); and
- Pro-rata part of employment benefits up to the effective date of termination.
If an employee voluntarily resigns from his/her job, he/she will only be entitled to the pro-rata part of employment benefits, up to the last day of employment. If the employer terminates the employee with cause, the latter will be entitled to the following:
- 12 days of salary per year of services, capped to two times the minimum wage (currently 80.04 Mexican pesos); and
- Pro-rata part of employment benefits up to the effective date of termination.
Finally, if an employee dies, following the procedure established in the FLL to designate his/her economic dependants, the employer is obligated to pay to the latter the following:
- 12 days of salary per year of services, capped at two times the minimum wage (currently 80.04 Mexican pesos); and
- Pro-rata employment benefits up to the effective date of termination.
If the grounds for the termination are adequate, an employer has no legal obligation to pay the dismissed employee any compensation or severance. The employer is, however, obliged to pay the employee's regular salary during the notice period and to compensate the annual vacation the employee has accrued but not taken at the time of the expiry of his/her employment contract.
If a court finds that the employee has been dismissed without legal grounds, the employer is liable for an illegal termination. In this case, the employee is entitled to an indemnity. The minimum indemnity is equal to three months' and the maximum compensation 24 months' salary of the dismissed employee. The sum depends primarily on the length of the employment of the person dismissed, the employee's possibilities of finding new employment, judgment of the procedure carried out by the employer and whether the employee has given reason for his/her dismissal. A typical indemnity ranges from six to ten months' salary.