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 (2nd Edition)
If the employer terminates the employee with cause, the law entitles the employee with the following severances:
A. Accrued monthly salary (owed until the day of termination)
B. Accrued vacation (one month per year) and vacation bonus (1/3 of the monthly salary), if applicable
C. Prorated Christmas bonus (1/12 of the employee's monthly salary per month)
D. Severance fund (Fundo de Garantia por Tempo de Serviço – “FGTS”, 8% over the severance due)
E. Other payments may be required depending on the employment contract, collective bargaining agreement, or internal policy (e.g., profit and sharing results, discretionary bonus, contractual bonus, stock options, etc.)
If the employer terminates the employee without cause, the law entitles the employee with the following severances:
A. Accrued salary
B. Accrued and prorated vacations, if applicable
C. Vacation bonus, if applicable
D. Accrued and prorated Christmas bonus
E. FGTS payment (8% over the severances due)
F. FGTS fine (50% over the balance of the FGTS fund, of which 40% belong to the employee, and 10% serve as tax)
G. Other payments may be required depending on the employment contract, collective bargaining agreement, or internal policy (e.g., profit and sharing results, discretionary bonus, contractual bonus, stock options, etc.)
These severances also applies to the employee that claims constructive dismissal.
If the employee resigns, the law provides the employee with the following severances:
A. Accrued salary
B. Accrued and prorated vacations, if applicable
C. Vacation bonus, if applicable
D. Accrued and prorated Christmas bonus
E. FGTS payment (8% over the severances due)
F. Other payments may be required depending on the employment contract, collective bargaining agreement, or internal policy (e.g., profit and sharing results, discretionary bonus, contractual bonus, stock options, etc.)
The Labor Reform introduced a new form of employment termination—the employer and employee may terminate the relationship by agreement. In such cases, the severances verified in the termination without cause also apply for this scenario, but the notice and the FGTS fine are reduced by half. To the extent this is a recent provision of the law, this possibility should be analyzed on a case-by-case basis.
Under the LSA, an employer must provide at least thirty (30) days’ written notice of termination to the employee. Alternatively, an employer may provide thirty (30) days’ compensation instead of the advance notice. Please refer to Question 4 for more details.
In the case of an early retirement package or mutual separation offers, there are no statutory formulas. Instead, the amounts offered are matters of contract; provided that, if an employer policy or regulation (including any collective agreements) stipulate a formula, the employer must follow its policy, regulation, or collective agreement.
The employer shall be required by law to pay the following items concurrently with the related termination:
- Severance Pay - equal to the last monthly gross salary of an employee paid respectively for each year of his/her passed service. However, the monthly gross salary to be considered for severance pay calculation is capped. The cap is regularly updated by the government and is applied when the salary in question exceeds it. Currently, the severance pay cap for 2018 is determined as TRY 5,001.76.
- Notice Pay - changes between 2 to 8 weeks’ gross salary, depending on the employee’s length of service (up to 6 months of service– 2 weeks; between 6 months and 1.5 years of service – 4 weeks; between 1.5 years and 3 years of service – 6 weeks; more than 3 years of service – 8 weeks). There is no cap applicable for this and the actual salary of the employee, as well as his/her additional financial benefits (e.g. bonus) is considered. Yet it is possible to make the employee work during the notice period, instead of paying a notice pay.
- Vested, but uncovered allowances (if any) e.g. the amount corresponding to unused annual leave entitlement.
In case of a mutual termination protocol, in addition to the above payments, an amount changing from 4 to 12 months’ salary of the employee is also paid as an additional compensation. The exact amount to be agreed with the employee shall depend on the negotiations to be made with the employee. In recent precedents, the facts like seniority, position, job description, latest salary and social and familial status of the employee have been influential in determining the reasonable benefit. Yet amounts closer to 12 months are very rarely paid and are paid only to those that are at the very executive level (and have a command on the trade secrets of the company). For regular level white collar positions, it is around 4 to 8 months.
If Dutch law is applicable to the employment contract the employer must pay the employee a statutory transition payment on non-renewal of a fixed-term contract of two years or more or a dismissal after two year’s employment, unless the dismissal is the result of seriously culpable conduct.
Transition payments are linked to length of service and age:
- For the first 10 years of employment: the payment is one-sixth of the monthly wages for each completed six months of service;
- For the following 10 years of employment: the payment is one-quarter of the monthly wages for each completed six months of service;
- In the case of an employee aged over 50 and employed for more than 10 years: the payment is one-half of monthly wages for each completed six months of service. However, this is a transitional arrangement lasting until 2020 that does not apply to small employers with fewer than 25 employees.
For calculating the transition payment the monthly wages include holiday pay, overtime, shift allowances and bonus payments. The transition payment is capped at € 79.000 or at one year’s salary, whichever is greater.
Parties are free to agree on a higher amount than stemming from the abovementioned calculation.
An employee is entitled to additional compensation if the employer’s conduct has been seriously culpable. Collective bargaining agreements may deviate the calculation of the payment as long as the employees receive equivalent compensation.
Under Thai laws, the following financial compensations are required to be paid in order to terminate the employment contract.
1) 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.
2) 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.
3) 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
120 days or more but less than one year
1 year or more but less than 3 years
3 years or more but less than 6 years
6 years or more but less than 10 years
10 years upwards
22. 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.
Employers are legally obliged to give workers the minimum notice required under their contract of employment, or the minimum statutory notice if this is greater. If the worker’s engagement continues during the notice period, they will be paid as normal. If it is intended that the worker’s contract will terminate immediately, the worker may be entitled to receive a lump sum payment equivalent to the sums specified in the contract as pay in lieu of notice. In such circumstances, the contract may specify that the worker is under an obligation to mitigate his losses by looking for alternative employment and that such sums will paid subject to him making reasonable efforts to do so.
If there is no right to pay in lieu of notice in the employee’s contract and it is terminated by the employer without giving the required notice, the employee will be entitled to compensation, subject to the employee’s obligation to mitigate his losses as noted above.
Where the reason for dismissal is redundancy, an employee who has two or more years of service will be entitled to a statutory redundancy payment. The employee’s age and length of service are used to calculate the relevant multiplier for a week’s pay, subject to a maximum cap. Many employers offer enhanced payments, either on a case by case basis or as a contractual entitlement, if the termination of employment is by reason of redundancy.
Employers must pay employees for any accrued but outstanding holiday entitlement on the termination of employment.
Unless the employer has a contractual obligation to make any other payment to a worker on the termination of employment, it will not be obliged to do so. However, where a dispute exists between the employer and the employee, it is common for some compensation to be paid relative to the sums the worker claims he would be entitled to in the Employment Tribunal or Court.
If a dismissal is found to be unfair by an Employment Tribunal, it can award compensation. This is calculated in accordance with the losses suffered by the worker, arising from the dismissal, including projected future losses, up to a maximum of one year’s pay or the statutory cap (currently £80,541, rising to £83,682 from 6 April 2018), whichever is lower.
Where the employee is a company director, shareholder approval for the payment of compensation may be required.
As described in Question 4, an employer that terminates an employee without cause must provide statutory notice (or pay in lieu) and, where applicable, 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 with a termination clause that displaces the common law and complies with the minimum requirements of applicable employment 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 or combinations of these three methods.
For terminations due to just causes, the Labor Code does not require the payment of separation pay. Nevertheless, in exceptional cases, the Supreme Court has granted separation pay in the amount equivalent to one-half month’s pay for every year of service to a legally dismissed employee as an act of social justice where the dismissal (1) was not for serious misconduct; and (2) does not reflect on the moral character of the employee or involve acts of moral turpitude.
For terminations due to redundancy or the installation of labor saving devices, the separation pay is at least one month pay or at least one month pay for every year of service, whichever is higher. In cases of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher, with a fraction of at least six months being considered one whole year.
According to the Severance Pay Law – 1963, an employee who has been dismissed after completing at least one year of service with a particular employer or in a particular workplace, is entitled to statutory severance pay in an amount equal to one month’s salary (as in effect at the time of termination), multiplied by the number of years' service (prorated in the case of part of a year). Greater entitlements may, of course, be set out by any additional binding source applicable between the parties, such as employment agreements (whether written or oral).
Please note however, that the amounts accrued in the employee's severance fund (which is part of the employee's pension arrangement) are on account of the employer's liability to pay the severance, such that at the time of termination the employer is only required to pay the shortfall between the statutory entitlement set out above and amount accrued in the fund. Sometimes and subject to the application of a special arrangement between the parties, the amounts accrued in the severance fund are in lieu of the employer's liability to pay severance pay.
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 a 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.
In redundancy situations, an employee who has worked for an employer for a minimum of two years is entitled to a statutory redundancy payment calculated according to their length of service and rate of pay. The payment is two weeks' gross remuneration for every year of service plus an additional one week's gross remuneration, subject in each case to the statutory ceiling of €600 per week.
In the case of a mutually agreed exit that does not involve a redundancy, there is no set compensation payable by an employer as a matter of law. However, in order to ensure that an employee waives any and all employment claims he or she might have, employers are generally incentivised to offer an ex-gratia severance payment as consideration for a waiver of such claims. Depending on the particular circumstances of the termination, certain tax reliefs may apply.
Financial compensation for termination is usually assessed by reference to the potential compensation that an employee might receive in the event that they successfully challenge their dismissal. Compensation of up to two years' gross remuneration is available in relation to an ordinary unfair dismissal claim, and up to five years' in the case of a whistleblowing related unfair dismissal. Such compensation is based on actual loss and estimated future loss, and an employee is required to mitigate his or her loss.
By contrast, a discrimination dismissal claim can give rise to a compensation award of up to two years' gross remuneration, but such compensation is based on the effect of the discrimination as opposed to actual financial loss. There is also no duty to mitigate such loss. As a consequence, discriminatory dismissal awards tend to be higher than ordinary unfair dismissal awards.
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.
In the event of dismissal, the severance indemnity is defined by the collective bargaining agreement. For all employees having at least eight months of seniority, it amounts to a minimum of 1/4 of a monthly salary per year of service up to 10 years of seniority, and 1/3 of a monthly salary for each year over 10 years.
In the event of a mutually agreed termination, the same indemnity applies and may be topped-up to reach a consensus.
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.
According to LCL, the financial compensation employers shall pay to their employees pursuant to 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 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 generally be 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 claim economic compensation from the employer.
B. The employer proposes to terminate the employment contract and with the conditions of the termination being concluded through negotiations between the two parties, following negotiations.
C. The employer has the legal basis to unilaterally terminate (see question 1&2) without employees’ fault.
D. Unilateral termination enacted by the employer in response to challenges to the integrity of the business 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 the contract terms, 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 referred to as ‘capped number’), the rate for the economic compensation to be paid to him shall be the ‘capped number’ and shall be for no more than 12 years of his employment.
The term ‘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 type of financial compensation, it is required to be paid to employees in certain limited circumstances, these being: extra medical treatment subsidy related to sickness and lump-sum disability subsidy for re-employment related to industrial injuries, etc.
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.
If the employee is dismissed by a notice period to be served, he will receive his salary (and benefits) during this period and will not receive any extra compensation.
If the employee is dismissed with an indemnity in lieu of notice, the duration of the notice period will be legally determined (see question 4). The eventual discussion will focus on the valorisation of the different benefits, i.e. private use of the car, extra insurances, bonus, etc.
In case of termination, the employee will also be entitled to vacation pay, pro rata end of year of premium and variable pay on pro rata of the performance during the year, and the salary of public holidays falling in the 30 days after the end of the contract.
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.
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 or provided for in collective agreements – 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 or collective agreement 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 due to illness). This is due to the fact that, to the extent that respective termination agreements include a waiver of claims under mandatory law, they must constitute real settlements in which also the employer makes concessions. Therefore, they are deemed null and void if there is no adequate balance of the employer’s and the employee’s (particularly financial) interests.
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.”
There is no statutory requirement for an employer to pay redundancy or any other ‘severance’ pay on termination.
Redundancy compensation or severance pay may be provided for in an individual or collective employment agreement.
Rarely, an employer may have a custom or practice of making such payments, or may choose to make an ex gratia payment.
Compensation may be awarded by the Employment Relations Authority or Employment Court if it finds that the termination of an employment relationship was unjustified.
Statutory severance in the FLL for wrongful termination or unjustified dismissal is a fixed formula comprising the following elements:
a. 3 months of consolidated salary (base salary plus benefits in kind and in cash);
b. 20 days of consolidated salary per year of services rendered;
c. 12 days of salary per year of services, capped to two times the minimum wage (currently 88.36 Mexican pesos); and
d. 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:
a. 12 days of salary per year of services, capped to two times the minimum wage (currently 88.36 Mexican pesos); and
b. 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:
a. 12 days of salary per year of services, capped at two times the minimum wage (currently 88.36 Mexican pesos); and
b. Pro-rata employment benefits up to the effective date of termination.
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
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.
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 and the employees challenge the dismissal before Court, 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.
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.
An employer is required to make the following payments upon termination of employment of an employee:
Retrenchment Compensation: As discussed in Question 2 above, an employer is required to pay retrenchment compensation (calculation mentioned in Question 2) in case of retrenchment. In case the employer is dispensing with the notice period requirement, the employer shall be required to pay salary in lieu of such notice. It is to be noted that, in the event the employment agreement / appointment letter of the employee states for a notice period of a longer duration as compared to the notice requirement for retrenchment, the notice period of the longer duration shall prevail and the employer shall be required to comply with the notice period provisions as may be set out in the employment agreement / appointment letter. Further, the employer may also be required to pay gratuity to the employee as set out below:
Gratuity: For an employer to whom the Payment of Gratuity Act 1972 (“Gratuity Act”) applies, an employee who has rendered at least 5 years of continuous service for such employer, shall be eligible for gratuity upon termination of his employment. Such gratuity shall be calculated as follows: For every completed year of service or part thereof in excess of 6 months, the employer shall pay gratuity to an employee at the rate of 15 days wages based on the rate of wages last drawn by the employee. The amount of gratuity payable shall not exceed INR 10,00,000.
Leave encashment: The accumulated leaves must be calculated and corresponding ‘wages’ be accordingly paid to the employees.
Benefits: Employment agreement / appointment letter specify the benefits payable to an employee. Benefits contained in employment policies of an organisation are also made applicable to an employee by virtue of the employment agreement / appointment letter. The employees shall be provided with the benefits as per the employment agreement / appointment letter and the company policy.