The rules on severance pay in detail

In cases of redundancy or the dismissal of managers and those in a position of trust, the employer must pay the employee compensation based on the number of years worked, at a minimum. The law requires payment of one month’s salary for each complete year worked or for portions of time over six months. However, this amount has two significant limitations: i) it may not exceed 11 months’ pay, i.e. compensation for 11 years of service at the employer (although this cap does not apply to employees hired prior to 14 August 1981) and, ii) the amount of the compensation may not exceed 90 Inflation Indexed Units (approximately USD 3,600). These two limitations may, however, be voluntarily disregarded by the parties in the employment contract or, for example, in a collective agreement.

In calculating severance pay and compensation in lieu of notice, the employer must take into account all the employee is entitled to as at the contract termination date, including social security contributions, bonuses and benefits in kind (excluding only occasional discretionary benefits).

As an additional benefit some organisations pay directors or key managerial staff compensation based on the number of years worked, without keeping to the legal minimum of one month’s salary for each year worked.

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Author: Munita & Olavarría

Date: December 2019