The rules on severance pay in detail

The employer is not liable to pay any additional compensation for legally valid terminations. Therefore, the employer has no statutory obligation to pay severance pay. However, the employee is legally entitled to compensation if the employment contract is terminated without proper grounds.

Provided that the termination is performed lawfully and the employer and employee have not agreed otherwise (e.g. in the employment contract), the employer is not obliged to make any additional payments to the employee upon termination of employment.

However, some organisations have established voluntary redundancy packages to be offered to employees under threat of dismissal on collective grounds. The size of the redundancy package is usually around 50% of the employee's salary for the notice period. For example, if the notice period is six months, the redundancy package is an additional three months' salary, amounting to total compensation of nine months' salary. Such additional compensation does not, however, affect the employer’s liability for unjustified termination, unless the employee expressly waives his or her right to make claims about the employment relationship and its termination.

The managing director is not considered an employee of the organisation and employment law does not apply to the relationship. The employer should therefore conclude an agreement on terms of service with the managing director. Such an agreement usually provides the director with the right to additional fixed compensation in the form of a severance payment if the agreement is terminated by the employer for reasons unrelated to the director.

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Author: Dittmar & Indrenius

Date: December 2019