The rules on severance pay in detail

Employees with at least three years of service who are dismissed with notice for a reason connected to the operation of the employer are entitled to statutory severance pay. The same rule applies if the employment is terminated because the organisation no longer exists.

Statutory severance pay is based on the employee’s current monthly salary, which includes the basic salary; where relevant, the pro-rated part of the salary based on the employees’ performance, paid in the previous six months; and where relevant, the shift and overtime allowances paid in the previous six months. The severance pay is calculated on the following basis:

  • one month for at least three years of employment;

  • two months for at least five years of employment;

  • three months for at least ten years of employment;

  • four months for at least 15 years of employment;

  • five months for at least 20 years of employment;

  • six months for at least 25 years of employment.

If the employee is within five years of retirement when made redundant for a reason connected to the operation of the employer, the statutory severance pay is as follows:

  • two months’ pay for more than three years of employment;

  • three months’ pay for more than five years of employment;

  • five months’ pay for more than ten years of employment;

  • six months’ pay for more than 15 years of employment;

  • eight months’ pay for more than 20 years of employment;

  • nine months’ pay for more than 25 years of employment.

No severance needs to be paid to a ‘retired’ employee (i.e. a person who claims a pension in addition to working on an indefinite term contract with the employer). Nor is severance payable if the reason for termination is connected with the employee’s performance (i.e. the employee’s abilities other than medical reasons) or the behaviour of the employee.

Employers sometimes offer payments that are more generous than the statutory entitlements if the parties conclude a settlement agreement. Collective agreements and employment contracts also sometimes include more generous provisions.

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Author: CLV Partners

Date: December 2019