The rules on severance pay in detail

The payments that must be made to an employee upon termination of employment include the following:

In the case of a ‘workman’ (blue collar employee):

  • Salary until the employee’s last working day.
  • Notice pay (if applicable) – i.e. salary in lieu of a notice period, if no statutory notice is being given. (No such payment is required to be paid if the employee is terminated for misconduct.)
  • Pay for unused and accrued annual leave.
  • Severance pay, if the workman has completed at least one year (i.e. 240 days) of employment, at the rate of 15 days’ wages for each full year or period of more than six months of service.
  • Gratuity – i.e. employees who have worked for a continuous period of five years must be paid a gratuity at the rate of 15 days’ salary for every completed year of service.
  • Any other benefits – i.e. any other termination benefits payable according to the terms of employment contract.
  • Provident fund, where the employer has made deposits into this fund - the employer is required to sign a claim form or transfer form to enable the employee to receive his or her entitlement.
  • Bonuses and performance-linked incentive payments (‘PLI’) – i.e. any bonuses or performance related pay promised by the employer, on a pro-rata basis.
  • Any ex-gratia amount mutually agreed between the employer and the workman.

‘Non-workmen’ (white collar employees) are entitled to salary until their last working day, notice pay (if applicable), pay for unused and accrued annual leave, bonuses, PLI, provident fund payments (if any), any ex-gratia amounts and a gratuity (if payable). Non-workmen are not entitled to statutory severance payment. Note that if the terms of contract provide for a longer notice period or better severance pay, the employer must comply with the more favourable terms.

Certain State specific laws also provide for an additional service payment at the rate of 15 days’ salary for every completed year of service, payable in the case of both workmen and non-workmen.

In terms of possible additional payments, note that employers sometimes also provide contractual redundancy pay schemes that offer payments that are more generous than the statutory ones.

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Author: Kochhar & Co.

Date: December 2019