The rules on severance pay in detail

Upon termination of employment, regardless of the cause, employees are entitled to receive the following severance payments:

  • Seniority premium: This is payable to employees with an indefinite term contract, irrespective of the reason for termination.  It is calculated at the rate of one week’s wages for each complete year of service, counted from the beginning of the employment. If an employee does not complete a year of service, payment is made proportionally, by multiplying the sums earned by 1.92%.
  • Accrued and proportional vacation:  On termination of employment, the employee is paid for vacation periods at a rate of 30 days for each period of 11 months worked or one day for each period of 11 days worked.
  • Accrued and proportional 13th month bonus:  This is paid as an additional month of salary per year, in three installments (in April, August and December) during the working relationship. It is a special bonus granted by the employer which does not form part of salary.  However, when the employment relationship is terminated, the employee is entitled to receive the proportion of this payment that has been accumulated.
  • Employees with an indefinite employment relationship employed for less than two years are also entitled to an advance notice payment equivalent to one month's salary.

Employees employed for more than two years only can be dismissed based on a justified cause set out in the Labour Code.

  • In addition to severance benefits (which are vested rights) these employees may claim an indemnification for unjustified dismissal based on length of service according to a schedule in the Labour Code, if the rules have not been complied by the employer.
  • For employees with an indefinite contract who started working for the employer on or after 14 August 1995, the indemnification is equivalent to 3.4 weeks of salary per each worked year for the first ten years.  Every year after this entitles the employee to one week’s additional salary.  If a year is not complete, they are entitled to a pro rata amount.
  • Employees with a fixed term contract or who employed on a specific project who are dismissed without a justified cause are entitled to an indemnity equal to the salary they would have received during the time remaining of the contract or the remaining part of the project.
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Author: Arosemena Noriega & Contreras

Date: December 2018