The rules on severance pay in detail
Unilateral termination by the employer based on redundancy or without cause (or “desahucio escrito del empleador” in the case of managers or employees who provide services in positions of trust), triggers the following payments:
- The employer pays compensation to the employee based on the number of years worked. Generally, the payment is based on the last month’s salary for each year worked or for portions of time over six months. However, this has two significant limitations: the amount (i) may not exceed 11 months’ pay and ii) may not exceed 90 Inflation Indexed Units (i.e. worth approximately USD 3,577).
- The two limitations that apply to the calculation base may, however, be voluntarily disregarded by the parties, in the employment contract or, for example, in a collective agreement.
Compensation in lieu of prior notice:
- This is equivalent to 30 days’ work, or payment of the last month’s salary. It has a legal limit of 90 Inflation Indexed Units (i.e. approximately USD 3,577).
- Note that both for severance and compensation in lieu of notice, the employer must consider what gross sum it needs to pay the employee as of the termination date. This may include social security contributions, bonuses and other permanent benefits, but will exclude benefits the employee may receive occasionally, such as a Christmas Bonus, for example.
- The employer must always pay for pending vacation days, pro rata vacation and all accrued pay.
Author: Munita & Olavarría
Date: December 2018