Severance pay

What it means

Severance is due when employment ends for organisational reasons or on health grounds on the employee’s side. The amount rises with years of service with the employer.

Under a termination agreement on the same grounds severance is usually higher than after notice, because the notice period falls away. That is why both sides often prefer an agreement.

No severance is due when employment ends by the employee’s own notice, on expiry of a fixed term or during probation. What matters is the reason for ending it, not who proposed it, which is why a termination agreement must state the organisational or health ground expressly.

How it works in practice

It is calculated from average monthly earnings, premiums and bonuses included. Planning should add the contributions that go with it.

If the organisational change is decided before the year end but the employment ends in the new year, the cost belongs to the year of the decision: a provision for severance is booked.

Before the conversation with the employee we work out the options for the client: notice with a notice period and severance, or an agreement with higher severance and an earlier end date. The comparison uses the full employer cost including contributions, not just the figure on the payslip.

What to watch out for

Notice on organisational grounds without genuinely abolishing the position is invalid. Hire someone else into the same job a month later and a court will say so, with wage compensation payable until judgment.

Before giving notice on organisational grounds the employer must offer other suitable work if it has any, part-time included. Fail to do so, or fail to be able to prove it, and the notice is as open to challenge as one for a job that was never really abolished, with a dispute lasting months.