Restructuring legislation

Every private sector employee (with an employment contract extending to over one month) is entitled to severance pay upon termination of the employment relationship.

Provided that the employment relationship lasts longer than one month, from the first day of the employment relationship the employer is obliged to pay a contribution amounting to 1.53% of the monthly pay into an employee provision fund (Mitarbeitervorsorgekasse). No contributions must be paid for the first month, however (§ 6). The fund has to be selected in due time on the basis of a company agreement, that is between the employer and the works council. If there is no works council in the company, the employer has to select a fund and inform all staff members in writing within one week. If at least one third of the employees reject the chosen fund within two weeks, the employer has to suggest an alternative. Upon request of the workers concerned, an employees' organisation has to be consulted. If still no agreement can be established within two weeks after involving the employees' organisation, an arbitration board will decide upon the fund.

Upon termination of the employment contract, the worker is entitled to severance payment from the fund, unless (§ 14):

• the termination came into effect on demand of the worker;
• the termination came into effect by the employer because of wrongful behaviour of the worker;
• contributions have been paid into the fund for less than three years.

If the worker wants to draw on the payment, s/he has to inform the fund in writing within six months following the termination of the employment contract. The amount of severance payment is calculated based on the accumulated contributions by the end of the month when the entitlement becomes due.

The worker can also opt for leaving the money in the fund for later use. In the latter case, contribution periods of different employers will be aggregated. The same holds true for cases of resignation by the employee, as well as for employees in short-term employment (less than three years).

This provision applies to anybody who started an employment relationship in the private sector after 1 January 2003. The provision was further extended to freelancers (Freie DienstnehmerInnen) as of 1 January 2008.

In case of individual redundancy:

Both the employer and the dismissed worker have to choose between the notice period during which the employment contract is still running and the severance pay by stopping the contract immediately. In the later case, the severance pay is equivalent to the wage and benefits multiplied by the duration of the notice period that should have been notified.

In case of collective dismissals:

In addition to the unemployment benefits, workers affected by the collective dismissal are entitled to a special severance pay. The amount of this allowance is equal to half the difference between the net wage and the amount of the unemployment benefits the worker receives. The maximum gross salary value used for this calculation amounts to €3,144.66.

The employee is entitled to four months of severance pay, starting the day after his/her working agreement or after his/her notice period ended.

Certain categories of workers are excluded, such as those in the construction sector, and port and ship workers.

For the purpose of calculating the special indemnity, the law considers that the collective dismissal is deemed to occur if during any given 60 day period, a notice of termination is given to:

• six or more employees in an enterprise employing between 20 and 59 people; and
• 10% or more of the workforce in an enterprise employing 60 people or more.

In case of fixed-term contracts:

There is no severance pay during the trial period.

After the trial period, the severance pay is equivalent to the amount of salary that was due until the end of the contract. Nevertheless, this amount may not exceed twice the wage corresponding to the duration of the notice period that would have been calculated in the case of a permanent contract.

While there is no general provision on statutory severance pay in place, workers are entitled to redundancy pay equal to one month's salary in the case of individual or collective dismissal on economic grounds. With a decision of the Council of Ministers, or on the basis of collective labour agreements or employment contracts, compensations for a longer period could be defined. If within this period the employee started the work with lower salary, he/she is entitled to receive the difference in remuneration for the affected time period.

According to the Labour Act, Article 126, severance pay is the amount of money paid by the employer to a worker who was dismissed after two years of continuous work as a means of securing income and mitigating the adverse consequences of the dismissal. Severance pay shall not be obtained by a worker who was dismissed due to his or her misconduct and by a worker who at the time of dismissal is at least 65 years old and has 15 years of pensionable service.

An employee whose employment contract is terminated after two or more years of continuous service has the right to severance pay, unless the notice is due to the employee's misconduct, in which case no right to severance pay holds. Under the provisions of the Labor act, in the event of a business transfer, the years of service with the previous employer are added to the transferred employment contracts, which are considered to be continuing contracts from the previous employment.

The severance pay amount is determined by the length of service. The minimum severance pay amount for each year of service is one-third of the average monthly salary earned by the employee in the three months prior to the termination of the employment contract. Unless otherwise specified by law, collective agreements, employment regulations or employment contracts, the total severance pay amount may not exceed six times the average monthly salary earned in the three months prior to the termination of the employment contract (Article 126, Paragraph 4).

In accordance with the Book of Rule on the Law on Personal Income Tax, severance pay due to business reasons is exempt from taxation up to the amount of EUR 821.71 for each year of service with the same employer. Severance pay due to injury or occupational illness is exempt from taxation up to the amount of EUR 1,061.78 for each year of service with the same employer. In this case, the payment of the amount is above the non-taxable part, this part of severance payment is considered the worker's salary. Therefore, social insurance contributions as well as income tax and surtax should be paid on that sum.

The termination of employment law 24/1967 introduces the obligation for compensation to redundant employees who have a continuous service of at least 104 weeks. Redundancy compensation to employees is covered by the redundancy fund which is entirely financed by employers' contributions (1.2% on employees' gross earnings). The redundancy fund covers both individual and collective redundancies.

Compensation to redundant employees is calculated on the basis of the employee's length of service, as described in chart IV attached to the law:

• for up to 4 years of service, severance pay is two weeks for every 52 weeks of continuous employment;
• 5–10 years of service, two and a half weeks for every 52 weeks of continuous employment;
• 11–15 years of service, three weeks for every 52 weeks of continuous employment;
• 16–20 years of service, three and a half weeks for every 52 weeks of continuous employment;
• 21–25 years of service, four weeks for every 52 weeks of continuous employment.

The redundancy fund has upper thresholds for compensation payable to redundant employees (amount subject to change).

An employee whose employment relationship is terminated by notice given by an employer due to reorganisation or by agreement for the same reason is entitled to receive severance pay. The severance pay amounts to one month's payment for termination of employment in the first year, two months for the second year and three months for those who have worked more than two years for the employer.

For the purpose of paying the severance pay to the employee concerned, average monthly earnings are considered as average earnings.

This regulation applies to collective dismissals of employees as well as to individual dismissals and is commonly applicable both for full-time and part-time contracts, for permanent and fixed-term contracts.

Dismissed employees are entitled to notice pay.

For salaried workers this is the following (for non-salaried workers this is regulated in collective agreements):

• one month notice pay for service of up to five months;
• three months for service of five months to two years and nine months;
• four months for service of two years and nine months to five years and eight months;
• five months for service of just over five years and eight months to eight years and seven months;
• six months for longer service than eight years and seven months.

In addition, for service of 12, 15, 18 years employees are entitled to redundancy pay under Section 2a of the Salaried Employees Act (one, two and three months’ salary respectively).

These are valid for individual as well as collective dismissals; there is no general legal entitlement to anything more than is provided for in an individual dismissal unless envisaged by a collective agreement or social plan.

In cases of termination of the employment contract due to redundancy, the employer must pay compensation in the amount of one month's average wage of the employee calculated on the basis of the previous six months' wage.

In case the cancellation of an fixed-term contract due to redundancy, the employer must pay compensation to the extent that corresponds to the wage that the employee would have been entitled to until the expiry of the contract term. No compensation shall be paid if the employment contract is cancelled due to force majeure.

If an employee cancels their employment contract extraordinarily for the reason that the employer is in fundamental breach of the contract, the employer must pay the employee compensation to the extent of three months’ average wages of the employee. This compensation is not subject to the provisions of Chapter 7 of the Law of Obligations Act. The court or labour dispute committee may change the amount of compensation considering the circumstances of the cancellation of the employment contract. The amount of compensation may not be reduced by benefits and allowances paid to the person by the state.

If an employer gives advance notice of cancellation later than provided by law or a collective agreement, the employee has the right to receive compensation to the extent to which he or she would have been entitled to upon adhering to the term for advance notice.??If the employer wishes to terminate the employment contract with immediate effect, the employer may choose to remunerate the advance notice period in money. This will be calculated based on the average working day salary of the employee for every working day that advance notice of cancellation of the employment contract was given less.

Those employed with the same employer from 5 to 10 years are entitled to an additional one month's salary from the unemployment insurance fund (Töötukassa). For persons who have been working for the same employer 10 or more years, two months' salary is added by the fund.

These provisions apply to individual as well as collective dismissal cases.

State officials can be entitled to severance pay when dismissed, or if resigning after at least 150 days since the start of an indefinite lay-off. Severance pay will then be applicable if a job centre has not been able to find work or training for the employee within one month following the dismissal or resignation. The employee must be between 45 and 64 years of age and must not be entitled to any kind of pension. In order to qualify for the severance pay, the employee must further have been employed by the state for a minimum of five contiguous years prior to the dismissal, with an average weekly working time of at least 16 hours.

Severance pay is not formally regulated for any other types of employers or contracts.

Employees with eight months of seniority or more for the same employer on an open-ended contract are legally entitled to severance compensation in case of dismissal on economic grounds or for personal reasons. However, employees are not eligible for severance compensation in case of dismissal for misconduct or negligence.

Even though regulated, the law only establishes a minimum threshold for severance payments. The latter are calculated upon the gross monthly salary of the employee before the termination of the employment contract. Accordingly, they cannot be lower than the following amounts:

• 25% of the gross monthly salary times years of seniority, for employees with up to 10 years of seniority;
• 33.33% of the gross monthly salary times years of seniority, for employees with 11 years of seniority or more.

The gross monthly salary of reference for the calculation above corresponds to the most advantageous formula for the employee between the following:

• The monthly average of the 12 months prior to the termination of the contract or the monthly average of all months prior to the termination, if the length of service is less than 12 months;
• A third of the monthly salary for the three months prior to the termination of the contract.

In the last case, any annual or exceptional bonus paid to the employee needs to be considered only up to an amount calculated in proportion to the period for which the bonus is paid. Moreover, the severance payment is calculated in proportion to the length of time the employee worked full-time and part-time.

Severance compensation is not cumulative with any other indemnity of the same nature.

Under the Employment Protection Act, an individual employee on permanent contract is entitled to severance pay if the employer indicates in the notice of dismissal that the dismissal is based on operational grounds and offers compensation or if the worker does not file a complaint against the dismissal within three weeks time.

In this case, severance payments of half a month’s wage for each year of the employment relationship can be filed. The maximum payment stipulated by law equals to 12 months' salary. This rises to 15 months' salary for employees aged 50 or older, with at least 15 years of continuous service, and to 18 months' salary for employees aged at least 55 and with at least 20 years of continuous service.

There is legal entitlement to severance pay for an employee in the case of a collective dismissal if a works council is in place. Under the Works Council Constitution, in case of collective dismissals due to operational grounds, the employer and the works council negotiate a social plan that includes redundancy compensation.

In case the employer does not comply to the social plan, the worker may turn to the labour court for severance pay.

By virtue of the latest legislation (article 66, Law 4808/19.06.2021) if the dismissal is for a reason other than the ones specifically prohibited by the Law (i.e. due to discrimination, harassment, etc.) the Court awards, in favour of the employee, an amount of additional compensation, which may not be less than 3 month's ordinary pay or more than twice the compensation specified by law due to termination at the time of dismissal. When determining the amount of additional compensation, the Court takes into account, in particular, the intensity of the employer's fault, and the property and financial situation of the employee and the employer. Any non-payment of the legal severance pay (in full or in part) results in the invalidity of the termination of the employment contract; however, the new law states that “when the amount of the compensation paid is less than the amount of the legal compensation, due to an obvious error or reasonable doubt as to the basis for its calculation, the annulment of the complaint is not recognized, but its completion is ordered”. In other words, the invalidity of the termination is not recognized, but the termination compensation is ordered to be supplemented.

The Law repeals, for the first time, the distinction between employees and blue-collar workers regarding dismissal compensation (which under previous legal framework was significantly lower for blue-collar workers), starting from 01.01.2022.The distinction between employees and craftsmen (as far as severance pay is concerned) is no longer valid and this is one of the main changes brought by the Law. Until 31.12.2021, the compensation for dismissal of craftsmen was significantly lower than that of employees while, from 01.01.2022, regarding the the severance pay, it is provided that “… the monthly wage of the craftsman is considered to be the 22 wages, unless they are already paid a monthly salary”.

As of July 2019, employers must pay severance indemnities and corresponding taxes to the employees’ bank accounts via wire transfer instead of using a bank cheque. The new law also states that the prescription periods for filing employees claims for severance pay (three and six months from the dismissal date) may be suspended if employees file a petition before the labour inspectorate for a labour dispute or conduct of a reconciliation procedure, until the procedure is finalised, and corresponding decision issued. As of August 2019 (amendment 36542/1007 of Law 4611/2019) the  employer is ot obliged to provide a valid reason for termination of employment.

The employer is required to report the following terminations to the ERGANI database (that is the Information System of the Ministry of Labour): voluntary termination of employment (Law 4488/2017); termination of an open-ended employment contract; and termination of a fixed-term employment contract.

The notification must be made within four business days from the final day of employment, and must be accompanied by a scanned document signed by both the employer and the employee, or an extrajudicial declaration of the employer indicating that the employee is leaving the employment on a voluntary basis and that the departure will be reported via the ERGANI system. In the latter case, the extrajudicial declaration must be delivered to the employee within four business days after he/she leaves the employment and the ERGANI notification must take place on the day after the extrajudicial declaration is delivered. Failure to comply with these requirements will result in the employment contract being deemed to be terminated by the employer (meaning that the employer will be liable for severance payments).

Law 4093/2012: An open-ended employment agreement that has a duration of more than 12 months can be terminated after prior written notice from the employer. Specific periods of notice between one and four months are laid down depending on the length of service with the employer (for further details see notice period for employees). In the case of an open-ended employment agreement terminated by the employer, the severance pay is calculated as detailed below.

Length of service with the same employer:

• from 1 day to 1 year no severance pay is due; and
• from 1 year to 4 years severance pay of 1 month is due if the employer complies with the statutory period of notice. If the employer does not comply with the period of notice, a severance pay of 2 months is due.

Correspondingly:

• from 4 to 6 years, a severance pay of 1.5 months is due if the employer has complied with the legislation on the notice period and 3 months if not;
• from 6 to 8 years, a severance pay of 2 months is due if the employer has complied with the legislation on the notice period and 4 months if not;
• from 8 to 10 years, a severance pay of 2.5 months is due if the employer has complied with the legislation on the notice period and 5 months if not;
• from 10 to 11 years, a severance pay of 3 months is due if the employer has complied with the legislation on the notice period and 6 months if not;
• from 11 to 12 years, a severance pay of 3.5 months is due if the employer has complied with the legislation on the notice period and 7 months if not;
• from 12 to 13 years, a severance pay of 4 months is due if the employer has complied with the legislation on the notice period and 8 months if not;
• from 13 to 14 years, a severance pay of 4.5 months is due if the employer has complied with the legislation on the notice period and 9 months if not;
• from 14 to 15 years, a severance pay of 5 months is due if the employer has complied with the legislation on the notice period and 10 months if not;
• from 15 to 16 years, a severance pay of 5.5 months is due if the employer has complied with the legislation on the notice period and 11 months if not;
• from 16 and above, a severance pay of 6 months is due if the employer has complied with the legislation on the notice period and 12 months if not.

There are no differences for the above according to dismissal types (individual or collective) or contract types (for instance, part-time or full-time). In case of dismissal (for any reason, including redundancies) of a blue-collar worker, severance pay varies according to the length of service, from 5 days to 165 days' wages, regardless of whether the the employer complies with the statutory period of notice. 

A fixed-term contract can be terminated before its end without notice period for a significant reason, either by the employer or by the employee. 'Significant reason' consists of the existence of events during the contract which make it impossible to continue the agreement in good faith (for instance, breach of contractual obligations and damage caused by the employee with failure to comply with the essential terms of the contract and detraction of the employee by the employer, and so on). If a significant reason exists, the employer is not obliged to pay compensation. If the contract is terminated and no significant reason exists, the employee can go to court to claim the wages that would have been received until the end of the contract.

An employee shall be entitled to severance pay if his/her employment relationship is terminated:

• by the employer;
• upon the dissolution of the employer without succession; or
• if during a transformation as a legal succession or a business transfer, the transferee employer is not covered by the labour code.

The entitlement to severance pay shall only apply upon the existence of an employment relationship with the employer for certain time lengths (specified below) at the time when the notice of dismissal is delivered or when the employer is terminated without having a legal successor. The regulation states that any period of at least 30 consecutive days for which the employee did not receive any wages (for example was on unpaid leave) does not count into the period for which entitlement for severance pay is considered.

The following exceptions apply:

• maternity and parental leave applies, as well as any leave of absence without pay for nursing or caring for a child. (“Parental leave” was added to the types of leave available to employees with an effect of 1 January 2023, under Article 77 of Labour Code)
• and unpaid leave of absence for the purpose of reserve military service for a period of no more than three months.

Severance pay shall be the sum of the absentee pay due for:

• one month, for up to three years of service;
• two months, for up to five years of service;
• three months, for up to 10 years of service;
• four months, for up to 15 years of service;
• five months, for up to 20 years of service; and
• six months, for up to 25 years of service.

The amount of severance pay shall be increased by 1-3 months’ absentee pay (as detailed in the labour code) if the employment relationship is terminated within the five-year period before the date when the employee reaches the age limit for old-age pension. There are slight differences to the timeline with amounts going up to eight months after 20 years of service if the worker is employed in the public sector (see Law XXXIII of 1992 on the Status of Civil Servants, Article 37(6)).

The employee shall not be entitled to receive severance pay if they are:

• a pensioner at the time when the notice of dismissal is delivered or if the employer terminated without succession;
• dismissed for reasons connected with his/her behaviour in relation to the employment relationship or on grounds other than health reasons, or
• employed on a fixed-term contract (except in some cases when an agreement is made otherwise).

Collective agreements can derogate from the above provisions on severance payments, also to the detriment of workers concerned (hence the collective agreement could set, at least in principle, lower severance pay than stipulated by legislation). There is no direct legislation regarding severance pay in collective dismissals.

An employee who is being made redundant is entitled to a statutory payment, conditional on them having at least 104 weeks of continuous service in an employment insurable under the Social Welfare Consolidation Act 1993; is over the age of 16; and is being made redundant as a result of a genuine redundancy situation.

Employees made redundant are entitled to two weeks’ gross pay for each year of service, plus one week's wages. The payment calculation is subject to a ceiling of €600 per week. Statutory redundancy payments are exempt from tax. Any ex gratia redundancy amount (above the legal minimum) is subject to taxation.

If the employer company is liquidated and is unable to pay the redundancy entitlements, redundant employees can seek payment from the Social Insurance Fund, maintained by the Department of Social Protection, for their statutory entitlements.

In 2022, the Act was amended to make provision for payment, on the redundancy of a person who was laid off for a period as a result of COVID-19 related restrictions and whose redundancy lump sum is reduced by virtue of that period of lay-off, of an additional sum from the Social Insurance Fund. The amount of that additional sum is equal to the difference between the actual lump sum due to the person on redundancy and the amount to which they would have been entitled but for the relevant period of lay-off.

In Italy, there is no severance pay or redundancy compensation as such. However, upon termination of the employment relationship, the employee receives the so called TFR (Trattamento di fine rapporto), which is a part of workers' wages whose payment is deferred upon termination of the employment relationship. Hence, it cannot be considered a proper severance pay, since it is constituted by a certain amount of salary set aside each month. The TFR is calculated according to the formula of a year's overall salary divided by 13.5, plus 1.5% for each year of service plus compensation for inflation.

The TFR must be paid to the worker in any case of termination of the employment relationship (and therefore independently of the reasons that determined it), except in the case of its full allocation to supplementary pension funds. The law provides for some specific hypotheses in which part of the TFR, which is usually set aside, to be anticipated during the employment relationship. Since 2004 (Legge 243/2004) the TFR can be used to finance complementary pension schemes and be destined to a complementary pension fund. This pension complements the ‘public-law’ pension guaranteed by the compulsory social security system. This means that the worker can actually choose whether to receive the TFR upon termination of the employment relationship, or to pay the sums accrued into a Complementary Pension Fund, which will then provide the worker with a complementary pension.

Starting from 1 January 2007, the TFR has assumed the prevailing purpose of financing complementary pension schemes. There is now an obligation for workers to decide within six months after their hiring the destination of the TFR, i.e. whether to allocate it to a supplementary pension fund or to maintain it in the company. If the worker does not express a preference, the TFR is automatically destined into the supplementary pension fund. This decision is irrevocable.

Law 296/2006 also states that the TFR that the workers of companies with at least 50 employees decide to keep within the company and not to allocate to complementary pension schemes is managed by a special fund set up at INPS (Fund for the provision of the TFR to the employees of the private sector, known as Fondo di Tesoreria, Treasury Fund).

As per changes introduced by Law 4 August 2017, no. 124, workers can also split TFR between the company fund and a pension fund and require an anticipated payment of pension benefits resulting from the payment of TFR into complementary pension funds in case of unemployment for a period exceeding 24 months.

The employee is entitled to severance pay in certain cases of dismissal, including redundancy due to a reduction in numbers of employees. If a collective agreement or the employment contract does not specify a higher severance pay, the employer has to pay a severance pay of the following amounts:

• one month average earnings if the employee has been employed by the employer for less than five years;
• two months average earnings if the employee has been employed by the employer for five to 10 years;
• three months average earnings if the employee has been employed by the employer for 10 to 20 years; and
• four months average earnings if the employee has been employed by the relevant employer for more than 20 years.

In compliance with section 75 of the labour law, 'average earnings shall be calculated based on the work remuneration calculated for the work of the employee during the previous six months, on supplementary payments specified in regulatory enactments, collective agreements or employment contract, as well as from bonuses'. The law also details seven specific cases for the calculation of the payments, related to specific employment situations.

In compliance with the Labour code, dismissed employees are paid different severance payments depending on the reasons for termination, the length of service, the type of contract and other factors.

When terminating an employment contract on the initiative of the employee for valid reasons (article 56), the employer must pay the employee a severance pay in the amount of two times the average salary (see last paragraph for details of calculation). The amount is reduced to one average salary for employment relationships that last for less than one year. Law No XIV-1189 of 28 June 2022 (came into force on the 1st of August, 2022) extendet the list of employees entitled to terminate their contract of employment for important reasons (Art. 56), adding that not only employees caring for family members but also those caring for "a person living with the employee" may do so. Severance pay/redundancy pay itself has not changed under this Article 56 of the Labour Code. However, as per those mendements the employer is automatically obliged to pay these employees the amount of the severence pay provided for in Article 56(2) of the Labour Code.

When terminating an employment contract on the initiative of the employer without any fault on the part of the employee (article 57), the employer must pay the employee a severance pay in the amount of two times the average salary. The amount is reduced to half the average salary for employment relationships that last less than one year.

The Law on guarantees for employees in the event of employer insolvency and long-term service allowances establishes a procedure to pay the dismissed employee a long-term service allowance, taking into account the continuous length of employment in the same workplace. According to articles 9-11, a long-term service allowance requires at least five years of continuous employment relationship under the terminated contract on the date of dismissal, provided that the employee is dismissed on the initiative of the employer without any fault on the part of the employee. Eligible employees are paid this allowance from the Long-term Service Allowance Fund. In the case of employees dismissed from budgetary establishments and from the Bank of Lithuania, the allowance is paid by their employer. Redundant and eligible employees receive the following compensation from the Long-term Service Allowance Fund, unless a new employment contract is signed between the employee and an employer within three months from the date of redundancy:

• compensation amounts to 77.58% of the employee’s average salary for one month if the length of service with the employer is from 5 to 10 years on the day of termination;
• compensation amounts to 77.58% of the employee’s average salary for two months if the length of service with the employer is from 10 to 20 years on the day of termination;
• compensation amounts to 77.58% of the employee’s average salary for three months if the length of service with the employer is 20 years or more on the day of termination.

For the calculation of the allowance, the employee’s salary is defined as the income from employment received in the previous 12 months, as set in the regulations of the Long-term Service Allowance Fund (articles 5-11). The Long-term Service Allowance Fund is administrated by the State Social Insurance Fund Board under the Ministry of Social Security and Labour.

According to the Labour code (article 59), an employer is entitled to terminate an employment contract with an employee due to reasons not specified in article 57(1) by giving notice 3 working days in advance and paying a severance pay in the amount of no less than six times the employee’s average salary. This provision does not apply to state and municipal institutions or establishments funded by the state or municipal budget.

When terminating an employment contract without the will of the parties to the employment contract (article 60), the employee is paid a severance pay in the amount of his or her average salary for one month. The amount is reduced to half the average salary for employment relationships that last less than one year.

When terminating an employment contract in the case of employer bankruptcy (article 62), the employee is paid a severance pay in the amount of two times the average salary. The amount is reduced to half the average salary for employment relationships that last less than one year.

The Labour code (article 69) provides for a severance pay in case of fixed-term employment. If an employment relationship under a fixed-term employment has lasted for over two years and has expired at the end of its term, the employee is paid a severance pay in the amount of one monthly wage.

The average pay for employees is calculated on the basis of their salary over the three calendar months prior to their dismissal in accordance with Description No 496 of the average wage calculation procedure (21 June 2017). In accordance with this legal document, the period covered is the last three calendar months preceding the month (or any part thereof) for which average wage is payable (paragraph 5).

A dismissed employee, except in the case of gross misconduct, is entitled to a severance allowance (Indemnité de départ) if they have at least five years of service within the company. Employees are entitled to:??Severance allowance and notice period according to length of service:

The allowance is calculated on the basis of wages paid to the employee for the previous 12 months which immediately preceded the notification of termination. The following items are included in the wages or salaries: financial allowances in the case of illness, standard allowances and supplements. The following items are excluded from wages and salaries: overtime pay, bonuses and the allowance for incidental expenses.

The employer must pay the severance allowance at the end of the notice period whether the notice was worked out or not. The amount is not subject to income tax or social contributions.

Employers of fewer than 20 workers can opt for an extended period of notice in case of redundancy instead of severance allowance, applicable for employees dismissed for economic reasons with a seniority of more than five years.

Option without allowance (businesses with fewer than 20 employees):

There is no legal severance pay or redundancy compensation other than the compensation in lieu of notice relating to redundancies.

Compensation in lieu of notice relating to redundancies

• Redundancies involving contracts for an indefinite period of employment:

On receiving notice from the employer, the employee has the option to either continue to work during the notice period, or to request the employer to pay him/her a sum equal to half the wages that would be payable in respect of the unexpired period of notice.

If the employer decides not to allow the employee to continue to work during the notice period, the employer is obliged to pay to the employee a sum equal to the full wages that would be payable in respect of the unexpired period of notice.

• Redundancies in cases involving fixed-term contracts:

Where there is not a justified reason to terminate an employment that is on definite basis after the probation period, the party who breaches the contract is liable to pay the other party a sum equal to one-half of the full wages that would have accrued had the contract of employment remained in force.

The transition payment

With the introduction of the Balanced Labour Market Act (January 2020) employees have the right to receive transitional payment from the day they began their employment, if their employment is terminated at the initiative of the employer. Employees whose contract concludes or is concluded due to seriously culpable act on the part of the employer, are also entitled to such compensation.

The transition payment has, for the most part, replaced the practice of dismissal compensation packages that were doled out by cantonal courts whenever a dismissal took place without mutual agreement or the longer but often cheaper route by seeking approval from public employment service (UWV). The choice between the two options used to be at the employers' discretion. The main idea behind the new legislation is to make the dismissal process quicker, simpler, and fairer. For small and medium-sized enterprises (SMEs), a special transition period was in place until 2020. 

On 14 September 2018, the Dutch supreme court ruled on the employee's right to a transition payment in the event of partial termination of his/her employment contract. It was decided that in this case, the employee is entitled to a partial transition payment.

However the supreme court also stated that there were several conditions to this ruling:

• the partial termination was a necessity, for example, for redundancy reasons or for a long-term incapacity to work;
• the employee lost at least 20% of his/her working hours; and
• the loss of working hours is expected to be permanent.

No transition payment is due in case of serious employee culpability and after retirement age.

For each year that the employment contract has lasted, the transition payment is equal to one third of the salary per month and a proportional part thereof for a period that the employment contract has lasted less than one year. However, such compensation is subject to a cap, to view the current cap, visit the Government of the Netherlands. Further rules may be laid down by order in council regarding the calculation method of the transition payment.

Deviating from the dismissal payment in a social plan

According to the Royal decree on dismissals, an employer can, in cooperation with the works council and/or in accordance with a collective bargaining agreement, set up a social plan. Alternatively, a social plan can be agreed at a sector level. In this case, employer organisations and trade unions are the primary actors in establishing the conditions of the plan. A social plan should outline what will happen in case of a restructuring, possibly extending severance payments and placement policies beyond what is legally required. More frequently, the goal of a social plan is to minimise dismissals by formulating a plan for placing redundant employees at other companies. A collective agreement can also stipulate that a social plan has to be made when a collective dismissal or restructuring is imminent. A social plan can increase an employer's chance of getting a dismissal permit if this becomes necessary.

The day after notice periods ends, employees are entitled to a severance payment equal to:

• the monthly remuneration, if the length of service is for less than two years;
• twice the monthly remuneration, if the length of service is from two to eight years;
• three times the monthly remuneration, if the length of service is over eight years.

The duration of employment is calculated including previous employment periods, if a transfer of undertakings had taken place before article 23(1) of the Labour Code . The amount of the severance payment cannot exceed 15 times the minimum remuneration for work as defined under separate provisions. The severance payment is calculated based on the way of calculating the cash in lieu of holiday leave.

Severance pay is paid by employers employing at least 20 employees and only in two situations:

• if the termination of employment is based on collective dismissal (within 30 days, dismissals of at least 10 workers in companies with 20-99 employees, at least 10% of workforce in companies with 100-299 employees or at least 30 dismissals in companies employing more than 300 employees);
• in case of individual termination of employment, if the termination is due to reasons not attributable to the individual employee.

In other words, employees in companies employing less than 20 employees have no right to the redundancy payment. 

If the company is liquidated or bankrupt, the liquidator or official receiver is obliged to pay severance from the company assets. If this is not possible, he/she must apply to the Employee Benefits Guarantee Fund, for supplementing the missing funds. In any case the affected employee is compensated.

In 2011, severance entitlements were reduced from 30 to 20 days pay per year of service. Law 69/2013 further reduced severance entitlements to a maximum of 12 times the individual’s base salary plus seniority pay or 240 times the statutory minimum wage (or 18 times the individual's base salary plus seniority pay in case of fixed-term or temporary contracts). Law 13/2023 of 3 April changes the calculation of the compensation.

As a result of these and prior changes, severance will generally be based on three different formulas for periods of service before, during and after the following dates:

• Employment contracts prior to 1 November 2011: compensation is equivalent to one month of base salary per year of seniority.
• Employment contracts between 1 November 2011 and 30 September 2013: compensation is equivalent to 20 days of base salary per year of seniority.
• Employment contracts from 1 October 2013 to 30 April 2023: compensation is equivalent to 18 days of base salary per each complete year of seniority (in the first 3 years, when the contract has not reached 3 years on October 1 2013) and to 12 days of base salary per each complete year of seniority (in the subsequent years until the date of termination).
• Employment contracts before 1 May 2023 (Law 13/2023 of 3 April): compensation is increased from the current 12 to 14 days times the individual’s base salary plus seniority pay per each complete year of seniority (article 366). The new amount will only be applicable as from the entering into force of the new law, which means that for older contracts the compensation will be calculated based on 12 days in relation to the previous years.

The compensation cannot exceed 20 times the minimum national wage (€760 in 2023, total €15,200). To view the current national minimum wage, visit Eurostat.

This refers both to individual and collective dismissal.

Additionally, Law 13/2023 of 3 April amends Labour Code in its articles 344 and 345 and establishes the amount of the compensation as a result of the termination of fixed-term contracts is increased to 24 days times the individual’s base salary plus seniority pay per each complete year of seniority.

The Compensation Fund (Fundo de Compensação do Trabalho) and the Guarantee Fund for Work Compensation (Fundo de Garantia de Compensação do Trabalho - FGCT) were extinguished since May 2023. They were used to partly finance severance payments and were applicable in situations of both individual and collective dismissals.

The Labour Code provides (only as a mere possibility) that employees dismissed for reasons which do not pertain to their person may benefit from redundancy compensation under the terms stipulated:

• by the law. Such pieces of legislation were indeed applicable to certain industries (and in particular to state-owned units), but today they are no longer in force;
• by the applicable collective agreement.

The Labour Code - as a general law - therefore does not include explicit provisions on redundancy compensation; compensatory payments are currently only provided in collective agreements.

According Act No. 311/2003 Coll. of the Labour Code, the employer is obliged to grant severance pay after giving notice to an employee, or if the employment relationship is ending by mutual agreement, for the following reasons:

• if the company or business is dissolved or relocated and the employee does not agree with the change;
• if an employee becomes redundant due to change in his or her duties, technical equipment or the reduction in the number of employees is aimed at securing work efficiency, or due to other organisational changes having an impact on employment;
• if the employee has lost his or her ability to perform the work due to changes in health conditions as a result of an occupational disease or the threat of such a disease.

The minimum amount of severance pay depends on the employee's number of years in service for the employer.

When employment is terminated by notice, the minimum amount of severance pay is equal to one to four times the employee's average monthly earnings, according to the number of years in service (at least from 2 to 20 years). For instance, employees that have been working for the employer for at least 2 years but less than 5 years are entitled to one monthly earning, employees that have been working from 5 to less than 10 years are entitled to two monthly earnings, etc. Employees who have been working for the employer for less than 2 years are not entitled to severance pay.

If employment is terminated by agreement (the employee leaves the company before the statutory notice period), the severance pay is between one and five monthly average earnings (employees in service less than two years are entitled to one monthly earning and other employees specified above from two to five monthly earnings).  

A severance allowance applies also when an employer terminates an employee's employment contract (by notice or by agreement) for the reason that the employee cannot longer perform his or her job as a result of an occupational accident, occupational disease or the risk of such a disease. The allowance equals to at least 10 times the employee's average monthly earnings.

An employer who cancels a permanent employment contract for a business reason (including cases of collective dismissals, that is at least 10 workers in companies with 21-99 employees, at least 10% in companies with 100-299 employees or 30 dismissals in larger firms) is obliged to pay the worker severance pay. The basis for the calculation of severance pay shall be the average monthly salary which the worker received during the last three months before cancellation. The worker is entitled to severance pay amounting to:

• one-fifth of the wage basis for each year of employment with the employer if the worker has been employed with the employer for more than one and up to ten years,
• one-quarter of the wage basis for each year of employment with the employer if the worker has been employed with the employer for a period from ten to twenty years,
• one-third of the wage basis for each year of employment with the employer if the worker has been employed with the employer for a period exceeding twenty years.

The amount of severance pay may not exceed tenfold the average monthly salary which the worker received during the last three months before cancellation, unless otherwise stipulated by a branch collective agreement. In proceedings of compulsory settlement, the worker and the employer may agree in writing about the method and the form of paying severance pay or a reduction of the minimum statutory amount of severance pay if due to the payment of severance pay the existence of a larger number of jobs with the employer would be jeopardised.

The employer must pay severance pay to the worker upon the termination of the employment contract unless otherwise provided by a branch collective agreement.

A worker whose fixed-term employment contract has been terminated is also entitled to severance pay, except in cases when a worker has replaced a temporarily absent worker, performed seasonal work for less than three months in one calendar year or performed public works/job in the frame of active employment policy.

In the case of termination of a fixed-term employment contract concluded for a period of one year or less, the worker is entitled to severance pay in the amount of one fifth of the wage basis (i.e. average monthly salary of a full-time worker during the last three months prior to the termination of the employment contract). If the fixed-term employment contract exceeded the period of one year, the worker is entitled to severance pay increased by a proportionate part of severance pay for each month of work (i.e. 1/5 of wage basis + 1/12 of 1/5 of wage basis for every month employed beyond one year of employment).

In the event of fair dismissal, legislation requires that employees are paid a minimum legal compensation of 20 days’ pay for each year of service, up to a maximum of 12 months’ pay.

In the event of unfair dismissal of an employee who had an open-ended contract, legislation requires that employees are paid a minimum legal compensation of 33 days’ pay for each year of service, up to a maximum of 24 months’ pay. 

In enterprises of fewer than 25 employees, the Public Fund of Wage Warranty (Fondo de Garantía Salarial) will pay 40% of the legal indemnification of employees in collective redundancies (within 90 days, more than 5 employees made redundant if the whole workforce is affected; at least 10 employees in companies with fewer than 100 employees; 10% of the employees in companies between 100 and 299 employees; and at least 30 employees in companies with more than 299 employees).

Severance pay for temporary contracts was modified by Royal Decree 10/2010. It established that the severance pay will increase annually by one day per year of service, from the eight days per year of service paid in 2010 to 12 days as of 1 January 2015. Thus, severance pay for temporary contracts is now fixed at 12 days per year worked. If the employer dismisses a temporary worker before his/her contract expires and dismissal is declared unfair, severance pay will be equal to 33 days’ pay for each year of service, up to maximum of 24 months’ pay.

Temporary substitutes that replace workers (for example, for maternity leave) do not receive severance payment.