Severance pay is the financial compensation that a company pays to its worker when he is fired from the company. Normally it does not apply, or is less, if there is an objective justification for the termination of the employment relationship.
In other words, severance pay is the payment that an individual receives from his employer when he decides to terminate his services.
Usually, if the dismissal is justified, due to poor performance or a disciplinary offense, for example, the worker cannot demand the compensation, or it is less compared to what he would receive if the dismissal were unjustified. However, it all depends on the legislation of each country.
For example, in the case of Spain, for unjustified dismissal, the compensation is equivalent to 33 days of wages per year of service. This, up to a maximum of 24 monthly payments. This measure, it should be clarified, applies to those contracts signed as of February 2012.
If the employment contract was signed before February 2012, the compensation will correspond to 45 days per year of service, up to a limit of 42 monthly payments, in the first tranche, that is, until February 2012. As of that date, the consider a second tranche where 33 days per year of service correspond. The results of both tranches are added to calculate the total compensation.
All of the above, it is worth specifying, applies as long as the company does not choose to reinstate the worker.
Likewise, if the dismissal is justified, and the authorities recognize it, the compensation is equivalent to 20 days of salary for each year of service, with a maximum of 12 monthly payments.
Factors influencing severance pay
The factors that influence the calculation of the severance pay are mainly the following:
- Worker's salary: The higher the remuneration, so will the compensation.
- Years of service: The longer the employment relationship, the greater the compensation will have to be.
- Causes of dismissal: If the dismissal is justified, the law could contemplate compensation, but not as high as when there is cause for dismissal.
Compensation and job flexibility
The higher the severance pay to be paid to the worker, the less the flexibility of the labor market.
In other words, if the compensation required for the fired employee is very high, there will be less incentive for the employer to make such a decision.