How do severance payments compare in Europe?
In recent years, the severance payable for unfair dismissal in Spain has been subject to several reforms. The 2012 Labor Reform reduced the amount of severance for unjustified dismissal in contracts signed thereafter from 45 to 33 days’ salary per year of service, with a limit of 24 months’ salary. Following the 2015 Tax Reform, severance for dismissal, exempt in the amount established as mandatory in the Workers’ Statute, is now subject to personal income tax where it exceeds €180,000.
One of the objectives of the Labor Reform was to make labor costs cheaper, considered to be one of the main reasons for the high rate of unemployment and the increase in temporary contracts in Spain. The measures taken included reducing the severance payable in cases of unjustified dismissal on the terms described above.
This measure was highly controversial and forced Spain to take a look at the rest of Europe. The question asked by the majority of Spaniards was: “are dismissals in Spain really more expensive than in other European Union countries?
In Austria, the system in force until 2003 provided for severance ranging from 2 to 12 months’ salary, depending on the worker’s seniority; however, following the 2003 reform, employers now make monthly contributions of 1.53% of the worker’s salary to a worker fund or cash pool that the worker is entitled to redeem upon dismissal. Moreover, changing jobs does not mean forfeiting the accumulated balance but rather that the new employer is obliged to continue making the monthly contributions, creating what is commonly known as the “worker’s backpack”.
Legislation in countries such as Germany and Belgium does not provide for severance for dismissal but does stipulate quite lengthy advance notice periods in cases of dismissal without cause, mainly depending on the worker’s seniority.
In Finland, following a regulated procedure prior to the decision to dismiss an employee (among other aspects, workers must be warned in order to be able to correct their behavior and, in all cases, prior to dismissal, workers have the right to be heard and an attempt must be made to find a solution to the dispute other than dismissal), workers must be given advance notice, the length of which will depend on each worker’s seniority and, if the dismissal is declared to be unjustified, severance of between three and twenty-four months’ salary must be paid.
Other countries apply systems similar to the Spanish system, based on the salary and seniority of the worker, such as Denmark, where severance for unjustified dismissal can be up to three months’ salary; Italy, where severance takes into account the number of company employees, in addition to the worker’s salary and seniority, with a general upper limit of twenty-four months’ salary; or The Netherlands, where a correction factor is also applied according to the worker’s personal circumstances.
It is therefore clear that legislation varies greatly from one European country to another and that instead of simply comparing the number of days’ salary per year of service, we should consider other factors that are equally or more important that the mere amount of the severance, such as advance notice mechanisms to help the affected worker find a job, the severance funding system or the social protection in place.
Garrigues Labor and Employment Law Department