The Supreme Court changes the method of calculating severance for dismissal
On September 29, 2014, the Supreme Court handed down a judgment reinterpreting the method of calculating severance for dismissal for contracts signed prior to the 2012 Labor Reform.
The 2012 Labor Reform amended the amount of severance for unjustified dismissal, reducing it from 45 days’ salary per year of service, up to a maximum of 42 months’ salary, to 33 days’ salary, up to a maximum of 24 months’ salary.
This change did not apply across the board to all workers, but rather it was agreed that the new severance amounts for dismissal would only apply to contracts signed after February 12, 2012, the date on which the Labor Reform came into force.
For contracts signed before the Labor Reform, a transitional regime was established whereby severance for dismissal was calculated as follows:
i) First portion: length of service prior to the Labor Reform.
The worker’s length of service in the first portion is calculated at a rate of 45 days’ salary per year of service, up to a maximum of 42 months’ salary.
ii) Second portion: length of service after the Labor Reform.
The worker’s length of service in the second portion is calculated at a rate of 33 days’ salary per year of service, up to a maximum of 24 months’ salary.
iii) Applicable limits
The upper limit of the severance for the two portions cannot exceed the equivalent of 720 days’ salary, unless the amount of the first portion exceeds 720 days’ salary, in which case the resulting figure would be applied as the maximum severance payable, provided it does not exceed 42 months’ salary.
Prior to the new Supreme Court judgment, the majority of High Courts took the view, in applying the literal wording of the law, that when the length of service under the first portion exceeded 720 days’ salary, the second portion did not apply, since the applicable limit was the amount corresponding to the first portion.
However, contrary to this interpretation, which was understood to be generally accepted, the Supreme Court judgment states that in dismissals with a length of service predating February 12, 2012, the second portion must also be calculated, even if the 720-day limit has been reached in the first portion, the only limit now being a maximum of 42 month’s salary when both portions are added together.
We will have to wait for future judgments to determine whether or not the ruling is an isolated case or a change in legal theory that creates case law by changing the way severance for unjustified dismissal is calculated for contracts executed prior to the Labor Reform.
Garrigues Labor and Employment Law Department
