When are you entitled to severance pay?

When is an employee entitled to severance pay?

The Labour Code clearly states that an employee is entitled to severance pay upon termination of employment without fault. The basic rule is that entitlement to severance pay arises only on termination of employment for cause on the part of the employer, not on termination by the employee.

But even that is not the final answer. One of the situations listed in the Labour Code must occur. These are:

• if the employer or part of it is abolished;
• if the employer or part of it is transferred;
• if an employee becomes redundant as a result of a decision by the employer or the competent authority to change its tasks, technical equipment, to reduce the number of employees in order to increase the efficiency of work or to make other organisational changes.

In these cases, it is irrelevant whether the employer gives notice to the employee or whether the employee concludes a termination agreement for the same reasons.

In practice, we can imagine situations where one of the three branches that the employer has in the Czech Republic is closed down, or the branch moves from Prague to Brno, or there is some internal change, for example, new automatic sorters for returned bottles are installed and there is no longer a need for an employee to manually sort the bottles.

Mrs. Zdeňka, who worked for a clothing manufacturer, contacted the office of an available attorney. However, he did not stop the situation during the cover-up and closed his operation. The boss suggested to Ms. Zdeňka that they enter into a termination agreement together, while being very accommodating to her and allowing her the equivalent of a notice period. No reason for the termination of the employment relationship was mentioned in the agreement. We have advised Ms Zdeňka that, given the situation, the employer’s offer is not as accommodating as it appears at first sight and that she should demand that the reason for the termination of the employment relationship be stated and, above all, that the severance pay be paid. Zdeňka brought this to the employer’s attention and, although reluctantly, the employer paid her severance pay.

In the above cases, the severance pay is based on years of service. It is relevant whether the employment relationship lasted less than one year, one to two years or more than two years.

Severance pay in the event of occupational disease or accident at work

A very specific case that can also lead to severance pay is if you are no longer able to work because of an occupational disease or accident at work and you have given notice or entered into a severance agreement with your employer for these reasons.

Since your health has been damaged here, and in addition in direct connection with the exercise of your current occupation, the statutory compensation will be significantly higher than in the above cases.

Calculation of severance pay

As mentioned above, the minimum amount of severance pay in the event of termination of employment for organisational reasons is guaranteed according to the number of years of service. The calculation of severance pay is based on the rules laid down in the Labour Code, with the key role played by the decisive period for calculating severance pay. This period includes the last completed quarter from which average monthly earnings are determined. An employee who has been with his employer for less than one year shall receive a severance payment of at least one average monthly earnings. If the employment relationship lasts for more than one year but less than two years, he shall be entitled to at least twice the average earnings.

Finally, if the employment relationship lasted more than two years, severance pay of at least three times the average earnings may be claimed.

If the employment relationship is terminated due to occupational disease or an accident at work, the employee is entitled to a severance payment of 12 times the average earnings.

Average earnings are determined from gross wages. Basically, it is the average of the earnings for the last completed quarter. This means that if the average earnings at the end of September, for example, are considered, the quarter April to June is assessed. If the end of October is addressed, then July to September is assessed, etc.

Calculators for calculating severance pay can also be found on the internet. Here, you just need to enter how long your employment lasted, whether there was a medical termination, and then you need to know your gross pay and the number of hours worked in the last three months. All this information can be found on your payslip.

Severance pay is subject to ordinary income tax. The amount of severance pay is added to your other income in the month and taxed at 15%.

What is the upper limit on severance pay?

The severance pay amounts are set as a minimum. Therefore, no one and nothing prevents an employer from paying an employee a higher severance payment, possibly in cases other than those provided for in the Labour Code. However, the employer must comply with the minimums set out in the table in any event.

If you want to be sure what amount of severance pay you are entitled to, the severance pay calculator can help you by entering the length of employment and other data to calculate an indicative amount.

When is severance pay not payable?

The basic rule is that an employee is not entitled to severance pay if he or she resigns or resigns during the probationary period. There is no entitlement to severance pay even if the employee works under a performance or employment agreement.

Thirdly, there is no entitlement to severance pay if the employer terminates the employment for other reasons, such as gross misconduct. In such a case, you will not be entitled to severance pay even if you have previously been given notice of termination of employment, for example for redundancy.

Severance pay and levies

Severance pay is mutually beneficial, especially because it is not subject to social security and health insurance contributions (this does not apply to taxation, as mentioned above). In practice, this means that the employer saves and the employee gets more. This applies not only to the minimum amount of severance pay specified in the law, but also to the total severance pay you and your employer agree on.

However, you will have to pay social security and health insurance contributions if you receive severance pay for a reason other than the statutory reason. You will also always have to pay income tax.

Severance pay and Jobseeker’s Allowance

The fact that you have been paid severance pay can affect another important thing, namely unemployment benefit. If you receive any financial compensation of this type from your employer, the start date of your Jobseeker’s Allowance will be delayed according to the amount you have been paid. This means that if your severance pay was one month’s salary, you will not start receiving benefits until one month has passed. If you were paid three months’ pay, you will not start receiving support until after three months.

However, some clients come to us when their employer suddenly closes down, and although they are entitled to severance pay, the employer is unable to pay it for financial reasons. In this case, they can turn to the Labour Office, which can provide them with compensation. This compensation is neither taxable nor insured.

Refund of part of severance pay

Employees are reimbursed part of their severance pay if they return to the same job before three months have elapsed since the end of the original employment relationship. The amount of the severance payment will be based on what the average salary was.