Termination of Employment Due to Redundancy and Severance Pay

Termination of Employment Due to Redundancy and Severance Pay

An employer may terminate an employee's employment only for reasons specified by law. One such reason is the so-called redundancy of the employee, which entitles the employee to severance pay. Severance pay in the case of redundancy represents an important financial compensation that helps the employee cope with the difficult period following the loss of employment. In practice, redundancy is a frequent reason for termination of the employment relationship. Therefore, in the following article, we will focus on the details of the entitlement to severance pay in the case of redundancy.

Employee Redundancy

Redundancy occurs when the employer decides to implement an organizational change that leads to a reduction in the number of employees or the elimination of certain positions. The Labour Code regulates this situation in Section 52, letter c) as a valid reason for termination by the employer.

Such a situation may arise, for example, when:

• The employer improves efficiency in production or introduces new technologies,

• Two departments are merged, which means that some employees are no longer needed,

• The employer reduces costs and must reduce the number of positions,

• The nature of the business changes, and some positions are no longer necessary.

If the employer carries out an organizational change and, as a result, the employee is no longer needed, the employer may terminate the employment relationship for redundancy under Section 52, letter c) of the Labour Code.

Entitlement to Severance Pay

Severance pay is a one-time financial compensation intended to help the employee cope with the unexpected loss of employment. It is not a regular part of the salary but rather a protective measure provided by law to employees in situations where they lose their job due to reasons beyond their control.

The Labour Code grants severance pay primarily when the employment relationship is terminated for organizational reasons (e.g., redundancy), due to a work-related injury or occupational disease, or if the employer ceases business operations.

If the employee is dismissed due to redundancy, the employee is entitled to severance pay by law. The entitlement to severance pay also arises if the employment relationship is terminated by mutual agreement for the same reason. It is recommended to specify the reason for redundancy in the agreement to avoid any future doubts about the employee's entitlement to severance pay.

Amount of Severance Pay in the Case of Redundancy

The amount of severance pay depends on the duration of the employee's employment with the employer and is determined based on a multiple of the employee's average monthly earnings:

• Less than 1 year – severance pay equal to one month's average earnings,

• 1 to 2 years – severance pay equal to two months' average earnings,

• More than 2 years – severance pay equal to three months' average earnings.

The average earnings are calculated from the income of the previous calendar quarter. This includes not only the basic salary but also bonuses, rewards, and other salary components. It does not include holiday pay, severance pay, or travel allowances.

When is Severance Pay Paid?

The employer is obliged to pay the severance pay to the employee after the termination of the employment relationship, no later than on the next payday. There is an option to agree with the employer on a different payment method, such as a lump sum on the day the employment relationship ends or installments. If the employer fails to pay the severance pay, the employee may seek its payment through legal means.

New Employment After Receiving Severance Pay

Severance pay is paid regardless of whether the employee immediately takes up new employment. The employee does not need to worry that if they find a new job immediately after the termination of employment, they will lose their entitlement to severance pay.

However, if the employee returns to the same employer before the expiration of the period for which the severance pay was paid (e.g., if they received three times their earnings, they must return within 3 months), they are obligated to repay the proportionate part of the severance pay (Section 68 of the Labour Code).

Know Your Employee Rights

In practice, it is important for employees to know their rights and understand when they are entitled to severance pay and the amount they are entitled to. A proper understanding of this area can help prevent potential disputes with the employer and ensure that the employee receives what they are entitled to.

Employee Rights Portal

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