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Understanding Severance Payments in Global Markets

It may not be the most pleasant of experiences, but an inevitable reality for almost any company is the occasional need to terminate an employee. While the United States’ labor laws designate “at-will” employment, this concept does not exist in most other countries. Instead, there are statutory guidelines for termination in most other jurisdictions, including required severance payments. Any misstep in the termination process, particularly in meeting severance payment obligations, can cost a company if not properly planned for or managed.

Before making any hiring or termination decisions, it is helpful to consider and fully understand severance payment requirements. To help our clients prepare and plan, GoGlobal applies an accrued severance payment system as part of our PEO/EoR services. In this piece, we will outline how the accrued severance payment operates and explore key severance pay requirements in select global markets.

When utilizing an EoR or PEO provider, the service provider is the ultimate legal employer, so any decisions around terminations should be discussed and agreed upon before termination actions are taken. This is also the policy of GoGlobal. This ultimately protects the client, as they are unlikely to be familiar with local employment law and practice. GoGlobal will be able to help ensure that separation from the employee is done quickly, compliantly and cost effectively. Often the best recourse is mutual separation, which would include payment equal to or above statutory severance requirements.

What Is Accrued Severance?

Notably, the job market volatility ensued by COVID-19 has underscored the need for GoGlobal’s clients to be acutely aware of termination liabilities on a monthly basis. The better prepared a company is to make severance payments as required, the less surprises there are in critical cash flow matters. To that end, we have implemented an accrued severance system that varies by country and accounts for obligations.

The accrued severance is the accrued aggregate amount of statutory termination obligations (whether outlined as payments of severance, redundancy, termination etc.) to the employee being terminated. To clarify, the payment of statutory termination obligations does not guarantee the ability to terminate an employee. It also does not mitigate the risk of an unlawful termination lawsuit, which would likely exceed any statutory termination obligations accrued.

Clients do not pay a service fee on the accrued severance. Rather, it acts as a deposit. GoGlobal bears all additional costs in managing, tracking and administering the accrual amount to the terminated employee. Any unused portion of the payment will be refunded to the client after all matters related to the termination of the employee have been fully and finally resolved, usually within three months of the employee’s last working day.

Severance Pay in Korea

Under Korea’s Employee Retirement Benefit Security Act, a regular full-time employee in Korea is entitled to receive a severance pay within 14 days of being terminated. Full-time is generally defined as more than 15 hours per week or more than 60 hours a month.

For employees that have worked for at least one year, the required severance payment equates to one month’s salary for each year of employment. Average wages are calculated by using wages for the three months preceding termination. Severance payments apply to voluntary retirement as well as termination for cause.

An employer must provide employees with at least 30-days’ notice. If they do not provide this notice, they will be required to offer the employee 30 days of salary in lieu of the notice as a dismissal notice allowance. Customarily, employment contracts will provide for longer notice. As a contractual matter, an employee may be entitled to reasonable notice of termination in particular situations, which can be defined as much as a year notice.

Employers should note that employees with more than six months of employment service are eligible to file unfair dismissal claims if either of the following two circumstances apply:

  • Their employment was governed by a modern award or enterprise agreement, regardless of how much they earn and even if they have signed a high-income guarantee.
  • They are award- or agreement-free and they earn less than the relevant income threshold, which is subject to change yearly.

Under Korean law, only employees are entitled to severance pay. The term employee is defined as someone who provides labor pursuant to the employer’s management in exchange for wage compensation. However, this definition does not solely rely on how the contract describes the title of the individual. For example, even if the contract defines the party as an independent contractor or agent, the individual can still be classified as an employee if their role is found by the courts to have the characteristics of a typical employment relationship.

In Korea, GoGlobal’s accrued severance system collects 8.33% of the employee’s gross pay monthly.

Severance Pay in China

When it comes to termination in China, while requirements may vary across providences, labor laws generally favor the employee. Once a probation period has ended, it becomes increasingly difficult to terminate an employee. Before being terminated, the employee must be allowed to receive training or be transferred to a different position within the company. If the employee is still not fit to meet responsibilities after these steps have been taken, then the termination process can begin. The employer must provide written notice to the employee at least 30 days in advance of termination.

Employees are entitled to severance pay, except when:

  • The employee is on probation and is unable perform their duties.
  • The employee has breached company policies.

Severance pay generally totals one month of salary for employees who have been employed for over one year, with terminated employees usually receiving one month of severance pay for every year employed. In cases where the employee has been employed for six months or less, severance pay is typically calculated at half of the monthly salary. Furthermore, employment duration is always rounded up and severance pay is usually capped at 12 months. In cases of redundancy or layoffs, there is no applicable law. In this case, the employer must negotiate a mutually agreed upon termination with the employee.

In China, GoGlobal’s accrued severance system collects 8.33% of the employee’s gross pay monthly.

Severance Pay in Germany

Germany’s labor law operates to ensure that termination is justified according to the country’s labor code. To properly terminate an employee, the employer must notify the employee with a written notice four weeks ahead of the termination date. However, the statutory notice period is seven months for any employee that has over 20 years of employment service.

If there is a justified reason for dismissal and proper notice is given to the employee, the employer is not required to pay severance. However, in cases of redundancy, a severance is required which totals half a months’ salary for every year of service.

In Germany, GoGlobal’s accrued severance system collects 4.17% of the employee’s gross pay monthly.

Severance Pay in Poland

Poland’s labor code mandates that a severance payment is provided in cases where the employer has 20 or more employees, and the dismissal of the employee is through the fault of the employer. The severance payment total depends on how long the employee has worked for the employer, drawing from the following structure:

  • When an employee has less than two years of employment service, the employer must pay the employee one month of severance pay.
  • For employment of between two and eight years, the employer is responsible for two months of severance pay.
  • In cases where the employee has served for over eight years, the employer is liable for three months of severance pay.

In Poland, GoGlobal’s accrued severance system collects 4.17% of the employee’s gross pay monthly from companies with 20 or more local employees. If the company has less than 20 local employees, there is no accrued severance payment.

Severance Pay in Italy

In Italy, there are no conventional statutory severance or redundancy payments. Instead, the labor code mandates that employers set aside funds for each employee, called Trattamento di Fine Rapporto (TFR). Because TFR is an accumulated amount of salary set aside each month, it is not considered a proper severance payment.

An employee’s TFR is calculated according to the formula of a year’s overall salary divided by 13.5, plus 1.5% for each year of service. The leaving-service indemnity is payable in any case of termination, such as dismissal, voluntary resignation, disability, death, etc.

In Italy, GoGlobal’s accrued severance system collects 7.41% of the employee’s gross pay monthly, collected only for one year.

About GoGlobal

GoGlobal is the world’s fastest growing, privately owned Global Employer of Record (EoR) service provider, with a globally distributed and remote workforce. GoGlobal’s technology-enabled EoR solution allows businesses of all sizes and geographies to hire staff globally without the need to set up a local entity, opening new doors to rapid expansion and growth. GoGlobal clients can hire top talent anywhere in the world – quickly, cost effectively and compliantly.