How to calculate severance pay
How severance payments are calculated
In previous articles we have discussed both the types of dismissal that a worker can be subject to (Read: Differences between objective dismissals and disciplinary dismissals), as well as the compensation amounts to which they will be entitled in response to the type of dismissal and, where appropriate, of the final qualification of the same.
However, one of the most common questions that a worker usually faces when calculating his dismissal, is given by the way calculation of the compensation amounts, which is not exempt from doctrinal debate.
Although it is not a completely clear matter and that it responds to casuistic aspects, next we will try to give some brushstrokes about its calculation.
Calculate severance pay
First of all, when we proceed to the calculation of severance pay we must take into account three different factors:
- Type of dismissal.
- Seniority in the company.
- The annual gross salary.
In relation to point 1 (types of dismissal), in previous articles we have already outlined the compensation to which the worker who has seen his contract terminated will be entitled and based on the qualification that finally has the dismissal, so we are going to focus on the other two points.
We must attend to two possible antiquities.
- Real seniority: Refers to the time that coincides with the time the worker is registered with the company, that is, the start of the employment relationship. The calculation of the compensation with this seniority is exempt from taxation and contribution in the maximum amounts established by labor legislation.
- Recognized seniority: Sometimes, when negotiating the employment contract, seniority greater than the real one is recognized, with the sole purpose of ensuring that the employee does not lose excessive rights in relation to your previous job. What exceeds the actual seniority is recognized, and for this excess he would have to pay the proportional part of the compensation. In the contract you will have to state that the recognized seniority is recognized for compensation purposes.
In the event that the recognized seniority is greater than the real one by legal imperative, that is, due to the existence of a succession of companies typical of art. 44 of the Workers Statute< /a> or by subrogation based on an applicable Collective Agreement, the indemnity amount will be exempt from taxing and quoting in its entire amount.
Seniority is calculated in annual terms, with months expressed in decimals. When there are individual days in the last month, the figure is calculated upwards, that is, they are adopted as if it were another month, even if the difference was only one day. By way of example, if a worker has a seniority of 1 year, 5 months and 5 days at the time of dismissal, for the purposes of calculating the compensation, a seniority of 1 year and 6 months will be taken.
Annual gross salary
When calculating compensation, it is essential to be clear about the gross annual salary that has been received within the last year. Within said salary, all those concepts of a salary nature must be computed, excluding extra-salary ones, understood as the amounts that the worker receives as compensation or supplied for expenses incurred as a result of the work activity and are not paid during the days that one does not work such as diets, reimbursement of expenses, possible transportation bonuses as long as they are paid only in case of going to work, compensation of some kind such as transfers, etc.
The gross salary must be taken into account, not the net, that is, without deducting personal income tax withholdings or the worker’s contribution to Social Security.
To calculate the gross annual salary, it is necessary to distinguish between the fixed concepts and the variable concepts received during the last year, in attention to the following rules.
- Fixed amounts: This is any concept that is paid for the same amount and constantly throughout all months. Its amount will only vary in the event that salary updates occur, either by legal imperative or voluntarily. For compensation purposes, as the Supreme Court has indicated, the general rule is to adopt the fair fixed salary of the month prior to the dismissal and multiply it by the number of payments for the year. In any case, certain aspects must be taken into account:
- If the salary has been reduced in the months prior to the dismissal by decision of the employer, in which case it will be necessary to attend to each specific case.
- In cases of reduction in working hours always take into account the salary as if it had not taken advantage of said reduction.
- Regarding the extraordinary payments you have to see the items of which they are composed in order to identify them in the last payroll and calculate the extraordinary pay based on said amounts.
- Salary in kind: Observe with determination the possibility of the existence of these salaries that are collected under another nomenclature. The value that must be given to them is the one that is established in the payroll and, failing that, you must refer to the personal income tax valuation rules.
- Variable amount : When calculating the variable concepts to determine the gross annual salary, it is necessary to analyze the payroll for the 12 months prior to the dismissal and identify all those items that correspond. Variable remuneration refers to any amount received by the worker that has its origin in the achievement of certain objectives, either their own or that of the company, in order to improve its productivity. They are those such as stock options, bonuses, commissions, prizes, etc.
So, once all these concepts are identified, all those that have been received during the year prior to the dismissal must be added. For them, you have to take the payroll of the last 12 months prior to the dismissal and see any remuneration item that you have had during them such as stock options, bonuses, commissions, etc…).
Once we have identified both the fixed and variable amounts of the last year, both items are added to determine the gross annual salary. To calculate the regulatory day wage for compensation purposes, all you have to do is divide said result by 365 days (or 366 in the event of a leap year) in order to obtain the day wage, as the Supreme Court has highlighted in multiple judgments.
On some occasions, there are lawyers who calculate the gross monthly salary and divide it by 30 days in order to obtain a higher daily salary, but we must bear in mind that this rule has not been endorsed by our courts.
Formula for calculating severance pay
Once we have calculated our seniority, as well as the daily salary, all we have to do is multiply said amounts by the compensation that corresponds to the dismissal to which we have been subjected and apply the legal limits to know the corresponding amount.
As an example, if a worker has suffered an objective dismissal (compensation of 20 days per year worked with a limit of 12 monthly payments) and his regulatory salary is €50/ day, with an age of 1 year and 6 months, the formula will be the following:
Target severance pay = €50/day * 1.5 years of service * 20 days = €1,500.