In our newsletter of 28 April 2020, we described routes employers can take if they are forced to lay off employees in relation to the COVID-19 crisis. This follow-up newsletter looks at questions related to severance pay.
Termination of employment due to organisational reasons on the part of the employer
If the employment is terminated because of organisational reasons on the part of the employer, the employee is entitled to severance pay, regardless of whether the employment was terminated unilaterally by the employer or by the mutual agreement of both parties. The severance pay must equal at least:
- one month's salary, if the employment lasted less than a year;
- two month's salary, if the employment lasted at least a year but not longer than two years;
- three month's salary, if the employment lasted at least two years;
- or a different amount in certain cases where a set number of working hours is applied.
The salary is calculated by the employer based on the gross salary paid to the employee in the previous quarter and the amount of time worked in the previous quarter.
The Labour Code sets the minimum amount of severance pay. The parties are nevertheless free to set it higher, so-called increased severance.
Severance pay, whether in the minimum or increased amount, is not subject to deductions for health and social insurance. The severance payment is nevertheless subject to income tax.
Should the employee choose to apply for the unemployment benefit at the local labour office, he or she will be entitled to financial support for the first two months of the support period in the amount of 65 % of his or her monthly earning for the relevant period (i.e. for the previous two years before being added to the list of jobseekers), then 50 % for the following two months and 45 % for the remainder of the support period.
The maximum amount of the unemployment benefit in 2020 is CZK 19,398 (approximately EUR 730).
For employees it is also important to know that the support period is suspended by the number of months that are "covered" by severance compensation, i.e. unemployment benefits are granted only after the expiry of a period of time determined by the number of multiples of the average earnings from which the minimum amount of severance pay was derived.
Termination of employment by mutual agreement (not because of organisational reasons on the part of the employer)
If the employment is terminated by agreement and not for organisational reasons on the part of the employer (e.g. without stating a cause or at the employee's request), the employee is not entitled to severance by law.
The parties are nevertheless free to negotiate so-called contractual severance.
Unlike the severance set by law, contractual severance is subject to deductions for social and health insurance.
It is also important to note that the employee is entitled to unemployment benefits provided by the relevant labour office only in the amount of 45 % of his or her monthly earnings. The support period is not suspended in this case.
There are many pitfalls associated with layoffs and it is therefore a good idea to seek a professional assessment for each situation that considers all the circumstances.
Important: The information contained in this newsletter is of a general nature and should not be regarded as a substitute for legal advice on the specific question.