Statutory Severance Calculation

Service Duration

Time spent working for the company is the first variable in the math used to find the final payout. For a statutory severance calculation, one month of salary is paid for every full year the employee has been with the firm. If the employee worked for more than six months but less than a year, it counts as a full year.

If they worked for less than six months, the payment is half a month of salary. There is a cap on the total number of years that can be included in the calculation, which is usually twelve years. This ensures that the burden on the company does not become excessive for very long term employees.

The clock for service duration starts on the first day the employee began working, even if they were on a probation period.

Salary Ceiling

Regional economic differences are managed by placing a limit on the monthly salary used in the formula for high earners. When performing a statutory severance calculation, the average monthly salary is capped at three times the local average salary in the city where the company is located. If an employee earns more than this cap, the severance is calculated using the cap amount instead of their real salary.

This prevents the cost of termination from being too high for senior managers and executives. The average salary includes all bonuses, allowances, and commissions, not just the base pay. This means that the calculation can be complex if the employee’s income fluctuates significantly from month to month.

Accurately tracking these numbers is the responsibility of the human resources department.

Termination Category

Legal reasons for ending the employment relationship determine whether the severance must be paid at all and if the amount should be doubled. A standard statutory severance calculation applies when the termination is legal and follows the rules of the labor law. However, if a court finds that the termination was illegal, the company may have to pay double the amount as a penalty.

This happens if the company did not follow the correct procedure or did not have a valid reason to fire the worker. Some types of termination, such as those during a bankruptcy or a relocation of the factory, have their own specific rules for how the severance is handled. Understanding the category of the termination is the only way to calculate the risk of a labor dispute.

Most companies prefer to reach a settlement that is slightly higher than the statutory minimum to avoid the cost of litigation.