Labour Act – Severance pay and Fixed-term employment contract
The Labour Act regulates key aspects of employment relationships, including the possibility of severance pay and the rules governing fixed-term employment contracts. Employers and employees must be mindful of the legal limitations and obligations arising from these provisions.
Right to severance pay
Severance pay is a legally prescribed monetary amount that an employer pays to an employee to mitigate the consequences of employment termination, provided the employee has worked for the employer for at least two continuous years.
The right to severance pay applies to employees whose employment contract is terminated regularly, under the above-mentioned condition.
Conversely, employees are not entitled to severance pay if their contract is terminated due to misconduct or if, at the time of termination, they are at least 65 years old and have at least 15 years of pension service.
The amount of severance pay is determined based on the duration of employment and the employee’s average salary over the last three months. It may not be agreed upon or set in an amount lower than one-third of the employee’s average monthly salary (from the three months preceding the termination) for each completed year of service with the employer.
Unless otherwise stipulated by law, collective agreement, work regulations, or the employment contract, the total severance amount may not exceed six average monthly salaries earned in the three months before termination.
When calculating severance pay, the gross average salary from the last three months is considered. This includes base salary, overtime, night and holiday work bonuses, seniority increases, and performance bonuses. It does not include allowances, Christmas bonuses, holiday bonuses, travel reimbursements, support payments, or jubilee awards. If the employee did not work during the entire reference period, the salary they would have earned is taken into account.
Fixed-term employment contract
A fixed-term employment contract is a contract where the employment relationship is established for a specific, pre-defined period, based on an objective reason justifying a temporary need for performing a particular job.
The Labour Act limits the number of successive fixed-term contracts that can be concluded between an employer and an employee. A maximum of three successive fixed-term contracts may be concluded, with the total duration, including the first contract, not exceeding three years.
Successive fixed-term contracts include contracts concluded without interruption or with an interruption not exceeding three months, regardless of whether the contracts were concluded with the same employer or with different employers considered to be related.
After the three-year period has elapsed, a new fixed-term contract may only be concluded with the same employee if at least six months have passed since the end of the previous employment relationship.
Exceptions apply when the contract is concluded to replace a temporarily absent employee, for the completion of an EU-funded project, or if allowed by a special law or collective agreement due to other objective reasons.
If it is determined that a fixed-term employment contract was concluded contrary to the provisions of the Labour Act, and the employee continues to work beyond the agreed term, the contract is considered to be concluded for an indefinite period.
