When you agree with your employer on compensation related to the termination of the employment, this may have an impact on the payment of earnings-related daily allowance. In unemployment security, “severance pay”, “support package” or the so-called “golden handshake” is a “financial benefit to be divided into periods”. This means that earnings-related daily allowance cannot be paid for the period, which the financial benefit as a person's salary equates to. If, for example, the severance payment corresponds to six months' salary, earnings-related daily allowance cannot be paid for six months from the end of the employment relationship.
Financial benefit divided into periods
According to the Unemployment Security Act, "an economic benefit received from an employer based on an employment termination agreement or other similar arrangement between an employer and an employee prevents the granting of unemployment benefit for a period for which the benefit is divided into period, starting from the date of termination of employment, on the basis of the person's salary for the most recent employment relationship."
When an employment relationship is terminated by mutual agreement, it is normal for the employer to pay a compensation. It should be noted that the employer is not legally obliged to pay compensation. This is a joint agreement between the employer and the employee on termination of employment, and the contract may include the condition of compensation paid by the employer.
Compensation doesn't have to be money. For example, a work phone or computer might be part of the contract. From the point of view of unemployment security, these are also economic benefits that must be taken into account. Only training acquired by the employer is an advantage that is not considered. Typically, however, compensation is money.
Make sure you don't lose earnings-related daily allowance
When you receive a contractual financial benefit from your employer at the end of your employment relationship, you may be tempted to skip registering with the TE Office. There's a risk here. If you later apply for earnings-related daily allowance, we need to check if you have been on the labour market in the last six months. For example, if you have taken six months of “personal leave” with severance pay and have not been registered as a job seeker at the TE Office, it is possible that you have been out of the labour market for six months for no valid reason. Then you will lose the employment condition you have collected, and we will not be able to pay you earnings-related daily allowance.
Remember to register with the TE Office as an unemployed jobseeker on the first day of the lay-off at the latest. Do this even if you've received severance pay.
Even though we cannot pay earnings-related daily allowance due to severance pay, you can still apply for earnings-related daily allowance. The good thing about this is that you get a decision that specifies exactly how long the daily allowance cannot be paid. At the same time, we can also complete the working condition information, which means that processing your application is quicker if you apply for earnings-related daily allowance after the severance grant has been accrued. When you receive a decision, you can also check if we have correctly taken into account the severance pay paid to you. In some cases, it may be unclear whether it is, for example, compensation for damage or a financial benefit divided into periods. If you disagree with us on the nature of the financial benefit you receive, we can immediately check that. If there is disagreement, you can appeal the decision.
Fo what period does severance pay prevent the payment of earnings-related daily allowance?
As a principle this means that earnings-related daily allowance cannot be paid for the period, which the financial benefit as a person's salary equates to. The rule of thumb is that when the severance payment corresponds to, for example, six months' salary, earnings-related daily allowance cannot be paid for six months from the end of the employment relationship.
However, the actual division of the financial benefit into periods is a more precise measure and the length of the benefit period is calculated in days. The accrual made by dividing the financial benefit by the daily wage of the most recent employment relationship. The salary is determined as salary on which earnings-related daily allowance is based, but no statutory deduction is made from the income.
Example: Calculating of accrual
The person agrees to end the employment relationship and the contract includes a compensation of EUR 16,000 corresponding to approximately six months' salary.
The taxable salary for the period fulfilling the employment condition is EUR 18,750. The period has 130 working days and the earnings include a holiday allowance of EUR 2,500.
First we deduct the holiday allowance (EUR 2,500) from our salary (EUR 18,750). That leaves EUR 16,250.
This is divided by the calculated working days included in the period (130). This gives a daily salary of EUR 152.
The length of the period for accrual is calculated by dividing the financial benefit (EUR 16,000) by the daily wage (EUR 119.58).
The period of accrual is 128 days. If no even number is reached when the accrual length is calculated, the number of days is rounded down.
The accrual period is up to five days per calendar week. Thus, the accrual time is longer as a calendar period. For example, 128 accrual days in the calendar period 10.2.2020-5.8.2020. There are 178 calendar days in that period.
EUR 18,750,00 - EUR 2,500,00 = EUR 16,250,00
EUR 16,250,00 ÷ 130 days = EUR 125 per day
EUR 16,000 / EUR 125 / day = 128 days
Not everything is what it seems
When it comes to “severance pay”, there can be many different meanings behind it. This can be, for example, compensation corresponding to the salary for the notice period. Such a pay period does not amount to a financial benefit divided into periods, although it may otherwise prevent the payment of earnings-related daily allowance. It may also be that the employer pays you a commission, bonus, incentive or late payment of salary at the end of the employment relationship. These are earned during the employment relationship and are not financial benefits divided into periods, although they can be understood as part of the “severance pay”.
However, you may receive a salary increase or another bonus that is not based on performed work before the termination of the employment relationship. On the other hand, such a payment may be intended specifically as compensation for the termination of employment. If such an additional salary increase is not based, for example, on an increase in work or a change in the job description, it is a financial benefit that is divided into periods.
The above may cause confusion, especially since the work input of the employee's normal obligations, but possibly more significant than usual, in the event of ending of production, is not yet sufficient to demonstrate that there is a payment that will not be divided into periods.
The above may relate to situations where the employer wishes to ensure that employees remain in work until the end of the operations. Such retention payments are not salaries for work done, but part of an employment termination arrangement. Thus, they are an economic benefit accrued in unemployment security.