Severance pay: understand the legislation and how to calculate correctly

In the process of terminating an employee, understanding the applicable severance pay is essential to ensure that both the company and the employees are protected and that practices comply with the law.

Therefore, all HR and PD professionals must be up to date on its application and calculations in order to pay correctly and avoid fines being imposed on the company.

Learn about severance pay and how it works.

What are severance payments?

Severance pay is the amount owed to the employee by the company when the employment contract is terminated. This payment includes a series of components paid by the company to compensate the employee for the end of the employment relationship.

The main ones include:

• Salary balance;
• Proportional 13th salary;
• Vacation + 1/3 due;
• Vacation + 1/3 proportional;
• Prior notice;
• Compensation on FGTS deposits.

What does the CLT say about severance pay?

The CLT clearly establishes the rules for granting severance pay when an employment contract is terminated, starting with Article 477:

Art. 477. When the employment contract is terminated, the employer must make a note on the Work and Social Security Card, notify the competent bodies of the dismissal and pay the severance pay within the period and in the manner established in this article.

Thus, the text of the article specifies that payment must be made by the first working day following the end of the contract or by the tenth day following the end of the contract, when there is no prior notice, indemnification or waiver of notice.

Failure to comply with these deadlines makes the company liable to pay a fine. In addition, the law also requires that the termination of the employment contract be formalized by means of a notice of termination, which must be approved by the union or by the Ministry of Labor, when the employee has worked for the same company for more than one year.

What are the different severance payments?

Severance payments are payments due to the employee when the employment contract is terminated. Thus, each type of severance pay has specific characteristics, and its applicability depends on the context of the termination.

Salary balance

This corresponds to payment for the days actually worked by the employee in the last month of employment. So if the employee only worked part of the month before termination, they will be paid in proportion to the days worked.

Proportional 13th salary

This is the payment proportional to the thirteenth salary, calculated on the basis of the months worked by the employee during the year. For example, if an employee works for six months and is terminated, they are entitled to half of their 13th salary.

Vacation + 1/3 due

If the employee has accrued vacation that has not been taken, he or she will receive the amount corresponding to that vacation plus one third. This payment is due regardless of the reason for termination.

Vacation + 1/3 proportional

This vacation entitlement refers to the amount proportional to the time worked by the employee in the last accrual period, including the additional one-third of the constitutional entitlement. This right is guaranteed even if the employee has not completed one year's service.

Notice period

The notice period can be worked or indemnified and its duration varies according to the employee's length of service with the company. It allows the opposite party to be notified of the end of the employment contract, giving the employee time to find a new position or the company to find a replacement.

Indemnity on FGTS deposits

In the event of termination without just cause, the employee is entitled to an indemnity corresponding to 40% of the total deposited by the company in the FGTS during the period of the employment contract. This amount is intended to compensate the employee for the unexpected dismissal.

Unemployment insurance

Despite being linked to termination, unemployment insurance is a benefit granted to formal workers dismissed without just cause, including indirect termination, by agreement between the employee and the company, or as a result of the company's bankruptcy.

Thus, to be entitled to unemployment insurance, the worker must meet specific requirements in terms of minimum working time and the number of wages received before termination. In this way, it is not an amount paid by the company, but a labor right.

How do severance pay apply?

Without cause

When an employee is dismissed without cause, they are entitled to all severance pay, including:

• Salary balance;
• Proportional 13th salary;
• Proportional vacation + 1/3;
• Vacation pay + 1/3 (if any);
• Prior notice, which can be worked or indemnified;
• 40% fine on the FGTS balance;
• Unemployment insurance, if you meet the requirements to obtain it.

For just cause

In the case of dismissal for just cause, caused by serious misconduct on the part of the employee, he or she loses the right to several of the severance payments and receives only the balance of salary and vacation pay + 1/3 (if not taken).

Resignation

When the employee decides to voluntarily terminate the contract:

• You are not entitled to paid notice, but you must comply with it or compensate the company otherwise;
• He does not receive the 40% FGTS fine;
• You are not entitled to unemployment insurance;
• He receives a salary balance, proportional 13th salary and proportional vacation + 1/3.

Indirect dismissal

Indirect dismissal occurs when the company commits serious misconduct, justifying the termination of the contract by the employee. In this case, the severance pay is the same as for dismissal without just cause:

• Salary balance;
• Proportional 13th salary;
• Proportional vacation + 1/3;
• Vacation pay + 1/3 (if any);
• Indemnified notice;
• 40% FGTS fine;
• Unemployment insurance, if eligible.

Joint agreement

Introduced by the labor reform, it allows the employee and the company to agree on the termination:

• The employee receives 20% of the FGTS fine;
• You can withdraw up to 80% of the amount deposited in the FGTS;
• You are entitled to 50% of the amount of the notice period, if indemnified;
• You are not entitled to unemployment insurance;
• He will receive the rest of his pay, such as the balance of his salary, proportional 13th salary and proportional vacation + 1/3.

How to calculate severance pay

The calculation of severance pay can change depending on the type of termination of employment and the rights applicable in each case. See below.

Salary balance

For the proportional salary, divide the monthly salary by the monthly working hours and multiply by the number of hours worked in the month of termination.

For example, if an employee earns R$3,000 a month and has worked 10 days of a 30-day month, the calculation would be:

R$3000/30×10=R$1000

R$3000/30×10=R$1000

Proportional 13th salary

Here, divide the annual salary by 12 and multiply by the number of months worked in the year.

In an example, if an employee has worked for 7 months and their monthly salary is R$3000, then:

R$3000/12×7=R$1750

R$3000/12×7=R$1750

Proportional vacation + 1/3

Proportional vacation is calculated by dividing the monthly salary by the number of months and multiplying by the months worked in the acquisition period. A constitutional third is added to this amount.

For example, for a salary of R$ 3000 and 5 months worked:

R$3000/12×5=R$1250

R$3000/12×5=R$1250

R$1250+(𝑅$1250/3)=R$1666,67

R$1250+(R$1250/3)=R$1666,67

Prior notice

Prior notice is one month's full salary, unless the employee has more than 1 year's service, in which case they receive an additional 3 days per year of service, up to a maximum of 60 days.

In an example for an employee with 3 years of service and a salary of R$ 3000:

R$3000+(3×3×𝑅$100)=𝑅$3900

R$3000+(3×3×R$100)=R$3900

FGTS fine

The amount of the fine is 40% of the total deposited in the FGTS during the contract period.

For example, if the total deposited was R$12,000:

R$12000×0.40=𝑅$4800

R$12000×0.40=R$4800

Unemployment insurance

The amount of unemployment insurance is not calculated in the same way as other benefits, as it depends on the average salary over the last three months and the number of previous applications. However, there are specific tables that establish the minimum and maximum amounts.

What are the legal deadlines for paying severance pay?

When the employee has served notice, the severance pay must be paid by the first working day immediately after the end of the notice period. However, if the notice is indemnified, i.e. it is not physically served, the severance pay must be paid by the tenth day from the end of the contract.

Thus, if the severance pay is paid after the legal deadline, the employer is subject to a fine equivalent to one of the employee's salaries, as provided for in paragraph 8 of Article 477 of the CLT. This fine is owed directly to the employee:

• 8 - Failure to comply with the provisions of paragraph 6 of this article will subject the offender to a fine of 160 BTN per worker, as well as payment of the fine in favor of the employee, in an amount equivalent to their salary, duly adjusted by the BTN variation index, unless the worker demonstrably causes the delay.

Understanding severance pay is essential for HR and PD professionals. And to find out more about topics like this, check out our content on cash allowances!

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