How to calculate the severance pay?

What is a severance payment?

The severance payment, also known as a settlement, is an economic amount that is given to the worker as compensation once their relationship with the company that employed them has come to an end. It must be paid regardless of whether the termination of the contract is due to the end of its temporary nature, to a voluntary resignation by the worker or to an unfair dismissal, for objective or disciplinary reasons. In other words, payment is compulsory in all cases.

Difference between severance pay and compensation for dismissal

As we have just said, the severance payment is an amount that must be paid to the worker once their employment relationship with the company has ended, for whatever reason. This is also due to the fact that it refers to rights that cannot be waived, such as, for example, the extra pay, the corresponding holiday days, etc. We will look at this a little further on when explaining how to calculate a severance payment.

However, a severance payment is only paid to the employee if the contract has been unilaterally terminated by the employer. If this is due to objective reasons, it is calculated on the basis of 20 days' salary per year worked with a maximum of 12 monthly payments. In the event that it is due to unfair dismissal, it will be 33 days per year worked with a maximum of 24 monthly payments.

Both payments are complementary, i.e., a dismissed worker must receive the severance pay and the corresponding compensation separately, without one item affecting the other.

¿Cómo calcular un finiquito por despido?

In order to calculate the severance pay due to the employee at the end of his or her employment relationship with the company, the calculation is based on three fundamental concepts. These are:

Holiday days

At the end of each year and at the beginning of the next, the employee has a specific number of days of holiday, depending mainly on what is specified in his or her collective agreement and what is individually agreed in the contract signed with the employer.

It is possible that, if the dismissal or decision to take leave occurs, for example, during the month of April, the worker may not have taken any days off work. And, of course, since these refer to a full year's work, he/she will be entitled to be paid for the proportional part of those days.

Some companies prefer that the employee perform his or her duties until the last day of work and, in return, pay him or her for those days of leave that he or she is entitled to take. Others, on the other hand, prefer the employee to take his or her leave during the period between the notice of dismissal or termination or the definitive termination of the contract.

But what happens if the employee has already taken all his or her holiday entitlement for the current year and the employee is dismissed or terminates his or her contract? Well, the company, when calculating the severance pay, must deduct from the payment the amount corresponding to the holiday days that have been taken but which do not yet belong to the employee. This is a very common situation in those dismissals that take place after August.

Extra pay

Extra pay is exactly the same as holiday pay, i.e. the company must pay the employee the amount corresponding to the period worked but not paid in the severance pay.

Thus, if the worker, for example, receives his bonus payments every six months (one in June and another in December) and is dismissed in September, he will be entitled to receive the amount corresponding to July and August of his second bonus payment in his severance pay.

Obviously, in those cases in which the worker receives his extra payments pro rata within the monthly salary or in which he receives more than two per year, the calculations will have to be adapted to the circumstances.

The salary for the current month

The days worked during the month in which voluntary redundancy or dismissal occurs must also be included in the severance pay. This is particularly common when either of these two events leading to the termination of the employment relationship do not come into effect on the 1st of the month, but later in the month.

How to calculate the severance pay? A practical example

We believe that the best way for our readers to correctly understand how to calculate a severance payment is by means of a practical example. In this sense, we are going to use Isabel, an employee in the telecommunications sector who signed a fixed-term contract of 1 year and who, after its conclusion, was not renewed by her company. These are the fundamental data that we must consider in order to calculate the settlement:

• Salary: €1800 per month.
• Holidays not taken: 5 days.
• Extra pay: pro rata to salary (€300 per month).
• End of contract: 8 March.

First of all, we have to calculate the daily wage received by Isabel. To do this, we divide:

1800 / 30 = €60/day.

As it is 8 March when the dismissal takes place, we need to perform this multiplication to obtain the current month's salary:

60 € x 8 working days = 480 €.

In turn, each day of holiday corresponds to one day's pay. Therefore, if Isabel still had 5 days to take, we will have to multiply:

60 € x 5 days of holiday = 300 €.

Finally, all that remains is to obtain her share of the extra pay. As we said, Isabel receives them pro rata to her salary. In total, she received €300 per month. Therefore:

300 € / 30 days = 10 € x 8 working days = 80 €.

Now we have all the necessary data to calculate Isabel's severance pay:

480 € (salary for the current month) + 300 € (holidays) + 80 € (proportional part of the extra pay) = 860 €.

Therefore, when her contract is definitively terminated, Isabel should receive a total of €860 in severance pay.

Conclusions on severance payments

All in all, as you will have seen, calculating your severance pay is simpler than it might seem at first glance. In fact, if you have any fear of finding yourself in this situation or if your boss has already warned you that you will no longer be working for the company in the near future, you can take the opportunity to calculate your severance pay yourself and thus be prepared for the future. You will also be able to detect any irregularities.