One of the most common practical and often controversial issues faced by both those in charge of company personnel and workers themselves is the calculation of severance for dismissal. Whereas the legal modules are perfectly defined by legislation (currently 33 days’ salary per year of service for unfair dismissal, 20 days for dismissal on objective grounds, etc.), the remuneration used as the basis for the calculation is one of the most common asked questions.
The general rule is that all the amounts received by a worker from the company are considered as salary and, therefore, must be included in the regulating salary for the calculation of severance for dismissal, which includes both monetary remuneration and remuneration in kind.
Without being exhaustive, some of the most common cases of remuneration in kind that must be included for severance calculation purposes include a company car, provided it is granted for personal use and is not merely a working tool and housing provided to the worker. The valuation of these goods and services (and any others that may be provided by the company) gives rise to a great deal of litigation.
The salary used to calculate severance for dismissal also includes the contributions made by the company to pension plans, savings insurance, life and accident insurance and other similar benefits. In these cases, what is included as salary is the company contribution and not the possible benefit received by the worker from said instruments, pursuant amongst others to the judgment by the High Court of Justice of the Community of Valencia of January 12, 2016.
In addition, it is extremely common for workers to receive different amounts in the months prior to the termination of their contract, due to changes in remuneration. There are two different cases:
- Firstly, cases in which the worker’s salary changes prior to his/her dismissal, for example, as a result of an increase pursuant to the collective bargaining agreement, a company agreement, a material modification of working conditions, etc. In these cases, the updated salary as at the date of dismissal is taken as a reference, normally in the last month.
- In the other case, however, it is quite common for a worker to receive a variable salary, either based on items such as sales commission (very common in commercial sectors), incentives or a bonus for results of some kind, etc.
Unlike what occurs in the first case, in the second an average is taken of the remuneration received by the worker in the twelve month period immediately prior to dismissal.
Nevertheless, again we find special considerations that must be taken into account. When a bonus is not ongoing, but rather granted on an exceptional basis under very specific conditions, certain courts have ruled that, in special and very particular cases, the bonus may be excluded from the calculation of severance for dismissal. This was the case, for example, in the judgment by the High Court of Justice of Catalonia, of January 10, 2019.
Furthermore, sometimes the amount of a bonus or variable remuneration may be prorated when it is generated over several years, irrespective of whether it was received in the twelve months prior to dismissal. This is quite common in executive remuneration systems, such as in the case of stock options. This is established, amongst others, in the judgment by the High Court of Justice of Madrid, of February 11, 2009.
As observed, there are numerous cases and each one must be examined individually in order to correctly calculate the severance payable for dismissal.