The Supreme Court considers that the payment of a severance compensation in installments in progressive monthly amounts over several years through the subscription of an insurance policy is compatible with the non-contributory unemployment benefit for which, among other requirements, the recipient needs to have no income.
It is not unusual for companies and employees to reach agreements in dismissal proceedings whereby the former undertake to pay the latter a severance compensation in installments. Nor is it unusual that, to ensure the effective collection of the amounts paid in installments, the company takes out an insurance policy in which the employee is the beneficiary, and the insurer pays the agreed amounts as compensation. However, can this way of collecting severance pay have any impact on the access to non-contributory unemployment benefits?
One of the requirements for access to non-contributory unemployment benefits is that the applicant has no income. The current article 275.1 of the Consolidated Text of the General Social Security Law considers this requirement to be met “when the income of any kind of the applicant or beneficiary during the calendar month prior to those dates does not exceed 75 per cent of the minimum interprofessional wage, excluding the proportional part of two special payments”. The fourth paragraph of the same article defines as income or computable income, among others, “income derived from work, from movable or real estate capital, from economic activities and those of a contributory or non-contributory, public or private, nature”.
Within this legislative framework, therefore, the question arises as to whether the fractioned formula for payment of severance compensation, through the subscription of an insurance policy, can alter the nature of the deferred amounts received by the employee and whether, consequently, this can make them incompatible with the receipt of the non-contributory unemployment benefit, because it can be understood that, in this case, the potential beneficiary does have income.
The Supreme Court gave the answer in its judgement of October 3, 2023, which analyzed a case where the company and the employee in question had agreed to defer the severance payment over seven years by taking out an insurance policy to ensure the success of the payments due to the long period of the agreed deferral.
The State Public Employment Service concluded that the payments that the employee was receiving from the insurance company, which, in accordance with the tax regulations, were considered as income from movable capital, and since they exceeded the amount of 75% of the minimum interprofessional salary in force at that time, were incompatible with the non-contributory unemployment benefit for over 52 years of age that he was receiving, and claimed the employee to reimburse all the amounts received for this benefit.
The Supreme Court understood that the change in the tax treatment of the compensation received through an insurance policy, which is indeed considered as income from movable capital (and this implies that certain personal income tax withholdings must be made), does not alter the nature of the compensation derived from a termination of the contract and, specifically, its nature as an exempt amount for the computation of income for the purpose of meeting the requirements necessary for the receipt of the non-contributory unemployment benefit. Therefore, the Supreme Court concluded that the deferred payments received by the employee were compatible with the non-contributory unemployment benefit he had received.
Consequently, according to this ruling, splitting a severance compensation in installments and their payment through an insurance policy do not affect the possibility of accessing non-contributory unemployment benefits, and this may undoubtedly be an element of flexibility to which companies may resort when negotiating severance pays, should the circumstances of the case so require.
Garrigues Labor and Employment Law Department
