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Is the calculation of severance pay different from the settlement?
How is the settlement obtained? Only through a layoff or in other situations as well? How to know how much settlement corresponds to you? In this post we clarify it.
We tell you when a settlement is paid and what elements are part of its calculation. Because vacations generated and not taken are not the only thing to take into account.
What is the settlement?
The settlement is a liquidation of amounts that, can be derived from a dismissal, the termination of an employment contract or a voluntary resignation that puts an end to the contractual relationship between the worker and the company. In any of these three circumstances, you have the right to a settlement.
The balance and settlement document is a document that is delivered to the worker when his employment relationship with the company ends. It reflects all those amounts that the employee is entitled to receive on the date of dismissal, voluntary redundancy or the end of the contract. These are amounts generated but not yet collected. And do not forget that it is indifferent to talk about calculating liquidation or calculating settlement. They are synonymous in labor terms.
On the contrary, compensation for termination of contract or dismissal is given if you are fired from the company – except if the termination is disciplinary and is qualified as appropriate, fair – or if your contract expires. But even in those situations, you will also have access to the due settlement.
Other different scenarios can even occur where, apart from the settlement, the person hired deserves compensation by law: for a substantial change in working conditions or for a serious breach by the employer. You can find out about these two contingencies in this other article on compensation and its calculation.
In short, the settlement is not an award or compensation, but what the company must legitimately pay the worker on the date of termination of the employment relationship.
Termination request to the company
If you have decided to leave your job, or it is the employer who has decided to do without your services, and they have not given you the settlement, you must request it from your company in writing.
5 factors to calculate a settlement
The elements that are part of the settlement calculation formula are the following:
- The salary of the days worked after the last payroll.
- The proportional part of the non-prorated extraordinary payments, which have been generated but have not been received.
- The vacations generated and not enjoyed.
- Overtime not charged, if you have some of them pending.
- There may also be other amounts that have been agreed in the contract, by agreement or through a company agreement: bonuses, extraordinary bonuses, objectives, etc.
How is the settlement of a worker calculated? Steps
1. Days of salary of the last month
If you are wondering how to know how much of your settlement corresponds to you, the first thing when making the calculation is to count the last days that you have worked and contributed to Social Security after the last payroll.
To find the amount that the company owes you for that period, first you have to find the daily salary, and then multiply it by the number of days worked in the current month. If the salary is fixed, without variations from month to month, the amount received the previous month should be taken as a reference and divided by 30.
Example of calculating settlement: Part 1
Suppose that the monthly salary of a worker, Antonio, is €1,500. And that the last month that he was paid in full was November, since he was fired on December 9. If we divide 1,500 by 30 days, the result is €50 per day.
Next, we multiply 9 x 50: €450. This would be the money that would belong to the employee for the last days that he was in the company – the first part of the settlement.
2. Vacations generated and not taken
Another fundamental aspect to know how the settlement is obtained is the calculation of the vacations generated but not enjoyed. Here it is necessary that you find out how many vacation days correspond to you per year, by virtue of the agreement or employment contract. The most common is to have 30 calendar days, so it would be enough to make a simple rule of three to know the data of how much they owe you for vacations. Let’s illustrate it with an example.
Example of calculating settlement: Part 2
If Antonio’s contract ended on December 9 as we said before, he would have been contracted that year for 11 months and nine days. In total, 339 days. Considering that for every 360 days there are 30 vacation days, for 339 days he would be entitled to 28.25 days. Consequently, the employer has to pay Antonio the equivalent of 28.25 days of vacation, if the former worker had not taken any of them.
To carry out the exact mathematical operation, 28.25 must be multiplied by the daily salary (€50) from the previous step: 28.25 X 50 = €1,412.5. That would be the monetary value of your vacations generated and not enjoyed.
3) Extraordinary payments
When calculating a settlement due to dismissal, resignation or end of contract, extraordinary payments cannot be missing if they are not prorated (that is, in the event that they are not paid distributed among 12 monthly payments per year).
If you receive them in full in certain months of the year, for example, in summer and Christmas, you must take the time elapsed since you received the last extra pay as a reference. Let ‘s continue with the same example to see it more easily.
Example of calculating settlement: Part 3
Antonio receives, by contract, two extra payments of €1,500 every six months. In this case, it is necessary to count the days elapsed since the last one was received (July, but from the same day 1, as a rule) until the moment of cessation on December 9.
Therefore, to see what would belong to him from the next pay, we divided 1,500 (the amount of the full Christmas pay) by 182.5 days -six months-. The result would be €8.21 per day. Then, you have to multiply that daily figure by the days elapsed from July 1 to December 9, which are 162: 8.21 X 162 = €1,330.02. That would be the figure of what in the settlement would be considered as “extra pay earned but not collected.”
The final amount paid in a settlement
In summary, how is the settlement obtained? Well, now we have to add (according to the result of the previous calculations) :
- The days of salary worked but not collected since the last payroll
- The amount of unused vacations
- And that of the extra payments generated but not paid by the company
And apart, let’s not forget that, if there are any, other concepts must also be added that, as we mentioned before, must be included in the settlement if the collective agreement or the agreement with the company so establishes. And we would already have the final amount.
Deductions for personal income tax and Social Security
From the gross money that we have previously calculated, we must subtract what the worker assumes for the Social Security contribution, as well as the personal income tax withholdings.
Example of calculating settlement: Final Result
Antonio’s settlement would amount to: €450 for the nine days worked in December, plus €1,412.5 for the holidays he did not take, plus €1,330.02 for his part of the extra Christmas pay. So, calculating a settlement due to dismissal in the case of Antonio would result in a total of €3,192.52 (minus the due deductions for personal income tax and Social Security that would be applied).
Main doubts about the settlement
How much of a settlement corresponds to me according to the type of dismissal?
This question has the same answer as if we were facing an end of contract or voluntary redundancy of the worker: there are no differences in the calculation of the settlement according to the type of dismissal or cause of termination.
Consequently, how do you know how much settlement corresponds to you in your specific situation? You only have to carry out the calculations that you have read throughout this article. Not including any variation.
How much do I get in settlement for 1 year?
This recurring question, “how much do I have to pay for 1 year”, leads us to the same thing. Because it does not matter if you have worked in that company for 25 years or just one, since when a settlement is paid, only factors related to the year in which your employment relationship has ended are involved.
The only exception is if you have unspent vacation from the previous year that is not “lost” according to company policy.
Can the settlement calculation be negative?
It can happen, and it becomes a debt from the employee to the employer, although it is very rare.
The normal thing is that it is positive for the worker, but it is true that if, for example, it is he who has decided to leave the company and has done so without prior notice, and to this is added that he has enjoyed more days of vacation than that had accrued to date, the final balance may be favorable to the contractor. The same as if advances had been paid to the worker, among other possibilities.
What period exists to pay the settlement?
In practice, the settlement is delivered on the last day that the worker goes to his post. However, the company may be delayed in providing it. And we do not have good news in this regard, because there is no specific term to which the employer must comply -unless the collective agreement establishes otherwise-. However, the affected party has one year to claim it.
An advice before signing the settlement
At the time of termination of an employment relationship and the delivery of the settlement, it is vital that, if you do not agree with the amount paid a priori, sign it as “non-conforming” and note the date of receipt. This will allow time for an employment lawyer to assure you that the settlement is correct. And if it is not, having signed as “non-conforming” you can claim before the law.
This type of claim can also be carried out if, despite a lack of notice on your part, or that the company certifies that it has given advance payments to the worker or extra vacations, among other possible reasons, the settlement is negative and you think that the numbers don’t add up.
Settlement versus severance pay for termination of contract or dismissal
When a contract with a Social Security contribution is terminated, you always have the right to a settlement, regardless of the reason. And now you know how the settlement is obtained, as we have explained to you step by step. But we insist that it cannot be confused with compensation, which is an additional amount that can be added to the settlement. And that, in general, is much higher! Proof of this is this case that our lawyers won in court, where compensation of more than 30,000 euros was obtained for unfair dismissal of a traumatology and orthopedics supply business.