Redundancy pay on termination of employment due to redundancy (Serbia)

In the text Redundancy: a guide through a complex employment-law process we discussed what constitutes redundancy, in which situations an employer may declare it, and what the basic conditions are for such a dismissal to be carried out in accordance with the law.

We particularly emphasised that an employer cannot unilaterally dismiss employees citing “organisational changes” as the reason, without first adopting a decision on surplus employees, respecting internal procedures (if any) and providing a lawful explanation in the decision on termination of employment.

Still, even when all those steps are met, there is one more condition without which the dismissal does not occur in the formal sense at all: redundancy pay (redundancy pay pay). That is precisely the topic we address below.

Redundancy pay is the employee’s right

Redundancy pay is not a payment the employer grants at its own discretion, but a statutory right of the employee in the event of termination of the employment contract due to the declaration of technological, economic or organisational redundancy.

Article 158 of the Labour Law clearly stipulates that an employee whose employment terminates due to redundancy is entitled to redundancy pay, at least in the amount of one third of his or her wage for each completed year of service with that employer.

From this provision it can be interpreted that only employees who have not completed even one full year of service have no right to redundancy pay. In practice we have seen some employers pay redundancy pay even for that uncompleted year.

It is important to stress that this right cannot be excluded or reduced by contract. Any “agreement” under which an employee waives redundancy pay, or accepts a lower amount, is considered null and void and produces no legal effect. The right to redundancy pay is an inalienable right of the employee.

Who is entitled to redundancy pay?

An employee is entitled to redundancy pay if:

• the employment relationship ends by dismissal by the employer;
• the reason for dismissal is not the employee’s fault, but technological, economic or organisational redundancy;
• he or she has accrued service with that employer – at least one completed year with the employer or with its affiliated persons, as well as with a predecessor employer (in the case of organisational changes).

Employees who resign or conclude an agreement with the employer on termination of employment are not entitled to redundancy pay under the law, unless otherwise provided by internal acts or contract. Likewise, an employee who is dismissed for breach of duty or misconduct does not acquire this right.

Redundancy pay is paid only for completed years of service with the employer, in accordance with the employment contract. The employee is entitled to have counted also those years for which the employer may not have paid taxes and contributions. In this case, service with the employer therefore also includes actual work.

An employer may grant an employee redundancy pay in an amount exceeding the statutory minimum without limit, but may not grant it for more years than the employee actually has with it (e.g., for the employee’s entire overall career), nor pay redundancy pay for years for which redundancy pay has already been paid.

How is redundancy pay calculated?

To perform a correct calculation of redundancy pay, the following elements are taken into account:

• Number of completed years of service with the employer (if there were breaks in employment, that previous period is also counted);

• The employee’s average monthly wage in the last three months before the adoption of the termination decision;

• The statutory minimum – one third of the average wage per year of service.

 
Does “average wage” mean net or gross wage?

This question still causes dilemmas in practice.
Namely, under the Labour Law, “wage” means the gross wage, i.e., the average gross wage for the 3 months preceding the month in which redundancy pay is paid is used.

However, the question arises whether that calculated gross amount is also paid out.
The Appellate Courts and the Supreme Court have taken the position that the employee is paid the net amount of redundancy pay, since the employer pays taxes and contributions on that amount to the competent funds.

“…redundancy pay is not paid in a gross, but in a net amount, because redundancy pay in a gross amount is determined according to the gross wage as the basis, but upon payment of redundancy pay the employee is entitled to its net value, and this regardless of the fact that under Article 105 paragraph 2 of the Labour Law, ‘wage’ means a wage that includes taxes and contributions payable from the wage. The gross value of the wage – taxes and contributions – is not paid to the employee, but, for the employee, is paid to the competent fund: the Tax Administration and the fund, i.e., other bodies depending on the type of contributions and taxes.” 

(From the judgment of the Appellate Court in Belgrade, Gž1 2362/2019 of 28 May 2020.)

Redundancy pay calculator – illustration

As mentioned, if the employer’s internal act (e.g., Work Rules or a Collective Agreement)
An incorrectly calculated redundancy pay does not automatically mean nullity of the decision on termination of employment due to redundancy. Namely, if the employer has fully complied with the procedure and the dismissal is formally and substantively justified in the given circumstances, and the employer paid the redundancy pay on time, an incorrect calculation does not render the decision null. The employee may only in court proceedings seek a correct calculation of redundancy pay.

When is redundancy pay paid?

Redundancy pay must be paid no later than on the day the termination decision is served. That deadline is of essential importance. Namely, if redundancy pay is not paid before termination of the employment contract, the decision on termination produces no legal effect.

The Appellate Court in Belgrade, in judgment No. Gž1 515/2018 of 21 March 2019, states:

“…payment of redundancy pay is a condition for the validity of a decision on dismissal of the employment contract on the basis of redundancy, and it is the employer’s obligation, prior to the intended dismissal, to pay redundancy pay to the employee whose work is no longer needed, and this constitutes a condition for the lawfulness of the dismissal of the employment contract within the meaning of Article 179 paragraph 5 item 1 of the Labour Law.”

In other words, if an employee receives redundancy pay a few days or months after the date stated in the decision, it is as if he or she has not received it at all. Such dismissal is unlawful, and the termination decision is null.

This position has also been confirmed in the practice of the Supreme Court, which has repeatedly taken the view that payment of redundancy pay is an integral part of the lawful dismissal procedure and that even a delay in its payment is sufficient grounds to set aside the dismissal.

Judicial protection of employees

If the employer fails to pay redundancy pay, or pays it in an amount lower than prescribed, the employee has the right to:

• file a claim before the competent court to annul the decision on termination of the employment contract;
• file a claim seeking redundancy pay in the correct amount (damages claim);
• address the labour inspection, which may impose fines on the employer.

Misdemeanour fines for the employer in such cases can be up to 1,000,000 dinars, in accordance with Article 275 of the Labour Law.

Also, if the employee, by a claim, seeks annulment of the dismissal due to unpaid redundancy pay and the court upholds the claim, the employer may be obliged to reinstate the employee and pay all outstanding wages and contributions.

Special cases and practical issues

In practice, specific issues may also arise, such as:

• Fixed-term employees – as a rule, redundancy pay is not paid if the contract ends upon expiry of its term, but if dismissal occurs before the end of that term due to the declaration of redundancy, the right to redundancy pay exists;
• Mergers or cessation of business – a new employer may take over workers, but if they are nevertheless declared redundant, the right to redundancy pay is calculated in accordance with service with the previous and the new employer.

It is important to clearly distinguish situations in which there is a statutory right to redundancy pay from situations in which it is the employer’s business policy to offer it even though it is not obliged to. For such types of redundancy pay, the rules discussed here do not apply.

Conclusion

Redundancy pay due to the declaration of redundancy is not a matter of negotiation or goodwill, but a statutory right that protects the employee when he or she loses employment through no fault of their own.

Every employer considering a headcount reduction for any reason (technological, economic or organisational) must bear in mind the financial compensation that will have to be paid in accordance with the law. Any error in the amount, manner or timing of payment can lead to serious consequences, including annulment of the dismissal and reinstatement of the employee.

In any case, it is advisable that such procedures be carried out with prior legal advice, in order to protect employees’ rights and avoid unnecessary costs and disputes for employers.As mentioned, if the employer’s internal act (e.g., Work Rules or a Collective Agreement) provides for a higher percentage (e.g., 50% or a full wage per year of service), the rule more favourable to the employee always applies.

Law Firm Petrović Mojsić & Partners