Termination Requirements Around the Globe

Quick Hits

• U.S. at-will employment is not common internationally; other countries require valid reasons and advance notice for termination.
• Statutory severance pay is mandatory in many countries, calculated based on length of service and salary, and non-negotiable.
• Additional benefits include accrued but unused vacation, pro-rata thirteenth-month salary, earned bonuses, and seniority premiums.
• Good cause termination requires specific procedures and evidence, making it challenging to avoid severance payments.
• Employers may want to understand local laws, plan financially, and accrue liabilities to manage employment termination costs effectively.

At-Will Employment vs. International Norms

In the United States, at-will employment generally allows employers to dismiss an employee for almost any reason (or no reason at all) as long as the reason is not illegal. This concept, however, is foreign to most other countries. Internationally, employers must often provide a valid reason for employment termination or face substantial financial penalties. These penalties can include statutory severance pay and other mandatory benefits.

Statutory Severance Pay: A Misunderstood Term

One of the most misunderstood aspects of international termination payments is statutory severance pay. Unlike in the United States, where severance is typically associated with layoffs or reductions in force, statutory severance pay is a mandatory payment in many countries, generally when there is no “good cause” to terminate the employment relationship. Basically, the termination payment is a penalty for employers that are terminating the employment relationship that the employee expected would continue indefinitely. This payment is often calculated based on the employee’s length of service and salary, and it is enshrined in labor codes, making it non-negotiable. Note that some countries impose caps on severance payments. For example, in China, the cap is based on the city-specific minimum wage, while in the United Arab Emirates (UAE), the end-of-service gratuity has no salary cap but cannot exceed a total of two years’ pay.

Additional Benefits and Entitlements

Beyond having to provide a notice period (or payment in lieu as allowed by certain countries) and severance pay, employees in many countries are entitled to other benefits upon termination of employment, regardless of the reason for their departure. These benefits can include:

• Accrued but Unused Vacation: In many jurisdictions, employers must pay for any accrued but unused vacation days. This can be a significant financial burden, especially in countries where vacation days can carry over for several years.
• Thirteenth-Month Salary: Many countries require employers to pay a thirteenth-month salary or Christmas bonus. Upon termination of employment, employees are often entitled to a pro-rata portion of this payment.
• Earned Bonuses: In some countries, employees are entitled to bonuses they have earned, even if they are no longer employed at the time of payment and regardless of any language included in the bonus plan.
• Seniority Premium: This payment compensates employees for their loyalty and length of service. It is separate from severance pay and is due even if the employee resigns.

The Challenge of Demonstrating Good Cause

Generally, one of the ways employers can avoid paying notice periods and severance is to terminate employment for good cause. Demonstrating that good cause exists, however, can be a complex and lengthy process in many countries. Poor performance is not generally considered a valid reason to terminate employment. Rather, employers must prove that the employee behaved in a way that is prohibited under the relevant labor code, such as fraud, theft, and gross misconduct. Employers must follow specific procedures, including conducting hearings, collecting evidence, and issuing decisions within strict timeframes. Failure to adhere to these procedures can lead to a wrongful termination claim, potentially resulting in legal liability for the employer to pay damages to the separated employee, and in some cases, reinstatement.

Preparing for Termination Costs

To avoid being caught off guard by termination payments, U.S. employers may want to consider the following steps:

• Understanding Local Employment Laws: Before setting up operations in a new country, employers may want to seek a summary of the local employment laws, including termination payment obligations—for employees, independent contractors, and contingent workers employed through an employer of record (EOR).
• Planning Financially: Employers may want to consider setting aside funds to cover potential termination costs. The total balance in such a fund could include the cost per employee per year, including not only base salary but also social security contributions and additional benefits and payments. Being prepared will allow employers to make business decisions regarding employment relationships that are not bound by finances.
• Accruing Liabilities: In some jurisdictions, employers are required to accrue liabilities for mandatory entitlements. Being aware of these obligations can help employers manage their financial responsibilities effectively.

Conclusion

Navigating the complexities of termination payments for international workforces requires a thorough understanding of local employment laws and careful financial planning. By being proactive and informed, U.S. employers can avoid surprises and ensure compliance with international labor regulations.

Ogletree Deakins’ Cross-Border Practice Group and Global Reorganizations Practice Group will continue to monitor developments and will provide updates on the Cross-Border and Global Reorganizations blogs as additional information becomes available.

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