Under the 2018 amendment of the Labour Law 1997, the manner in which an employee working under an unfixed-duration contract (UDC) receives severance has changed. What was previously an indemnity for dismissal under the old labor law has now become a so-called “seniority payment” under the new amendment. For employees under a fixed-duration contract, severance pay of at least 5 percent of total wages due throughout the term of the contract remains payable upon termination of employment.
- A new regime for employees working under UDCs
Under the previous regime, a dismissal indemnity was provided to an employee upon termination of employment by the employer, except in the event of serious misconduct or resignation by the employee. Such dismissal indemnities have been replaced by seniority payments, composed of back pay for seniority accrued prior to 2019 (back pay) and new seniority pay from 2019 onward (new seniority pay). Back pay must be provided upon termination of employment for seniority accrued before 2019 and is capped at six months of base wages. New seniority pay, on the other hand, must be provided during employment (rather than on termination) in two equal installments per year—7.5 days every June and 7.5 days every December—to an employee whose seniority accrues from 2019 onward without limitation, provided that such an employee still works for the employer. Total new seniority pay per year is equal to 15 days of wages and fringe benefits.
For both back pay and new seniority pay, the probationary period is not factored into the calculation if it is provided under an independent probationary contract. If the probationary period is stipulated in the UDC, it will be factored into the calculation. The salary to be taken into account when calculating new seniority pay includes wages and other fringe benefits. Back pay, by contrast, is calculated on base wages only and excludes fringe benefits.
Similar to dismissal indemnities, outstanding seniority payments do not need to be paid in the event of termination due to serious misconduct or resignation by an employee.
- Benefits and drawbacks of seniority payments
The introduction of seniority payments has increased the number of payments to be made to employees and, hence, the employer’s liability in the event of failure to make such payments.
One of the positives that can be taken from this new regime is from a planning and business strategy development perspective. Seniority payments can be accurately predicted, which helps provide a more accurate picture of workforce expenses that businesses must take into account when budgeting.
Written by Chesda Teng and Marion Carles-Salmon of DFDL and Roger James of Ogletree Deakins
© 2019 DFDL and Ogletree, Deakins, Nash, Smoak & Stewart, P.C.