Severance pay: The most important rules in 2024

It is crucial that every employee is aware of the rules and conditions of severance pay, as these greatly influence the circumstances under which they can expect severance pay, as well as the amount of the same. This is particularly true in cases of employer-initiated ordinary dismissal, where the amount and method of payment of severance pay can be of significant importance. If someone is not familiar with the rules and conditions related to severance pay, they could easily miss out on a substantial amount or fail to properly enforce their rights.

Therefore, it is essential for every employee to get informed about the conditions, amount, and circumstances under which they are entitled to severance pay. Knowledge of the rules of severance pay is especially important, as legal regulations and the details of employment contracts can vary, and the conditions for entitlement can also change. Additionally, the calculation of severance pay can vary depending on the length of employment and other factors.

What is severance pay?

Severance pay is a benefit that an employer is required to pay to an employee if the employment ends under certain conditions. The purpose of severance pay is to provide financial support to the employee after the termination of employment, helping them through the transitional period resulting from job loss. Severance pay is a type of compensation, the amount of which depends on the length of the employment.

Severance pay is due if the employer terminates the employment with ordinary notice. By contrast, severance pay is not due if the employment ends by mutual agreement, if the employee leaves due to (extraordinary) termination by the employer with immediate effect, or if the employee resigns under ordinary (non-extraordinary) notice.

The rules for severance pay in Hungary are governed by the Labour Code (Act I of 2012). The law defines the cases and conditions under which severance pay is due and specifies the amount the employee is to receive, depending on how long they have been in the service of the employer. As a general rule, the amount of severance pay increases with the length of the employee’s service: the longer the employment, the higher the severance pay.

The rules of severance pay

Severance pay is a benefit to which employees are entitled under specific circumstances, with various rules and conditions determining when and under what circumstances it is applicable. It is important to be aware of these rules so that employees know their rights when their employment ends.

In what cases is severance pay due?

An employee is entitled to severance pay in the following cases:

1. Dismissal by the employer: When the employer terminates the employment with ordinary notice. This is one of the most common situations where severance pay must be paid.
2. Dissolution of the employer without a legal successor: If the employer ceases to exist without a legal successor, such as in case of bankruptcy or liquidation proceedings, the employee is entitled to severance pay.
3. Lawful resignation by the employee: If the employee resigns in a situation where such resignation is deemed lawful due to the employer’s conduct, severance pay may also be due.
4. Change in the employer’s identity or legal status: If the employer undergoes a change in legal status or other reasons that remove it from the scope of the Labour Code, leading to the termination of the employment contract.

What are the exclusions where severance pay is not due?

There are situations where the employee is not entitled to severance pay, including:

• (Extraordinary) termination with immediate effect: If the employment is terminated by immediate dismissal by the employer due to serious breach of obligations by the employee, severance pay is not due.
• The death of the employee: If employment ends due to the employee’s death, severance pay is not due, although relatives may be entitled to other benefits.
• If the employment ends with the employee’s ordinary resignation and the reason is not due to serious breach by the employer: In this case, the employee waives severance pay.
• If a fixed-term employment ends with expiration: When a fixed-term employment automatically ends with the expiration of the term, the employee is not entitled to severance pay, unless the employer terminates it with ordinary notice before the term ends.
• In case of retired employees.

What conditions must be met for severance pay entitlement?

The entitlement to severance pay is subject to certain conditions, the most important of which are the following:

1. Length of employment: The amount of severance pay depends on the length of employment. To be entitled to severance pay, an employee must have at least 3 years of continuous employment with the same employer.
2. Type of termination: The employment must end with employer-initiated termination, ordinary notice, or termination of the employer without a successor for severance pay to be due. If the employment ends by mutual agreement, (extraordinary) dismissal with immediate effect, or employee-initiated ordinary resignation, severance pay is not automatic.
3. Proper conduct by the employer: The employer must adhere to the rules and procedures prescribed by the Labour Code during the termination process. If the court finds that the employer acted unlawfully, the employee may also be entitled to additional compensation beyond the severance pay.

Amount and calculation of severance pay

The amount of severance pay depend on various factors, and it is especially important to understand how this amount is calculated based on the length of employment. The Labour Code clearly defines the rules regarding the amount of severance pay and how the amount increases with the length of employment.

Calculation of severance pay based on years of employment

The amount of severance pay depends on the employee’s length of service, and according to the Labour Code, it is as follows:

• After 3-5 years of service: the employee is entitled to one month’s absentee fee as severance pay.
• After 5-10 years of service: the employee is entitled to two months’ absentee fee.
• After 10-15 years of service: the employee is entitled to three months’ absentee fee.
• After 15-20 years of service: the employee is entitled to four months’ absentee fee.
• After 20-25 years of service: the employee is entitled to five months’ absentee fee.
• After more than 25 years: the employee is entitled to six months’ absentee fee.

This severance pay amount further increases if the employment ends within five years preceding the employee’s retirement age.

How does severance pay increase with length of employment?

The amount of severance pay increases proportionally with the length of employment, meaning the longer an employee works for a particular employer, the higher amount of severance pay they can expect. This gradual increase reflects the employee’s loyalty and professional experience accumulated during their time with the employer.

A longer employment not only means a higher severance pay amount but also greater security for the employee in the event of termination. Employees who have worked for a company for many years can receive significant severance pay, which helps them through the job search or transition to a new job.

The exact amount of severance pay is calculated based on the number of years worked and the employee’s monthly absentee fee.

The absentee fee is determined based on the base salary, flat rate in lieu of salary supplement, performance pay and salary supplements paid in the last six months prior to the due date (reference period).

It is important to note that the total income of the employee should be considered when calculating severance pay, which can often result in a higher severance pay amount.

Severance pay after 5 years and 10 years of employment

The amount of severance pay is closely related to the length of employment, and accordingly, the amount varies. Let’s look at specific examples of how much severance pay an employee might receive after 5 years and 10 years of service, and how this applies to different types of employment contracts.

Severance pay after 5 years of employment

Example 1: Indefinite-term employment contract

Let’s assume that Anna has been working for a company for 5 years under an indefinite-term employment contract. If the employer terminates Anna’s employment with ordinary notice, she is entitled to severance pay equivalent to two months’ absentee fee.

• Absentee fee: HUF 300,000
• Amount of the severance pay: 2 × HUF 300,000 = HUF 600,000

Example 2: Fixed-term employment contract

If Anna works under a fixed-term contract and the employer terminates the employment before the contract ends, the amount of the severance pay is also equal to two months’ absentee fee if the employment lasted more than 5 years. The amount of the severance pay is calculated as follows:

• Absentee fee: HUF 300,000
• The amount of the severance pay: 2 × HUF 300,000 = HUF 600,000

After 10 years of employment

Example 1: Indefinite-term employment contract

Now let’s consider Peter, who has been working for a company for 10 years under an indefinite-term employment contract. If the employment ends for the reasons mentioned above, Peter is entitled to severance pay equivalent to three months’ absentee fee.

• Absentee fee: HUF 350,000
• The amount of the severance pay: 3 × HUF 350,000 = HUF 1,050, 000

Example 2: Fixed-term employment contract

If Peter works under a fixed-term contract, which his employer terminates before the term of the contract ends, the severance pay amount is the same as three months’ absentee fee, in case the employment lasted more than 10 years. The amount of the severance pay is calculated as follows:

• Absentee fee: HUF 350,000
• The amount of the severance pay: 3 × HUF 350,000 = HUF 1,050,000

Net or gross? Taxation of severance pay

The gross amount of severance pay is reduced by the following tax liabilities:

• Personal Income Tax (PIT): A 15% PIT must be deducted from the gross amount of the severance pay. This income tax is generally applicable for the tax year, and the amount of severance pay received should be included in the personal income tax return.
• Social security contributions: Both the employer and the employee must pay social security contributions on the severance pay. The exact percentages may vary, but generally, the following contributions apply to severance pay:
  • Pension contribution: 10%
  • Health insurance contribution: 7%
  • Labour market contribution:  1.5%

In summary, severance pay is an important financial benefit, and its exact amount and conditions depend on the length of the employment. Employees should thoroughly familiarize themselves with the details of their employment contracts and local regulations to fully utilize their entitlements. As employees, it is essential to be aware of our rights and obligations both before and after the termination of employment.

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