One of the most discussed topics recently is severance pay, and in particular the timing of its payment is highly questioned. When severance pay is not paid on time, various problems can arise under the applicable legislation.
When Is Severance Pay Paid?
The payment of severance pay is generally due on the date the employment contract ends. However, for several reasons employers sometimes do not pay severance on time or fail to pay it at all. Under the Employment Law No. 1475 and the amendments introduced by Law No. 2869, if severance payment is delayed, a specific interest rate applies.
Accordingly, when severance pay is not paid on its due date as set out in the relevant articles of Law No. 1475, the highest interest rate determined by banks is applied. In other words, for every day of delay the severance amount accrues interest calculated at the highest bank rate. The provisions that regulate interest on severance pay do not differentiate between private and public banks. Because the law refers to the highest interest, the bank that applies the highest rate is taken as the reference. However, if banks do not apply the rates they reported to the Central Bank for the relevant periods, those rates are not considered.
Repayment with Interest
If severance pay is not paid on time, courts can order payment with interest. In reinstatement cases, when an employee applies within the prescribed period but the employer does not rehire them, the termination date is accepted as the reference date. For severance interest, the starting point is treated as the date when the employer indicated the employee would not be rehired or the end of the period allowed for rehiring.
The court will also order statutory interest for notices and other employment rights from the date of default specified for those rights or from the date the lawsuit was filed. The interest rate for severance is determined as the highest interest rate applied to deposits from the date the employment contract was terminated.
Determining the Highest Interest Rate
If severance pay is not paid on time, the employee must file a lawsuit at the labor court. The judge calculates the delay period for severance pay based on the termination date or, if applicable, the employee’s date of death. The court must order payment of the severance along with the highest deposit interest rate in effect during the delay period.
To determine the highest deposit interest rate, the court obtains written notifications from the Central Bank and other banks to learn the applicable rates. When calculating delay interest, the employee is entitled to be compensated as if they had invested the severance immediately at the bank offering the highest rate available at that time. The start date for interest on severance is the date the employment contract was terminated. This right does not require an additional default declaration to become effective.
Another important point concerns employees who terminate their employment due to retirement, old-age, disability, or lump-sum payments from pension funds. These employees must provide their employer with documentation proving they applied to the pension fund or relevant institution for a pension in order to claim severance. The employer’s obligation to pay severance begins from the date the employee presents that document; it cannot be backdated before the termination date. The obligation to pay interest also takes effect from the date the document is delivered to the employer.
If an employee seeks severance due to retirement, they must also document their application to the Social Security Institution (SGK) and prove they are entitled to retire. If these conditions are not met, the right to severance pay does not arise.