Severance, Accrued Leave and Clean Employee Settlements

Almost every labour claim I see against an employer comes back to one of three numbers: severance, the accrued leave balance, and the prorated year-end bonus. This piece sets out how those numbers are built, how they are treated for tax and social security, and how to write a settlement that is still defensible years later.

Severance under Article 24

The rule itself is short. On termination, an employer must pay an employee with at least one year of service, for each year of service, whether continuous or intermittent, an amount equal to one month of their last wage. Part-years are prorated.

Three phrases in that sentence generate most disputes:

• "Continuous or intermittent": an employee who worked two years, left for six months and returned for three more has five years of service, not three, unless the first period was formally and documentably settled.
• "Last wage": the basis is pay at the date of exit, not pay in the year the service was accrued. A year-end raise therefore increases the cost of every prior year of service.
• "Wage": base wage plus fixed allowances paid by virtue of the job. Overtime and one-off benefits are excluded. Where a job classification scheme applies, the group wage and seniority increment form part of this base.

Seniority increment is a different thing

The two are constantly confused. The seniority increment is an annual addition to current wages, granted by Supreme Labour Council resolution to employees with at least a year of service; it appears on the monthly payslip and is contributory. Severance is calculated when the relationship ends. One is a running cost, the other an accumulating liability.

Leave: entitlement, carry-over, buy-out

Annual leave is one month including four Fridays. No more than nine days may be carried into the following year; the excess lapses unless the employer required the employee to remain, which must be in writing.

On termination the unused balance is bought out. The practical failure in most companies is not ignorance of the rule — it is the absence of a leave register. With no record of leave actually taken, an employee's claim that they took none in five years is effectively unanswerable.

Tax and insurance treatment

For tax, severance, end-of-service benefits, dismissal compensation and leave buy-out sit within the exempt income of Article 91. But during an assessment, exemption without itemisation does not survive. The recurring problem is a lump settlement paid under one generic heading, part of which the assessor then reclassifies as a bonus and returns to taxable pay. An itemised slip prevents the argument entirely — see payroll tax for how the taxable base is built.

For social security, none of these items is contributory. What matters is recording the correct termination date and status code on the final list. A wrong or late entry both triggers assessment of extra months and can block the employee's unemployment insurance claim, which is how many disputes start.

Settlement checklist

1. Pull start and end dates and total service from the personnel file and reconcile them to the insurance lists.
2. Take the last wage and its components from the employment order, not from gross payslip figures.
3. Calculate each service period separately and deduct prior severance payments against signed receipts.
4. Extract the leave balance from the leave register and attach the statement.
5. Compute and show the prorated year-end bonus for the current year.
6. Show final month pay, overtime and deductions as separate lines.
7. Deduct employee debts only with documentation and written consent.
8. Pay the total from the company account and attach the bank receipt.
9. Record the termination date with the correct status code on the final insurance list.
10. Give the employee a signed copy and keep the other in the personnel file.

Why a signed release sometimes fails

Employers often assume the employee's signature closes the file. In practice the dispute boards look at three things: whether items were itemised, whether the amounts match the statute, and whether payment actually happened. A page reading "I have received all my entitlements and have no further claim", backed by cash with no receipt, carries limited evidential weight.

The hidden balance sheet item

Severance is an accumulating liability, not an expense of the year someone leaves. Without a monthly or annual provision, the real obligation stays off the balance sheet and the year several people depart destroys that period's profit. Recomputing the provision on each employee's current wage and true service is a standard step in year-end closing.

Key takeaways

• Severance is one month of last wage per year of service, including intermittent service.
• The last-wage basis means every raise repricing all prior years.
• Leave carry-over is capped at nine days and is indefensible without a register.
• These items are exempt from tax and contributions but must be itemised on the slip.
• Generic releases backed by undocumented cash payments do not protect the employer.