Severance Pay and Final Settlement in Luxembourg

1. Severance pay: who is entitled?

Severance pay is due to an employee bound by an indefinite-term contract who is dismissed by the employer, except where that dismissal is based on serious misconduct (Art. L.124-10). It therefore protects the employee whose contract ends for reasons relating to aptitude, conduct or the operational needs of the business.

Severance pay is also due where it is the employee who terminates their own contract for serious misconduct attributable to the employer — provided the labour court finds that termination to be well-founded (Art. L.124-7). In that case the employee is in the same economic position as a dismissed employee.

2. Statutory scale by length of service

The minimum amount of severance pay is set by the Labour Code according to continuous length of service, assessed at the date of expiry of the notice period (Art. L.124-7).

The seniority threshold is assessed on a continuous basis: a break in the employment relationship (resignation followed by re-hire, for example) may reset the count. Periods of contract suspension — parental leave, illness, accident — are in principle included.

3. Calculation base

Severance pay is calculated on the basis of gross salaries actually paid during the 12 months preceding notification of the termination (Art. L.124-7). Where the 12-month reference period is incomplete — notably in the event of recent hiring or prolonged absences — the calculation is adapted accordingly.

Items included in the calculation base

The following are taken into account: the gross base salary, sickness cash benefits paid during the reference period, and regular bonuses and supplements — that is, remuneration elements of a regular and foreseeable character, such as monthly contractual bonuses or shift-work supplements.

Items excluded from the calculation base

The following are expressly excluded: overtime pay, discretionary bonuses (exceptional or discretionary bonuses, a voluntary thirteenth month) and incidental expenses (reimbursements of professional expenses, travel allowances, benefits in kind valued outside the contractual salary).

4. Option for small businesses (fewer than 20 employees)

An employer employing fewer than twenty employees has an alternative to paying severance: they may choose, in the dismissal letter itself, to replace the severance payment with an extended notice period (Art. L.124-7).

The employer must expressly exercise this option in the dismissal letter. If they do not, the statutory severance pay remains due under the ordinary rules. During the extended notice period, all ordinary notice rules apply: the employee continues to perform their contract, or may be released from performing with full pay if the employer opts for garden leave.

5. Final settlement: obligations and deadlines

Termination of the employment contract triggers administrative and financial obligations which the employer must fulfil within precise deadlines.

Outstanding wages and itemised breakdown

Outstanding wages — corresponding to days worked since the last pay period — and an exact and detailed breakdown setting out the period worked, the number of hours, the applicable rates and all emoluments must be given to the employee no later than five days after the end of the contract (Art. L.125-7). This deadline is strict: a delay exposes the employer to a payment claim.

Severance pay

Severance pay must be settled when the employee actually leaves the workplace — i.e. at the end of the notice period or, in the event of garden leave, on the date from which that garden leave takes effect (Art. L.124-7).

Unused paid leave

If the employee has not used up all their paid leave entitlement at the time of departure, the compensatory leave indemnity for unused days is paid upon departure (Art. L.233-12). This indemnity is calculated on the basis of the average gross salary and follows the same tax and social-security treatment as salary.

6. Special cases, exclusions and limitation period

Serious misconduct and early retirement

Two situations exclude entitlement to severance pay. First, an employee dismissed for serious misconduct cannot claim any severance pay (Art. L.124-10) — unless the dismissal is subsequently found to be wrongful, in which case the severance pay becomes payable again together with damages. Second, an employee who has received an early-retirement benefit under the statutory early-retirement scheme cannot combine that benefit with severance pay (Art. L.124-7).

Cessation of business, insolvency or death of the employer

Where termination of the contract results from the employer's insolvency, cessation of business or death, the contract is terminated immediately. In that specific case the employee is entitled (Art. L.125-1) to salary maintenance for the month of the event and the following month, plus an indemnity equal to 50% of the monthly notice instalments to which they would have been entitled under the ordinary notice rules. This reduced indemnity reflects the involuntary nature of the cessation of activity for the employer or their heirs.

Limitation period

Claims for wages of any kind — including termination indemnities such as severance pay and the compensatory leave indemnity — are subject to a three-year limitation period running from the date on which those amounts fell due (Art. L.221-2). After that period the employee loses the right to claim payment before the courts, unless the limitation has been interrupted by a formal demand or legal action.