Prior to 2003, employers were obliged to pay severance payments directly to employees on termination of their employment contracts (unless the circumstances dictated otherwise). However, from January 2003 a new system was put in place. Since then, employers have no longer been required to make severance payments but must transfer 1.53 % of the employee's monthly salary to an individual savings fund.
Employees who commenced employment prior to 2003 are automatically subject to the new scheme may nonetheless opt-in, wholly or partially.
Partial opt-in involves the employee electing to freeze all entitlements accrued until the day of transfer according to pre-2003 rules. Any entitlements arising thereafter will fall within the new system, requiring employers to make contributions to the individual savings fund. In case of a full transfer, the employer and employee must agree on a transfer amount, which is then transferred to the individual savings fund in satisfaction of all previous entitlement. This amount should not be less than at least 60% of actual entitlement under the old system.
No taxes, social insurance contributions or other ancillary labour costs become due in this regard (unless the amount paid exceeds actual entitlement for severance according to the old system).
This year sees an important milestone in the introduction of the new severance system. Longer-serving employees to whom the opting-in opportunities apply should be aware that their ability to reach agreement with the employer for full transfer ends at the end of 2012. There is, however, no such time restriction on partial opt-in.