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Severance slip-ups

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Legal news
calendar 12 February 2023
globus Norway

A recent case from the Norwegian Supreme Court suggests that companies should give severance payments in monthly arrears. Employees who receive severance pay as a lump sum will therefore risk lower unemployment benefits because their income appears lower when calculated over three years.

Three employees terminated their employment by accepting a severance agreement with their companies. The severance pay was paid as a lump sum to all three employees. For all three employees, the severance pay was supposed to cover their loss of income for a long period of time. They received 18-, 24- and 42-months’ salary respectively.

Unemployment benefits are calculated based on the average income for the previous 36 months, with a cap of approximately NOK 660.000 per year. Illustratively, if an employee receives a lump sum payment corresponding to 36 months’ salary, the payment will be capped at NOK 660.000 for the first year. For the two subsequent years, the income will be calculated as NOK 0. The average over the three years will therefore be calculated as NOK 220.000. If the payments were made in monthly arrears however, the yearly income would be NOK 660.000 for each of the three years.

When the three employees later applied for unemployment benefits from the Norwegian Labour and Welfare Administration (NAV), they received a significantly lower amount than expected.

The importance of timing

The Supreme Court concluded that the unemployment benefits had to be calculated based on the time of payment. Therefore, employees accepting lump sum severance payments may be entitled to lower unemployment benefits than expected.

The Supreme Court reached this conclusion despite the negative effect such a calculation could have on future employees’ unemployment benefits. This was because the need for an easy and practical calculation to administer unemployment benefits was critical.

IUNOs opinion

With this recent judgement employees who have accepted a lump sum severance pay, risk considerably lower unemployment benefits.

IUNO recommends that companies offer severance agreements where severance pay is paid out in monthly arrears. This especially applies when the severance pay is substantial, and the employee will have difficulty finding other employment. When companies offer lump sum payments, the company can also be responsible for informing the employee of this risk due to the duty of loyalty.

[The Norwegian Supreme Court’s judgement of 20 December 2022 in case HR-2022-2433-A]

Three employees terminated their employment by accepting a severance agreement with their companies. The severance pay was paid as a lump sum to all three employees. For all three employees, the severance pay was supposed to cover their loss of income for a long period of time. They received 18-, 24- and 42-months’ salary respectively.

Unemployment benefits are calculated based on the average income for the previous 36 months, with a cap of approximately NOK 660.000 per year. Illustratively, if an employee receives a lump sum payment corresponding to 36 months’ salary, the payment will be capped at NOK 660.000 for the first year. For the two subsequent years, the income will be calculated as NOK 0. The average over the three years will therefore be calculated as NOK 220.000. If the payments were made in monthly arrears however, the yearly income would be NOK 660.000 for each of the three years.

When the three employees later applied for unemployment benefits from the Norwegian Labour and Welfare Administration (NAV), they received a significantly lower amount than expected.

The importance of timing

The Supreme Court concluded that the unemployment benefits had to be calculated based on the time of payment. Therefore, employees accepting lump sum severance payments may be entitled to lower unemployment benefits than expected.

The Supreme Court reached this conclusion despite the negative effect such a calculation could have on future employees’ unemployment benefits. This was because the need for an easy and practical calculation to administer unemployment benefits was critical.

IUNOs opinion

With this recent judgement employees who have accepted a lump sum severance pay, risk considerably lower unemployment benefits.

IUNO recommends that companies offer severance agreements where severance pay is paid out in monthly arrears. This especially applies when the severance pay is substantial, and the employee will have difficulty finding other employment. When companies offer lump sum payments, the company can also be responsible for informing the employee of this risk due to the duty of loyalty.

[The Norwegian Supreme Court’s judgement of 20 December 2022 in case HR-2022-2433-A]

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