Labor reform: changes in severance pay and interest
Changes in severance pay and interest
One of the changes introduced by the reform refers to the direct payment of severance pay to the worker. Now, article 15, paragraph 4, exempts the employer from penalties for late payment if they make the advance payment directly to the worker, provided that it is voluntary and within legal limits.
| Paragraph 4. When the employer provides reliable proof of direct payment to the worker of the amount corresponding to severance pay, said payment shall be considered as discharging the obligation, and no penalty shall be imposed for failure to deposit, unless it is proven that the payment was not made under conditions of freedom and that it was not used for purposes authorized by law. However, membership in the Severance Fund is mandatory.” |
Therefore, the default interest provided for in article 99 of Law 50 of 1990 (one day's salary for each day of delay) shall not be charged.
The main objective is:
- Reduce the administrative burden on employers.
- Improve the performance of severance payments for the benefit of workers.
- Amend article 99 of Law 50 of 1990, introducing changes in the way severance payments and interest are paid.
Advance monthly severance pay
What does it allow?
The employer may contribute 8.33% of the base salary to the severance fund on a monthly basis.
What does the base salary include?
- Monthly salary.
- Transportation allowance (where applicable).
This is equivalent to anticipating, on a monthly basis, what is normally allocated on an annual basis (one severance payment per year).
Key aspects
- The deposit is not considered a partial payment of severance pay.
- Workers cannot freely withdraw these funds, except in cases authorized by law (housing, education, etc.) or upon termination of the employment contract.
- The Ministry of Health and Social Protection will regulate how this payment is reported in the PILA.
Impact
- Improves the liquidity and profitability of severance payments by investing them from the outset.
- Reduces the risk for the employer of not having sufficient resources at the end of the year.
- Simplifies financial and accounting management.
Monthly payment of interest on severance pay
What does it allow?
Employers and employees can agree in writing that severance pay interest will be paid monthly instead of annually.
How much is paid?
- 1% of the base salary used for severance pay calculations per month.
- Includes salary + transportation allowance (if applicable).
- This is equivalent to 12% per year, as established by law, but distributed monthly.
Impact
- The employee receives additional monthly income.
- It avoids the accumulated payment of interest at the end of the year.
- It improves the employee's cash flow without affecting acquired rights.
