Severance pay and interest on severance pay

1.    Severance pay

¿Who receives severance pay?

Severance pay is a mandatory social benefit to which all workers covered by an employment contract are entitled, regardless of the type or duration of the contract. Domestic workers, family drivers, and daily and part-time workers are entitled to severance pay.

This benefit is regulated by Article 249 of the Substantive Labor Code and consists of the payment of one (1) month's salary for each year worked or proportionally in the case of less time worked.

Workers not entitled to receive severance pay

Severance pay shall not be paid or deposited to workers whose salary type is integral; the value of the severance pay shall be included within 30% of the benefit factor, and this salary may not be less than 13 times the current legal minimum monthly wage.

When are severance payments made?

Severance pay must be settled annually in the period between January 1 and December 31 of each year or proportional to the time worked in this period.

Once this payment has been made, it must be deposited into the severance fund chosen by the employee no later than February 14 of the following year. If the employment contract ends before this date and the deposit has not yet been made, the employer must pay the severance pay directly to the employee. 

How are severance payments settled?

Severance pay is calculated based on the worker's last monthly salary, provided that there has been no change in the last three months. Otherwise, the average salary earned in the last year is calculated.

Severance Pay Formula:

 Severance Pay = Base salary for settlement x Working Days

                     360 days

When the worker receives payments that are considered wages, these must be included in the

calculation of severance pay:

• Surcharges
• Overtime
• Commissions
• Bonuses and/or wage subsidies

2.     Interest on Severance Pay

Interest on severance pay is an additional social benefit to severance pay. It must be recognized and paid by employers to their workers on the accumulated balances for severance pay.

The employer is obliged to recognize interest equivalent to 12% per annum on the value of severance pay settled on December 31 of each year worked. This amount must be paid no later than January 31 of the following year and directly to the employee, as it is a financial recognition by the employer for withholding the money during the year.

How is severance pay interest calculated?

To calculate interest on severance pay, the following formula must be applied:

Severance Pay Interest Formula:

             Severance Pay Interest = Severance Pay Amount x Days Worked x 12%

                                                 360 days

Penalties for non-payment of severance pay

If the employer does not pay the employee the amount owed for severance pay due to the termination of the employment contract, they will have to pay a penalty equal to one day's salary for each day of delay, in accordance with Article 65 of the Substantive Labor Code.

The employer must deposit the severance pay by February 14 of the year following the year in which it was accrued, into the fund chosen by each employee. Failure to comply with this obligation in a timely manner may result in a penalty, as provided for in Article 99 of Law 50 of 1990, consisting of the payment of one (1) day's salary for each day of delay.

Severance pay during the worker's period of incapacity?

During a period of incapacity, workers are entitled to receive severance pay and interest on severance pay in full or proportionally, as applicable, since incapacity is not grounds for suspension of the employment contract.

Incapacities, whether of common or work-related origin, do not affect the calculation of social benefits. These must be paid based on the last base salary earned by the worker before the start of the period of incapacity.

Seizure of severance pay

As a general rule, severance pay is exempt from seizure under Article 344 of the CST. However, this provision also includes an exception stating that in the case of debts for alimony and loans to cooperatives, up to 50% of its value may be seized.

Loss of severance pay

According to Article 250 of the Substantive Labor Code, certain behaviors cause workers to lose their severance pay. These are:

• The employee commits criminal acts against the employer or their close relatives or the company's management.
• The employee causes serious intentional material damage to buildings, works, machinery, and raw materials, instruments, and other objects related to the work.
• The employee discloses technical or commercial secrets that seriously harm the company.

When the employee commits any of the acts described above, the employer shall have the right to withhold unpaid or deposited severance pay. To do so, the employer must file a formal complaint with the authorities, which must be followed by a criminal investigation.

Important! For the loss of severance pay, a conviction by a competent judge establishing the criminal liability of the worker is required.