Regulations and calculation of severance pay for new employees!

What is severance pay? Regulations and conditions for receiving severance pay – What is the formula for calculating severance pay and what are the benefits when leaving a job?

I. What is severance pay?

Severance pay is a benefit that an employee receives from an employer upon termination of an employment contract in certain circumstances as provided for in the Labor Code.

II. Conditions for receiving severance pay for employees 

Article 46 of the 2019 Labor Code clearly states that to be entitled to severance pay, employees must work regularly for 12 months or more and terminate their labor contracts in the following cases: 

– Expiry of labor contract;

– Complete the work in the labor contract;

– Both parties mutually agree to terminate the employment contract;

– Employees are detained, sentenced to death or banned from doing the job stated in the labor contract according to a court decision;

– Employees lose civil capacity or die;

– The employer is an individual who has lost civil capacity, is missing or dead;

– The employer unilaterally terminates the labor contract in the following cases: 

• Employees regularly fail to complete the work stated in the labor contract; 
• Due to natural disasters, fires, dangerous epidemics, and reduction in production and business scale at the request of competent state agencies;
• Employees are absent from work after the specified time limit…

– Employees unilaterally terminate the labor contract and must notify the employer in advance:

• At least 45 days for indefinite term contracts;
• At least 30 days for labor contracts with a term of 12 months or more;
• At least 3 days for contracts with a term of less than 12 months.

➤ In some cases, employees have the right to unilaterally terminate the labor contract without prior notice, such as:

• Not assigned or arranged according to the correct job and work location;
• Not guaranteed working conditions as agreed;
• Employers abuse, beat, and have behaviors that affect the health of employees…

➤ However, employees who have worked regularly for 12 months or more are not entitled to severance pay upon termination of their labor contract in the following cases:

– Employees eligible for pension;

– Employees who voluntarily quit their jobs without a valid reason for 5 consecutive working days or more.

III. How to calculate severance pay for employees

1. Formula and method of calculating severance pay

– The salary used to calculate severance pay is the average salary of the 6 consecutive months before the employee quits the job, calculated by year (full 12 months). In case there are odd months, from 1 month to 6 months is counted as 1/2 year; and over 6 months is counted as 1 year.

– Working time to calculate severance allowance is the total actual working time of the employee minus the time participating in unemployment insurance and the time for which severance allowance has been paid. In which:

• Total actual working time includes probationary period, maternity leave, sick leave according to regulations, time off work not due to the employee’s fault, weekly rest time, paid leave, etc.;
• The period of participation in unemployment insurance is the period during which the employee has paid unemployment insurance and the period during which the employee is not subject to unemployment insurance but has been paid by the employer together with the employee’s salary an amount equivalent to the unemployment insurance level that the employer must pay for the employee according to regulations.

>> See more: Conditions and procedures for receiving unemployment insurance benefits.

2. Time limit for payment of severance allowance to employees

According to Article 48 of the 2019 Labor Code, within 14 days from the date of termination of the labor contract, the employer must pay amounts related to the employee’s benefits, including severance pay.

For example:

On February 1, 2021, Ms. A’s labor contract with the company expired and during her working time, she completed the assigned tasks well. She worked at the company since February 1, 2017 and paid unemployment insurance since April 1, 2017. Ms. A’s average salary for the 6 consecutive months before quitting her job was 20,000,000 VND. During her working time here, she took maternity leave once for a total of 6 months.

Ms. A has actually worked at the company for 4 years (February 1, 2017 to February 1, 2021):

• The time the company paid insurance for Ms. A was 3 years and 4 months;
• The time to calculate severance pay for Ms. A is 8 months and is calculated as 1 year.

➜ So Ms. A’s severance pay is: 1/2 x 1 year x 20,000,000 = 10,000,000 VND.

IV. Cost of paying severance pay to employees when calculating corporate income tax

According to Clause 6, Article 8 of Decree 145/2020/ND-CP, the cost of paying severance pay is included in the production, business or operating expenses of the employer. Therefore, this is a reasonable expense when settling corporate income tax.

If the severance allowance is not paid in accordance with the provisions of the Labor Code and the Law on Social Insurance, this is an invalid expense when determining taxable income for corporate income tax.

V. Personal income tax on severance pay received by employees

– According to Point b.6, Clause 2, Article 2 of Circular 111/2013/TT-BTC, it clearly states that allowances are not included in taxable income, including severance allowance;

– In case the severance allowance received is higher than the prescribed amount, the excess amount must be included in taxable income;

– The difference included in personal income tax is calculated as follows:

• If paid to employees before termination of labor contract: deduct personal income tax according to progressive tax table.
• If paid to employees after termination of labor contract: deduct personal income tax at a rate of 10% if the excess is from 2 million VND or more.

VI. Guidance on accounting for severance pay

➤ Accounting for severance pay (according to Circular 200):

• Debit account 642, 641, 622, 627: Severance allowance is included in deductible expenses;
• Credit account 334: Severance allowance that the company must pay to employees according to regulations.

➤ When paying severance pay to employees:

• Debit account 334: Severance allowance that the company must pay to employees according to regulations;
• Credit account 111, 112: Pay severance allowance to employees in cash or bank deposit.

VII. Questions related to severance pay