Social partners agree far-reaching reform of severance pay

The Austrian social partners have been involved in a long-running and controversial debate over a reform of the country's statutory severance pay scheme. In late October 2001, they finally agreed on a proposal for a new system that - if adopted by parliament - would make an additional 800,000 employees eligible for severance pay. However, experts doubt that the cost model underlying the reform will hold, since they regard the estimated annual interest yield of 6% from the investment of employers' severance pay contributions as unrealistically high.

On 23 October 2001, the Austrian social partners presented a compromise proposal on the reform of the statutory severance pay (Abfertigung) system which will, if adopted by parliament, abolish most current restrictions and extend entitlement to an additional 800,000 employees.

At present, only a minority of the total number of terminated employment relationships meet the requirements for a severance payment. About 400,000 of all dependent employees, some 12% of the total, are currently eligible for severance benefits in the case of dismissal by the employer (according to figures from the Österreichisches Wirtschaftsforschungsinstitut Monatsbericht 12/2000). Moreover, the severance pay system has been in general regarded as detrimental to the desired higher mobility of employees, as they face a loss of severance pay entitlement when changing employer after less than three years' service with their current employer.

Current legal regulations

Austria's current employment legislation stipulates that severance pay must be paid to private sector employees in the event of termination of the employment contract by the employer, as long as the employee has worked for the employer for at least three years. Eligibility for severance payment rises in graduated steps with the length of service in a company, and ranges between two months' and, after 25 years' employment, one year's pay. No social security contributions are levied on severance pay and it is liable only to flat-rate income tax of 6%.

However, there are considerable restrictions on entitlement to severance pay. Employees are not eligible in cases of resignation by the employee (with or without appropriate notice) or summary dismissal due to fault on the part of the employee. Certain cases of resignation by the employee may, however, result in entitlement for severance pay - these are resignation due to retirement or family reasons. Moreover, eligibility for severance pay can be achieved in some cases where the employer summarily dismisses the employee for reasons relating to fault on the part of the latter.

History of political dispute

Since the late 1990s, the Austrian Trade Union Federation (Österreichischer Gewerkschaftsbund, ÖGB) has been demanding the extension of severance pay entitlement to cover not only dismissals but also voluntary resignations, and to include seasonal employees, without reducing the level of payments (AT9811109F). However, representatives of the Austrian Chamber of the Economy (Wirtschaftskammer Österreich, WKÖ) vigorously rejected any additional expenditure for companies and opposed extending severance pay entitlement to cases of resignation with notice by the employee.

Negotiations appeared to be deadlocked when, in mid-2001, the coalition government of the conservative People's Party (Österreichische Volkspartei, ÖVP) and the populist Freedom Party (Freiheitliche Partei Österreichs, FPÖ), announced its intention to reform the severance pay system (AT0106220N). A dispute arose – which even split the coalition partners – centring on the conditions under which entitlement to severance pay should be granted to employees. Under the ÖVP's proposed model, employers would have to make severance pay contributions only for employees who worked for them for more than one year. For employees who are more mobile in the labour market, such as seasonal workers in particular, this model would not have granted any additional entitlement. By contrast, the FPÖ preferred to introduce entitlement from the first day of employment onwards, a position shared by the two opposition parties - the Social Democratic Party (Sozialdemokratische Partei, SPÖ) and the Greens (die Grünen, GRÜNE) - as well as by ÖGB.

New severance payment scheme

Against this background of controversy, the government decided to delegate the drafting of a new severance scheme to the social partners. In October 2001, ÖGB and WKÖ reached a compromise over the severance pay reform with surprising speed. The main points of their proposed scheme are as follows:

• existing severance pay entitlements would remain unchanged;

• entitlement would in future start from the first day of employment onwards, and would apply regardless of the way in which the employment contract is terminated;

• employers would have to contribute 1.5377% of pay for all employees to a central fund, from the time that they are first employed until the time that they leave/retire (currently, individual employers have to make provisions in their accounts for at least half the severance pay entitlements that could fall due); and

• after at least three years, employees leaving the company - in the case of dismissal by the employer - would be able to choose between receiving their severance payment from the central fund at once, or saving their entitlement towards a future pension. In the case of resignation by the employee, the payment will be saved up.

While at present the maximum level of severance pay is reached after 25 years of employment with the same employer, under the new system the severance pay would rise continuously and reach its maximum after 37 years. However, this would be an improvement for most employees, as employees would not lose their entitlement to severance pay when changing their employer. Contributions to severance pay would remain liable to flat-rate income tax of 6%.

As regards the anticipated costs of the new severance pay scheme for employers, they would, on the basis of an assumed annual interest rate of 6%, amount to a total of ATS 13 billion (EUR 0.9 billion) per year. This is less than under the current contribution-based system, whereby companies spend ATS 20 billion (EUR 1.45 billion) annually. However, under the new system, severance pay contributions would be paid to a fund, specified by an agreement between the employer and the works council. Hence, the money would be invested in private capital markets, whose gains and losses would determine the amount of the total employers' expenditure. With the current weak economic growth rates, economists doubt that the assumed annual interest rate of 6% can actually be realised.

Commentary

The social partners' agreement on a new severance payment scheme can be regarded as a milestone in the lengthy debate between the current coalition government and the social partners. Moreover, the compromise reached between ÖGB and WKÖ appears to be another strong sign of life in Austrian social partnership. Since the new government came to power, the influence of social partnership on public policy has generally been curtailed (AT0109201F). However, it remains to be seen whether parliament will adopt the social partners' proposal for a new severance payment scheme. (Susanne Pernicka, University of Vienna)

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