Reform of severance pay under discussion

In mid-2001, Austria's coalition government announced its intention to reform the country's system of statutory severance pay. The aim is to extend entitlement to a wider range of situations and to introduce an option of using payments to fund occupational pensions. However, the details of the reform are a matter of controversy and debate.

Under Austria's current employment legislation, severance pay (Abfertigung) must be paid to private sector employees in the event of termination of the employment relationship by the employer, as long as they have at least three years' service with their current employer. Entitlement starts at two months' worth of final pay after three years' service, rising to: three months' pay after five years' service; four months after 10 years; six months after 15 years; nine months after 20 years; and 12 months after 25 years. No social security contributions are levied on severance pay and it is liable only to flat-rate income tax of 6%. There is no statutory entitlement to severance pay where the employee resigns (with or without the appropriate notice) - unless the resignation is due to retirement or family reasons - or where the employer summarily dismisses the employee for reasons relating to fault on the part of the latter.

These severance pay provisions are regarded as having significantly enhanced employees' commitment to their current employer and thus having helped companies to establish an internal labour market, something which would otherwise have been very difficult due to the very small size of most of Austria's companies. Nevertheless, for some time the system has been called into question for two main reasons. It has been criticised because of:

  • its supposed impact in terms of inhibiting mobility in the labour market; and
  • the restrictions on entitlement to severance pay. Legal opinion holds that the loss of entitlement in the case of resignation represents an unacceptable tie to the employer, which is also questionable under EU law, while loss of entitlement in the event of summary dismissal where the employee is at fault represents disproportionate disciplinary action.

Against this background, the coalition government of the conservative People's Party (Österreichische Volkspartei, ÖVP) and the populist Freedom Party (Freiheitliche Partei Österreichs, FPÖ) has announced plans for a reform of the system. As a cornerstone of the reform, the government envisages abolishing the present restrictions, implying that there will be entitlement to severance pay in cases of resignation with notice. Another aim is to redesign the system in such a way that it offers an optional way of contributing to an occupational pension to supplement the statutory scheme. Accordingly, employees leaving a company would be able to choose between receiving their severance payment or saving their entitlement towards a future pension. For employers, this pension option would mean paying contributions to a central fund set up to administer the system.

Beyond these broad outlines, many important issues, such as the amount of employer contributions and the period during which contributions are to be made, are still unclear. Some of these topics have proved highly controversial. For instance, the Chamber of the Economy (Wirtschaftskammer Österreich, WKÖ), representing employers, opposes extending severance pay entitlement to cases of resignation with notice by the employee. Even more importantly, the two parties in government disagree about the required minimum length of service for entitlement (currently three years).

According to the ÖVP, entitlement to severance pay should be subject to a minimum service of one year - this would, de facto, exclude seasonal workers, who mainly work in tourism. By contrast, the FPÖ would prefer to establish entitlement from the first day of employment onwards, a position shared by the two opposition parties, the Social Democratic Party (Sozialdemokratische Partei Österreichs, SPÖ) and the Greens (Die Grünen, GRÜNE) do. It remains to be seen what role the social partners can play in this decision-making process.

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