Parliament passes reform of severance pay

In June 2002, the Austrian parliament adopted a government bill reforming the severance pay system, based largely on proposals drawn up by the social partners. The reform will extend the scheme's coverage to an additional 800,000 employees, though payments will be lower than previously. However, experts believe that the government's assumption of a net yield of 6% from the investment of severance pay contributions (paid by employers into special funds) will probably not hold.

On 12 June 2002, the Austrian parliament adopted a government bill providing for a far-reaching reform of the severance pay system.

In the late 1990s, the Austrian Trade Union Federation (Österreichischer Gewerkschaftsbund, ÖGB) repeatedly called for a reform of the statutory severance pay (Abfertigung) system, arguing that it was no longer up-to-date in terms of labour market mobility, and unfair regarding the legal entitlement provisions (AT9811109F). The existing provisions excluded a majority of Austrian employees (between 85% and 88% of the total) from eligibility for a severance payment, since two main preconditions had to be fulfilled to achieve entitlement: the employee must have worked for at least three years for the same employer; and the termination of the employment must not have been caused by the employee's resignation (except retirement) or by justified summary dismissal.

Since these preconditions for entitlement were questionable from a legal perspective, the coalition government of the conservative People's Party (Österreichische Volkspartei, ÖVP) and the populist Freedom Party (Freiheitliche Partei Österreichs, FPÖ) which came to office in 2000 took up this issue during 2001, announcing the abolition of the legislative restrictions on severance pay entitlement. This initiative was connected with another of the government's aims: severance payments should be used to fund a system of occupational pensions, in order to support the statutory pension scheme. It thus proposed that employees eligible for severance pay should be able to choose between a cash settlement or saving their entitlement towards a future pension (AT0106220N).

However, as the coalition parties were unable to agree whether the entitlement to severance pay should be granted from the first day of employment – as preferred by the FPÖ – the government decided to delegate the drafting of a new severance scheme to the social partners. Following negotiations, ÖGB and the Chamber of the Economy (Wirtschaftskammer Österreich, WKÖ) presented their compromise proposal in October 2001 (AT0112231F). The social partners agreed on the following points:

  • all private sector employees should be entitled to severance pay from the first day of employment onwards;
  • entitlement should apply regardless of the reason for the termination of the employment relationship;
  • severance pay should be administered by special funds, with companies obliged to contribute 1.5377% of monthly pay for all employees to a separate fund for this purpose from the beginning of the employment relationship until the end; and
  • employees leaving the company should – if dismissed by the employer after at least three years' service – have the option either to take the severance payment at once or to save the entitlement towards a future pension. Importantly, entitlement should be maintained also in the case of resignation by the employee, as well as in short-term employment.

After a period of internal debate, the government accepted the crucial points of the social partners' draft and presented a bill on severance pay reform in May 2002, including some slight modifications with respect to the social partners' proposals. This bill was unanimously adopted by parliament on 12 June 2002.

The new severance pay scheme came into effect on 1 July 2002 and applies to all private employment contracts concluded from 1 January 2003 onwards. The main advantage of the new scheme - as emphasised by all parties and interest groups involved - is the extension of the scope of entitlement to severance pay in comparison with the former legislation, since all employees (including employees on unpaid leave) - except some 'atypical' workers - are now eligible for severance pay contributions. An estimated 800,000 new employees are now covered by severance pay. However, the amount of the severance payments provided by the new legislation is significantly lower than under the former legislation, due to the lower employers' contributions of 1.5377% of pay.

Both the government and the social partners see the new legislation as a success. However, there remains one serious problem. As experts have repeatedly stressed, the assumed net rate of annual interest of 6% for the severance pay contributions invested in private capital markets by the funds is unlikely to be achieved. The real return on investment is expected to be lower than 6%.

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