Deadlock over proposal on severance pay

Social partners in Portugal have not yet reached an agreement over government proposals to reduce severance pay and to create a fund to finance it. The debate began in January at the Standing Commission for Social Concertation. Employer confederations think any reduction should apply to existing labour contracts, not just future ones. Employers also oppose the government’s idea that funding for the partial payment of severance should be exclusively financed by them.


The government presented the proposal on 25 January 2010 to the employers and trade union confederations represented at the Standing Commission for Social Concertation (CPCS). Ministers suggested that severance pay should be cut for dismissals, and a fund created to finance this. The proposal is in line with the implementation of the Initiative on Competitiveness and Employment (Iniciativa para a Competitividade e Emprego), approved on 15 December 2010, by the resolution (in Portuguese, 163Kb PDF) of the Council of Ministers, which sets out:

b) To stimulate job creation by institution of a new compensation model in the event of termination of the contract of employment, in order to reduce the risk of corporate restructuring costs, without changing the concept of just cause for individual dismissal, through the following measures to be adopted by a legislation initiative towards the end of the first quarter of 2011:

i) To promote the creation of a funding mechanism to be supported by companies to ensure the partial payment of a compensation package to the employee by termination of employment contracts;

ii) To establish limitations on the values of compensation and severance pay payable to the worker, in the case of termination of employment contracts, applicable to contracts to be concluded after the date of its entry into force.

Severance pay to be reduced

Under the current law, those who are collectively dismissed or individually made redundant are entitled to payment of 30 days per year of seniority by a minimum of three months and without any limit. However, the new proposal reduces the compensation to 20 days per year and establishes a ceiling of no more than 12 months’ pay. The proposed reduction relates only to new contracts (permanent or fixed-term) and not to existing ones.

Under current rules, for example, a person who has worked in the same company for 30 years would be entitled, in case of dismissal, to pay equivalent to that for 900 working days (30 years times 30 days) not including wage complements. However, an employee with a contractual arrangement under the new rules who is dismissed after 30 years would be entitled to a maximum of 240 days pay (12 years times 20 days). If the workers each earn €1,000 (roughly equivalent to the average monthly wage in Portugal), the first worker would get €30,000. The second would receive only about €8,000. The proposed rules not only penalise those who have worked for longer, but also younger workers. As another example, a worker who earns €1,000 per month and stays in the same company for two years will receive compensation of €3,333 in case of dismissal, instead of €5,000 under the current rules.

Companies asked to fund redundancies

The government also proposed creating a fund to ensure the partial payment of compensation for dismissal. Ministers want this to operate solely from contributions from employers. The management of the fund has also been under discussion, with the possibility of it being managed by a public body and by three or four private ones, selected by public tender. This fund will be legally established, the contribution will be defined and compulsory, although the value to be paid by the employer for each employee is still subject to debate. After the entry into this fund, hiring a new employee will involve the creation of an individual account on behalf of the employer.

Mixed reactions of social partners

Severance pay

At the end of the first meeting with the social partners, the Minister of Labour, Helena André, argued that the proposed ceiling of 12 months is already implemented in Spain, and that both countries still continue to be the ‘most generous’ in relation to severance pay. Ms André explained that the government wants to ‘create conditions under which workers and enterprises can compete in an increasingly global labour market’. She drew a direct comparison with Spain: adding: ‘We don’t live isolated on an island, we look at the practices of other countries with whom we are in direct competition.’ She said the proposal for the fund is a measure to defend workers: ‘We are seeking to ensure that workers receive at least a portion of the compensation they deserve – one thing that is not guaranteed at the moment.’

Although Ms André has stressed that the government proposals are similar to those of Spain, the basis for calculation in Portugal would be a worker’s net salary, while in Spain the calculations are based on gross salary. Thus, the basis for calculation in Portugal will be dramatically lower.

Employers organisations have broadly welcomed the proposals for reducing the costs of compensation, but criticise the fact that the measures would relate only to new contracts (permanent or fixed-term). Employer organisations also wanted compensation to be reduced by between half and two thirds of current values. João Vieira Lopes, the President of the Portuguese Trade and Services Confederation (CCP), says the new measures will have no impact if they do not apply to existing contracts.

There are mixed reactions from trade unions about the reduction of severance pay. Arménio Carlos, a member of the Executive Board of the General Confederation of Portuguese Workers ( CGTP) says the reduction of severance pay is ‘a palace coup against the workers’ most basic rights’. The General Workers’ Union (UGT) considered any reduction of compensation ‘totally unacceptable’, adding that employers want to increase dismissals in Portugal. Nevertheless, UGT said the fact that the government proposal covers only new contracts was ‘positive’.

Compensation fund

The proposal of the fund has also brought mixed reactions. Employer organisations do not want to be the only ones financing it. Indeed, the CCP argued that companies would be unable to afford it, and that employees would indirectly bear the costs. António Saraiva, President of the Confederation of Portuguese Industry (CIP) feels contributions to ‘the fund must be mixed, private and public, and the public must come from the state budget’.

The CGTP is concerned that the measures will lead to companies cutting the wages of new workers. UGT welcomes the idea of compensation being paid by employers, but also concedes there should be some public contribution. João Proença, the Secretary General of UGT said: ‘The fund must not have any contribution from social security, nor can it have any contribution of workers. It is a business capitalisation fund. If it is to have another type of financing, namely through taxes, it is clear that it has to be governed and managed in a different way.’

However, for the time being, the Minister of Labour is not willing to accept the idea of a public contribution to the fund, arguing that the employers alone have to assume responsibility for dismissals compensation.

Maria da Paz Campos Lima, Dinâmia

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