Cessantia (severance) calculations, wage tax and social security aspects

Cessantia (severance) calculations, wage tax and social security aspects

As of the start of the Corona crisis, many entrepreneurs have had to think about the effects of the crisis on their business and whether it would be possible to maintain employment for their employees. Some have already decided that employment contracts needed to be terminated. Others have been able to maintain the workforce level by making use of the support offered through the SSRP or through a decrease in wages. For those who are contemplating lay-offs the following information may be useful.

 

The calculation of the cessantia benefit

The cessantia rights are based on the years of employment. The total right is calculated as follows:

0 – 10 years of employment

1 week wages per year of employment

11 – 20 years of employment

1¼ week wages per year of employment

More than 20 years of employment

2 weeks wages per year of employment

 

As an example, an employee with 25 years of service is entitled to 32½ weeks (10 times 1 week, 10 times 1¼ of weeks and 5 times 2 weeks) wages. Some CLA’s contain more generous cessantia arrangements.

 

Cessantia must be paid if the termination of the employment agreement is not caused by the employee. It must also be paid when the contract is terminated because of retirement of the employee, unless the employer has provided the employee with pension rights at least equal to the AOV rights of the employee.

 

The week wages as described in the Cessantia Ordinance must be established by the employer and employee, similar to the system used for Medical and Accident Insurance (ZV/OV), at the commencement of the employment and every time it changes and includes all fixed elements of the remuneration such as fixed wages, commission income, incentives, bonusses, vacation allowance and  other (monthly) allowances and benefits in kind. For those wage elements of which it is impossible to determine the exact value, employer and employee must establish the average value.

 

During the current crisis, some employers and employees have agreed to reduce wages or based on some (Collective) Labor Agreements the wages have been automatically reduced. It can be argued that, if the labor agreement is terminated after the wages have been reduced, that this lower wage forms the basis for the calculation of the cessantia. If the reduction in wages is not based on the labor agreement and was not mutually agreed upon, the employee is still entitled to 100% of his wages and consequently, the basis for the cessantia calculation would be 100% of the agreed upon wage.

 

Taxation of cessantia benefit

The present wage tax regulations provide the possibility to tax wages using the regular wage tax table or the “extra-ordinary wage table”. Whereas the regular wage tax table is based on the personal income tax table and progressively taxes the wage, the extra-ordinary wage table is based on the employees last year’s full year income, at a fixed rate. This rate is based on the highest ANG 1,000 of 90% of this income. As a result of this, an employee with 35 years of employment and a weekly salary of ANG 750 (total cessantia benefit of 52½ weeks or ANG 39,375 cessantia benefit) would trigger less tax (20% based on an annual taxable income of ANG 35,965) than his colleague with 3 years of employment and a week wage of ANG 2,500 (3 weeks cessantia or ANG 7,500 who would be subject to 40% wage tax.

Based on the Personal Income Tax Ordinance, cessantia benefits qualify for the “special rate”. This special rate, applicable upon request, is established on 80% of the difference in tax between the tax calculated including the cessantia and the income excluding the cessantia. For example, an employee is entitled to an ANG 45,000 cessantia benefit. His regular year to date taxable income amounts to ANG 24,000. His regular annual taxable income would be ANG 72,000. The tax to be withheld based on the extra-ordinary wage table would be ANG 11,812.50 (ANG 45,000 at 26.25%). The total income tax for the current year (over ANG 69,000) would amount to ANG 10,868.09 while the tax payable over ANG 24,000 (assuming he will not have any additional income for the year) would amount to ANG 928. The special rate for the income tax would be 80% of the difference or ANG 7,952.07. There is a minimum rate of 16¼% (which would amount to ANG 7,312.50) and a maximum of 32%. In this case it would be advantageous to request application of the special rate, for the calculation of wage tax. This request should be filed with the Inspector of Taxes before applying this special rate.

 

Social security

The cessantia benefit is not subject to ZV/OV premium. It is however subject to premium AVBZ and premium AOV/AWW. For the calculation of premium AOV/AWW for employees who earn wages below the maximum premium income, the following applies. Based on case law, the employer must determine the premium payable, taking into account the maximum premium payable for the period of employment in the year. In principle, the premium AOV/AWW is split between the employer (7.5%) and the employee (6.5%). If the employee in the above-mentioned example is dismissed as per 30 April, 4/12 of the annual maximum premium of ANG 14,753.59 (of which Ang 6,849.88 payable by the employee and ANG 7,903.71 by the employer) or ANG 4,917.82 (of which ANG 2,283.27 payable by the employee and ANG 2,634.55 payable by the employer). The premium AOV/AWW payable over the cessantia amount can be calculated taking into account the calculated year to date maximum minus the premiums already withheld and paid for the year.