Severance agreements: Guide to rights, severance pay and negotiation

Severance agreements can be an advantage for both the employer and the employee. For the employer, it can be a way to avoid conflicts and lawsuits, while the employee can receive financial compensation and clear conditions for the termination of the employment relationship.

Important elements of a severance agreement

1. Financial compensation: A severance agreement may include financial compensation to ensure a safe termination of the employment relationship.
2. Notice period: The agreement can regulate the notice period and any exemption from work obligations during this period.
3. References: How references should be handled and what can be communicated to future employers.
4. Confidentiality: Provisions regarding confidentiality and what can be shared publicly about the agreement and end reason.
    

Be thorough!

1. Salary, severance pay/severance pay and work obligation

A severance agreement often entitles the employee to severance pay in addition to salary during the notice period. During the notice period, it is not uncommon for you to be released from your duty to work.

Please note that if the notice period coincides with a month in which holiday pay is paid, you may be faced with the fact that you are not entitled to both holiday pay and salary in the same month. You can negotiate this, and it should be stated in the severance agreement what you have agreed on.

The severance pay, also called severance pay, will often be a certain number of months' basic salary. How many months you can receive depends on the facts of the case and the parties' desire and willingness to enter into a severance agreement. The severance pay can be paid on an ongoing basis on the ordinary payday or as a lump sum.

It should be agreed whether you can start a new job during the notice period or during the period in which severance pay is paid. It should also be stated in the severance agreement that new income-generating work during the notice period does not entitle the employer to make reductions in benefits under the severance agreement. 

2. Holiday pay

You are not entitled to holiday pay for payments that are not remuneration for work. If the severance agreement gives you the right to salary without an obligation to work, you should try to negotiate an agreement that holiday pay will be paid on the amount in question.

When you leave a job, all holiday pay you have earned up to the end date must be paid together with your last salary. This follows from Section 11 no. 3 (lovdata.no) of the Holiday Act. Advance tax must be deducted from holiday pay paid in the same year as it was earned. To avoid this, it can be agreed that holiday pay earned in the current year will be paid after the turn of the year.

3. Bonus and other outstanding claims

It must be clarified whether and to what extent you are owed money or other claims from your employer. This can be bonuses, unpaid overtime, travel settlements, plus time, unused holidays, etc. This must be included in the severance agreement, and it should be stated when the amount is to be paid. It should also be stated that the payments are already earned claims.

4. Other benefits

Many people are entitled to benefits such as free telephone, mobile phones, newspapers and magazines, home computers, company cars, insurance and pension schemes, etc. It should be included in the severance agreement for how long and to what extent these rights are to be maintained.

If you and your employer agree that you will take over computer equipment, mobile phones, mobile phone numbers or other equipment, this must be stated in the severance agreement. Please note that tax must be paid on the sales value of the equipment.

5. Compensation for pain and suffering

If your employer gives notice of termination without a valid reason, you can claim compensation for pain and suffering under certain conditions. This type of compensation is often referred to as compensation for damages.

Such compensation can be paid tax-free up to one and a half times the National Insurance basic amount (G), if the conditions for tax exemption are met. It will be the tax authorities that decide whether the agreed compensation is tax-free.

6. Educational support

In connection with the termination of an employment relationship, the employer can provide tax-free support for education of up to one and a half times the National Insurance basic amount. It is a condition for tax exemption that it is documented that the money has been used for education. The amount can be used for travel, accommodation, materials, tuition fees, course fees, etc.

7. Pension/gift pension/AFP

AFP (contractual pension) is a lifelong pension scheme that applies to about half of the private sector and to employees in the public sector born after 1963.

If you have an AFP scheme, it is important to know that a severance agreement may affect your right to receive AFP early retirement pension after the age of 62. To ensure your right to AFP, you should familiarise yourself with the terms and conditions for withdrawal and assess these in relation to the solutions in the severance agreement.

Important conditions for receiving AFP:

• You must be an employee: A key requirement is that you must be a genuine employee of an AFP company at the time you start drawing AFP early retirement pension (at the earliest at the age of 62). You therefore lose the right to AFP early retirement pension from your current employer if you enter into an agreement on full exemption from work before you turn 62. In such a case, you must ensure that a new employer also has an AFP scheme.
• No benefits without an obligation to work: As a general rule, it is a condition for AFP that you at the age of 59-61 do not receive any benefits from your employer other than salary for actual work. If, for example, you receive a severance package or salary without an obligation to work during this period, you may therefore lose the opportunity for AFP, also with a new employer later.

If you have already started drawing AFP, there are no special considerations you need to take into account in connection with a severance agreement

Read more about AFP

8. Non-competition clauses

An employment contract often contains provisions that limit your ability to work for competitors or start a competing business. It should be clarified in the severance agreement whether the employer will refer to such provisions and, if so, on what terms.

Read more about non-competition clauses

9. Unemployment benefits

During the period in which you receive salary from your employer, you are not entitled to unemployment benefit. If the salary is paid as a lump sum, NAV calculates how long this amount covers the loss of salary. During this period, you will not receive unemployment benefit.

An employee who leaves voluntarily, or is dismissed due to his or her own circumstances, is not entitled to unemployment benefits until after 18 weeks. If the severance agreement has been entered into as an alternative to dismissal in connection with reorganisation, redundancy or downsizing, you can avoid an extended waiting time. In such cases, the reason for the termination and that this is due to the company's circumstances must be stated in the severance agreement.

Read more about unemployment benefits at NAV (nav.no)

10. Certificate of Completion/References 

You should try to include in the severance agreement that the severance certificate must be suitable for applying for new work, and preferably clarify who can be the reference person.  Try to include a few points about the work performed and qualifications that should be included in the severance certificate.  However, please note that it is the employer who ultimately determines the references and content of the certificate.

It will often be useful to get the final certificate as early as possible so that you can start looking for a new job.  You can ask for a provisional final certificate, for example within 14 days of the severance agreement being signed, and a new final certificate after the notice period has expired.