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Severance agreements

Severance agreements are often used in connection with workforce reductions or when an employer wishes to terminate an employment relationship for other reasons. A severance agreement is not something you are entitled to, but your employer may be interested in such a solution so as to avoid having to make dismissals or to avoid a potential claim of unfair dismissal.

Pay and the obligation to work

Holiday pay

Bonus pay and other outstanding claims

Other benefits

Compensation for pain and suffering

Education

Pension/contractual early retirement pension

Non-compete clauses

Unemployment benefits

Be thorough

 

A severance agreement applies when you resign voluntarily in return for financial compensation from your employer. If you have received a notice of dismissal, a severance agreement signifies that you accept termination of the employment relationship.

It is extremely important that everything on which you and your employer agree is stated in the severance agreement as precisely as possible.

It is difficult to be specific about what you should expect to get under a severance agreement. The scope of the severance agreement will depend on the financial position of the enterprise and on what it usually includes in such agreements, and the content will often vary according to how long an employee has worked there. The employer's assessment of its chances of winning a dispute over unfair dismissal will also influence its willingness to pay.

Pay and the obligation to work

A severance agreement often gives the employee the right to a specified number of months' pay. The amount can be paid in instalments on the normal payroll date or in the form of a lump sum.

Holiday pay

You are not entitled to holiday pay on payments that do not constitute remuneration for work performed. If the severance agreement entitles you to pay without an obligation to work, it should be agreed that holiday pay will be paid on the specified amount.

When you leave a job, all your holiday pay entitlement up to the severance date must be paid along with your final pay. This provision is laid down in the Annual Holidays Act, section 11 (3).

Advance tax must be deducted from any holiday pay that is paid in the same year as it is earned. To avoid this, the parties may agree that any holiday pay earned in the current year will not be paid until after the end of the year.

Bonus pay and other outstanding claims

The parties must agree on the existence and scope of any outstanding claims the employee has against the employer. These can be bonus payments, unpaid overtime, travel claims, time off in lieu not taken, holiday entitlement not taken, etc.

Matters like these must be included in the severance agreement, but it is important to keep in mind that these claims relate to entitlements that have already been earned, not something the employee gives you.

Other benefits

Many employment contracts cover entitlement to benefits such as free telephone, mobile phone, newspapers and journals, laptop, company car, insurance cover and pension schemes, etc. The severance agreement should specify how long and to what extent your entitlement to such benefits will be maintained.

The parties can agree that the employee will retain computer equipment, mobile phone, etc. Tax must be paid on the market value of such equipment, or on the difference between the amount the employee pays for it and its fair market value.

Compensation for pain and suffering

If your employer dismisses you without reasonable grounds for doing so, you may claim compensation for pain and suffering, subject to certain conditions.

Providing the conditions for tax exemption are met, compensation of up to one and a half times the national insurance basic amount may be paid tax-free. The national insurance basic amount is adjusted annually and is currently set at NOK 90 068 (as at May 2015).

Any agreement made between an employer and employee regarding payment of tax-free compensation is not binding for the tax authorities. The general rule is that all payments received from the employer must be regarded as taxable income, and the tax authorities are free to assess the content of the agreement in relation to relatively stringent rules for tax exemption.

This implies that the employee runs the risk of a subsequent tax decision imposing additional tax and penalty tax in connection with agreements like these regarding tax-free compensation.

You should also keep in mind that all payments from your employer, including
compensation for non-economic loss on which no tax is deducted, must be declared on your tax return.

Education

The employer may, in connection with termination of an employment relationship, give the employee tax-free financial support worth up to one and a half times the national insurance basic amount for educational purposes.
The condition for such tax exemption is that documentary proof can be provided showing that the money was used for educational purposes.

Such a tax-free contribution from the employer can be used for travel and accommodation in connection with the education and for materials, tuition fees, course fees, etc.

When a severance agreement includes financial support for educational purposes, it normally specifies the time period for using the amount involved, for example one year. Such payments are disbursed on production of a bill for relevant expenses.

Pension/contractual early retirement pension

If a severance agreement is concluded in connection with an employee who is retiring on a contractual early retirement pension (AFP), the parties may negotiate on, for example, a gratuity pension which ensures that the employee maintains a certain percentage of the pay earned at the time of retirement.

For example, this might entail your employer committing to cover the difference between your pension and 70 per cent of your final pay until you turn 67 years of age.

A considerable number of requirements must be met before employees may retire on a contractual early retirement pension, one of the key ones being that employees must continue to work right up until commencement of drawing their contractual early retirement pension. Consequently, the parties cannot agree that the employee will receive full-time pay but work only half-time in the period prior to retiring on a contractual early retirement pension.

Once employees leave their jobs, they are no longer entitled to remain in their
employer's pension plan.

Non-compete clauses

Severance agreements often contain a clause that limits the employee's freedom to take up employment with the employer's competitors or to start up a competitive business. This matter should be clarified in the severance agreement if the employer wishes to impose such a clause and, if appropriate, the conditions that apply.

The general rule is that your employer may not impose a non-compete clause if you have been given notice as a result of the enterprise's circumstances (that is, workforce reductions or reorganisation).

Unemployment benefits

You may not receive unemployment benefits as long as you are receiving pay from your employer. If your pay under the severance agreement is disbursed in the form of a lump sum, the Norwegian Labour and Welfare Administration (NAV) will calculate how long this amount will cover your loss of pay. Unemployment benefits are not paid during this period.

An employee who resigns voluntarily or who is dismissed through their own fault is not entitled to unemployment benefit until after a so-called extended waiting period has passed.

This waiting period begins to apply from the time at which you would normally be entitled to unemployment benefits; see the section above.

If you accept the terms of a severance agreement, you can avoid the extended waiting time if your employer confirms that the agreement was entered into as an alternative to being dismissed as the result of reorganisation, redundancy or workforce reductions.

Be thorough

Finally, we would emphasize the importance of being thorough when a severance agreement is being drawn up. All rights and obligations agreed between the parties should be described and clarified, including matters which are often taken for granted. You should also investigate what implications the agreement will have on your tax situation, benefits and pension.

Naturally, NITO provides its members with assistance in the drawing up and quality assurance of severance agreements, and we recommend that you contact one of our lawyers or legal advisers before signing a severance agreement.

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