As an international Headhunter, Alhambra International regularly conducts executive searches across Europe. While some of our larger clients have a deep understanding of the intricacies of labour laws across the continent – thanks to their internal legal teams or advice from law firms – many mid-sized companies and foreign businesses lack this vital knowledge. This becomes especially clear when these companies expand into new markets and face the complex challenge of navigating different employment laws across Europe.
One recent experience highlighted this issue. A client approached us with the intention of focusing their search on only a few selected EU countries. Their reasoning? They had heard that firing an individual employee in other EU countries would be prohibitively expensive due to severance costs. This raised an important question: how varied are the severance systems in Europe, and do they truly represent a substantial financial burden?
Defining Severance Pay
Before delving into the details, it is important to define severance pay. Also known as redundancy pay or termination pay, severance is the compensation an employer provides to an employee who loses his job through no fault of his own, such as layoffs due to downsizing or restructuring. However, the rules governing severance pay vary significantly across Europe, from country to country, making it a critical factor for employers to consider when expanding or hiring internationally.
In our research, we relied on authoritative sources like the Eurofound’s ERM database, which details restructuring-related legal regulations across the European Union. This invaluable resource provides insights into the laws and regulations in EU Member States that are directly or indirectly linked to managing change and employee terminations.
Developing a Calculator for Severance and Notice Periods
To provide our clients with a precise understanding of these laws, we have developed a comprehensive calculator that determines, based on an individual employee’s situation, both the notice period and the severance pay due upon dismissal in each EU country. This calculator does not cover collective dismissals; instead, it focuses solely on individual terminations, giving our clients a clear picture of the potential costs of dismissing an employee in any given EU market.
Insights from Our Study
Our study revealed a wide variation in both notice periods and severance pay obligations across EU countries, reflecting the diverse labour market regulations within the region. Here is a summary of some key findings from the countries we analysed:
Notice Periods
- Germany: Employees with 8 years of service are entitled to a 4-month notice period. It’s worth noting that this notice period can be higher if it’s negotiated in the employment contract at the start of the relationship.
- France: An employee with 8 years of service is entitled to a 3-month notice period.
- Italy: Notice periods are generally shorter, with a typical period of 60 days (around 2 months) after 8 years of service.
- UK: Notice periods are notably shorter, with an 8-year employee entitled to 8 weeks (roughly 2 months).
Severance Pay
- Germany: An employee earning €7,000 monthly gross would receive €28,000 in severance after 8 years of service.
- France: Employees are entitled to €14,000 in severance after 8 years of service.
- Italy: Instead of severance pay, employees receive Trattamento di Fine Rapporto (TFR), which is essentially deferred compensation. This TFR is a portion of the employee’s salary set aside each month and paid upon termination, rather than a lump sum severance payment. The TFR would be €6,550 for an employee after 8 years of service
- Spain: Severance pay in Spain is particularly high, especially in cases of unfair dismissal, where employees receive 33 days’ salary per year of service, up to a maximum of 24 months’ salary.
Conclusion
For mid-sized companies and foreign firms unfamiliar with EU labour laws, understanding the variations in notice periods and severance pay across the continent is crucial for planning hiring strategies and managing workforce reductions effectively. As our study shows, these rules can differ dramatically and have a significant impact on a company’s bottom line.
However, severance pay is just one of many factors that companies should consider when expanding into a specific country or region:
- Economic Strengths: Companies should align their operations with the region’s industry strengths. For example, Germany is ideal for automotive and chemical industries, while France excels in cosmetics, tourism and luxury goods and Poland performs in mass production industry.
- Fiscal Stability: The fiscal environment, including tax policies and their stability, is crucial for long-term planning. A stable fiscal situation can mitigate higher labour costs. We recommend integrating severance calculations with tax/fiscal models for a comprehensive financial view when entering new markets.
- Infrastructure and Education: Advanced infrastructure and a well-educated workforce are essential for operational efficiency and competitiveness.
- Labor Costs: Include severance pay in the total labour cost when planning. This ensures a clear understanding of financial obligations in different markets.
Diverse labour regulations across Europe significantly influence long-term business planning. Companies should monitor upcoming changes in EU labour laws to adapt their strategies accordingly.
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