Adverse Selection and Targeting
Statutory termination payments are the minimum payments that any terminated worker must receive according to national or state legislation. These payments must be made whether employees leave through voluntary departure, early retirement terms, or compulsory redundancy.
The relevant laws and regulations vary among countries, but typically the main elements of statutory payments are:
Statutory payments can be an important part of the overall severance package.
National labor legislation often provides for a notice period prior to redundancy, typically ranging from one to three months and sometimes longer. In many cases there is the option to provide salary in lieu of the notice period. This enables managers to ask employees to leave the workplace immediately–an option with the following advantages:
Statutory termination benefits represent the minimum amounts that all retrenched workers must receive.
Statutory termination benefits vary considerably among countries, as table 5.1 indicates. Benefits typically are based on a formula linked to years of service. Often workers must have completed a minimum period of 6 to 12 months of employment to be eligible for these benefits. The International Labour Organisation's "Termination of Employment Digest" is an online resource that details national legislation and statutory severance payments and packages worldwide.
The ILO Web site offers access to comparative data on statutory termination benefits: http://www.ilo.org/.
| Economy | Notice period | Termination benefit | Other features | Information source |
|---|---|---|---|---|
| Cambodia | Sliding scale from 7 days(minimum) to 3 months for workers with more than 10 years of service | For workers with more than 1 year of service: 2 weeks' wages per year of service, up to a maximum of 6 months' wages | Workers on fixed-term contracts (rather than indefinite employment) are entitled to a severance payment as agreed in the labor contract, but not less than 5 percent of the total wages paid during the length of the contract | ILO 2000 |
| China | 30 days; notice is compulsory | Generally 1 month a year | Trade unions, workers, and labor administration must be consulted | ILO 2000 |
| Estonia (1) | 2 months | 3 to 4 months of salary, depending on service period | No other liabilities on firms | Orazem and Vodopivec 1996 |
| Estonia (2) | 2 to 8 months of wages | Venesaar 1995 | ||
| Hong Kong, China (Special Autonomous Region) | As contract of employment, unless fewer than 7 days; a legal minimum of 1 month | After 2 years' service at capped rate per year of two-thirds of last salary or HK$22,500, whichever is lower | For collective dismissals there are no legislative requirements for notice, consultation, prior authorization from a judicial or administrative body, or any other restrictions in relation to proposed redundancies | ILO 2000 |
| India | 1 month's notice | 15 days' wages per year of service, for workers with at least 1 year's service | Workers with more than 5 years of service also are entitled to gratuity payments | ILO 2000 |
| Indonesia | Termination requires prior approval by the labor administration and consultation with trade unions | 1 month per year up to a maximum of 5 years | General requirement to avoid redundancy wherever possible | ILO 2000 |
| Kazakhstan | 2 months | 3 months of salary | Code of Laws on Labor of the Kazakh SSR (as amended to 1994) | |
| Democratic Republic of Korea | 30 days' notice | Minimum of 30 days a year | Legal requirements to establish fair and rational standards for selection of redundant employees, and to consult with trade unions | ILO 2000 |
| Malaysia | 4 to 8 weeks, depending on length of service | 4 weeks for 10 days for the first year, 15 days for 2 to 5 years, and 30 days per year | Last-in/first-out selection has been imposed by courts | ILO 2000 |
| Nepal | 1 month | 30 days per year of service, plus gratuity and other statutory benefits | Last-in/first-out, plus:
|
Labor Act 1992 |
| The Philippines | Approval to terminate is required | 1 month a year if dismissed as a result of new technology; 1.5 months if dismissed as a result of enterprise closure or attempts to reduce losses | ILO 2000 | |
| Singapore | As employment contract, otherwise statutory minima of 1-4 weeks | None but that determined under collective agreements | ILO 2000 | |
| Slovenia | 6 months (24 months prior to 1991) | 1 month's salary per year of service | Firms are responsible for taking steps to retrain or reassign workers | Orazem and Vodopivec 1996 |
| Sri Lanka | 1 month, but must report to commissioner | Labor commissioner determines entitlements but her guidance on criteria given to employers is to pay 2 to 3 months' salary per year of service or full salary for the remaining period up to retirement, whichever is less, subject to a maximum of 50 months' salary | Labor commissioner has absolute discretion to approve applications for redundancy | ILO 2000 |
| Taiwan, China | 1 month | 2 months' salary for the first 15 years of service, 1 month of salary for the remaining years; maximum of 45 months' salary | ||
| Uruguay | 1 month's current salary for each year or fraction worked, up to a maximum of 6 months' salary | www.embassy-worldwide.com/embassy/embassy-of-uruguay-in-washington-dc-usa/ | ||
| República Bolivariana de Venezuela | Up to 3 months, depending on seniority | 1 month of "normal salary" for each year of service; this is doubled, however, if the employee is terminated without just cause. In addition, the employee receives any undistributed, accumulated interest in his or her severance indemnity account. | "Normal" salary for severance is defined as basic salary plus all fixed regular payments and allowances and any profitsharing payments, all brought to a monthly basis | Coil and Rice 1997 |
| Vietnam | 45 days for workers with an indefinite employment contract | Generally, one-half of a month's salary per year of service as severance allowance, plus 1 months' salary per year of service as loss of employment allowance | ILO 2000 |
A gratuity is a benefit paid at termination of service to an employee reaching the date of superannuation or on retirement, resignation, death, or disablement. Some countries have primary legislation setting out the basis for statutory gratuity payments, in addition to other statutory termination benefits. In other cases enterprise-level rules may set the terms of gratuity or supplement the legislation.
Pension entitlements are a substantial and important element of a worker's severance package, and they are covered extensively later in this module.
Some public sector or enterprise terms and conditions provide that termination benefits can include payment in lieu of earned (accrued) leave. For example, in Orissa, India, permanent employees are awarded "earned" leave at a rate of 15 days per year of service. If a worker takes no earned leave during the course 20 years of service, his or her earned leave could total 300 days (15 x 20). At retirement any unused earned leave can be converted to cash, subject to a maximum amount of eight months of salary. In Orissa the payment of unused leave at the end of service is a nonstatutory pay ment, but it is defined in the service rules and regulations of individual enterprises. The courts there have enforced the eligibility of retrenched employees for these payments so enterprises have had little discretion in their payment.
Large arrears can come as a financial surprise to the implementing agency. Dealing with them can delay the process and present governments and donors alike with some tough policy decisions.
There is usually no legal or ethical disagreement that displaced workers should receive any salary or other benefits that are due them. Those arrears, however, can be substantial if financial problems have led enterprises to defer payments for some months or years. Arrears may comprise:
Arrears can present practical challenges for the agency that is implementing the privatization of the infrastructure sector, among them:
Moral hazard is a concern for those asked to finance arrears.
Arrears are a particular worry for ministries of finance and for donors. Rescuing enterprise managers from the problem of arrears may cause greater arrears problems in the future because (a) the rescue signals that government has taken a soft approach to the budgets of SOEs, and (b) if enterprise managers believe that the overstaffing problem ultimately will be dealt with through a generous government severance program (at the time of privatization or before), they have little incentive to tackle overstaffing and to make the hard labor adjustment decisions that are needed on a day-today basis.
Statutory payments, together with contractual benefits (described below), can represent a substantial proportion of the overall payments to workers in both middle- and low-income countries. For example, in the privatization program in Taiwan, China, the total severance package for a typical middleranked employee with 15 years of service is proportioned as follows: statutory payments (70 percent), compensation for cessation of pension (14 percent), and ex gratia severance (16 percent) (Chang 2002, pp.11-15). In Brazil, federal rail employees who took voluntary departure terms received an average of about US$8,000 in ex gratia severance and US$10,000 in legal entitlements. In India, too, workers in Orissa who accepted the government's voluntary retirement scheme (VRS) received a significant proportion of benefits from statutory and contractual benefits–particularly workers with fewer years of service (figure 5.1).
Figure 5.1: End-of-Service Benefits in Orissa, India
Source: Adam Smith Institute, unpublished data, 2000.
Statutory termination benefits are usually paid from the current resources of the enterprise. Employers simply make the payment out of current operating expenses when workers reach a specified age or leave the enterprise. Generally there is no method of accounting for these liabilities, even though they can represent a substantial future commitment of an enterprise's resources. Consequently, severance programs can represent one of the most difficult problems in a PPI transaction, because they are legally enforceable obligations that can have dramatic cash flow and solvency consequences during labor restructuring.
In Latin America, however, some countries require workers to contribute to an individual account into which some percentage of their salary is paid on a regular basis. In the event of separation–voluntary or compulsory–workers can withdraw monies from these accounts. Any surplus at retirement can be used toward the worker's pension provision. This approach is effectively a severance program funded through forced savings by workers themselves, and similar in some ways to the provident funds described in the pensions section of this module. Brazil has had a program of this type for more than three decades, where displaced workers can use their individual FGTS (Fundo Garantia por Tempo de Servicio) accounts. In the 1990s Colombia replaced its severance pay program with fully funded accounts of this type (de Ferranti and others 2000).