In case you are fired, is severance pay based on a month’s usual salary or just the basic component?

Agama Law Associates Partner  Nitin Jain shares his views in The Economic Times on an article titled ‘In case you are fired, is severance pay based on a month’s usual salary or just the basic component?’.

Industrial Dispute Act and States’ Shops and Establishment Act

There are many conditions under Industrial Dispute Act and States’ shops and establishment act. However, employment contract of an employee prevails for payment of severance pay, if he/she is not covered under any of the applicable laws.

Severance pay as per employment contract

If an employee is not governed under the current labour laws, the terms of severance pay is dictated by the employment contract. Jain says, “The severance package is equivalent to a notice period, which is normally in the range of 30 to 90 days unless there are special circumstances which are also governed by the contract. Usually, the package is calculated based on the basic pay unless the employment contract states otherwise.”

Leave encashment

Jain says, “An employee is also entitled to leave encashment in addition to a severance package, as per the company’s HR policy, which is subject to the Shops and Establishment Act of the relevant state, as applicable.”

What new labour laws say?

Jain says, “There is no change in position regarding the payment of severance pay to an employee. When the new labour codes come into effect, the severance pay would either be dictated by the applicable labour law (if an employee is covered under the law) or by the terms of the employment contract (if not covered under the law).”