Severance Pay: Gross or Net Overview

Questioner

Is the severance payment based on the subdistrict court formula gross or net?

Lawyer

The calculation is based on gross salary and therefore also gross amounts, of which an employee then receives the net equivalent (after deduction of taxes).

Lawyer

The subdistrict court formula usually concerns a gross amount. The B component concerns the gross salary and is paid out net after deduction of payroll tax. However, the judge can indicate that the severance payment can be paid out net immediately.

Lawyer

What is stated above is a mystery to me. An employee must always pay income tax on a severance payment. The tax that one pays is a percentage of the income. The percentage increases as the income increases.

Lawyer

The severance payment is indeed often determined gross and paid out net depending on the tax bracket one is in. The judge can, as just indicated, determine that the severance payment is paid out directly to the employee net.

Lawyer

Mr Biharie's claim is incorrect. The judge cannot determine that an employee does not pay tax. Whatever amount one receives net (and of course one receives a net amount, just as an employee is paid a net salary but there is also a gross salary), there is a gross amount.

Lawyer

I agree with Mrs Doomernik's comments. The formula is: axbxc a = number of weighted years of service b = gross monthly salary c = correction factor.

Lawyer

My reasoning should be seen in the following context: It may sometimes happen that the subdistrict court judge can indicate that a severance payment is not a gross amount, but an amount that must be paid out net. It is now the case that some employees want to transfer the severance payment to, for example, an insurance company in order to avoid having to pay (high) taxes now. In this case, the employee can request the employer to transfer the severance payment gross to, for example, the insurer. Transferring a higher gross amount replaces paying payroll tax on that amount and paying out the net amount. In that respect, each net amount has a gross amount and the employee must always pay taxes, but in these types of cases the moment of paying taxes is postponed to the future.

Lawyer

The above answer from sir is wrong. These options have not been possible for a long time. The legislation has changed. There are still a few current exceptions under transitional law. The dismissal and everything that goes with it took place before January 1, 2014 or all of the following 3 conditions are met: - a settlement agreement has been signed no later than December 31, 2013 and the amount of severance pay and date of dismissal have been determined - no later than 31 December 2013, it is stated in writing between employer and employee that the severance payment will be used for bank savings or a pension fund BV. This must be formulated correctly. - the employee must actually leave the company by 30 June 2014 at the latest.

Lawyer

Indeed, I realized it later, I was a bit too quick with sending. In any case, thanks for the addition, Mrs. Doomernik.

Lawyer

Mr Biharie's answer is completely correct, although not complete. I still see it every now and then that an agreement on a net salary has been made between employer and employee in the employment contract, which is legally permitted, although this is usually very unwise for the employer. The subdistrict court judge will then have to use the subdistrict court judge's formula to calculate the severance payment based on the agreed net salary. It is then the employer's responsibility to gross up this amount and pay the payroll tax to the tax authorities.

Lawyer

There is always a gross amount and the payment of tax. The answer is therefore not correct. In addition, the second answer is also not correct, as Mr. Biharie himself also indicates, because it is no longer possible to save in a bank or to set up a pension fund BV in this context.

Lawyer

Indeed, the payment of tax is part of it, but the judge is free to award the severance payment net in accordance with the request of the requesting party and on the basis of the salary agreement made (gross or net). I do not follow on what Monique bases her in my opinion incorrectly assertive and in any case insufficiently nuanced answer that the severance payment is always only awarded gross, because that does not follow from the law or from practice.

Lawyer

The questioner does not ask at all whether the severance payment is awarded gross by the court.

Lawyer

Monique writes above: 'An employee must always pay income tax on a severance payment.' This is also an incorrect statement. It is the employer (and certainly not the employee) who is obliged to withhold payroll tax under the Wage Tax Act. In the case of a gross salary agreement, the payroll tax is deducted from this; in the case of a net salary agreement, the employer must first gross up the payroll tax to know how much payroll tax he must pay on this employee's salary.

Lawyer

The questioner asks: Is the severance payment based on the subdistrict court formula gross or net? The answer to this depends on what the subdistrict court judge has awarded based on the request. That is not always a gross amount by definition, as Monique states. The judge may also award it net if requested, and he can do so if the parties have made a net salary agreement that must be used for the calculation using the subdistrict court formula.

Lawyer

A severance payment based on the subdistrict court formula does not have to be awarded by the subdistrict court judge at all. This is also used in settlement agreements where the judge is not involved. The employer only has to withhold the payroll tax and pay it to the tax authorities on behalf of the employee; it is the employee who ultimately pays the payroll tax (= is liable for tax) and who will then receive back any overpaid payroll tax.

Lawyer

Monique, Now you are digressing from the original question, but indeed, parties can also record a number of things in a settlement agreement. In fact, you forget to mention that parties are not at all obliged to follow the subdistrict court formula but are completely free to determine the amount of the severance payment themselves, including whether it is net or gross.

Lawyer

The formula doesn't mention gross (or net)! Please stay on topic...

Lawyer

I'm not the one who deviates from the topic. I quote from the guidelines of the circle of cantonal judges: Recommendation 3.3 Remuneration (B): The calculation of B (remuneration) will be based on the GROSS monthly salary, in any case increased by fixed and agreed salary components, such as holiday allowance, a fixed thirteenth month, a structural overtime allowance and a fixed shift allowance. Except in very exceptional cases, the following will not be included in B (remuneration): the employer's share of the pension premium, the company car, expense allowances, the employer's contribution to the health insurance premium and incidental and non-agreed salary components.

Lawyer

Yes, this guideline is only a starting point (and not a law of the Medes and Persians within the meaning of art. 99 RO as we have all learned), because the gross salary is not always known and then the net salary must be used.

Lawyer

So there must be grossing up ... And it remains that the formula works with and speaks of gross amounts. Whether the formula and guideline are the starting point or not.

Lawyer

In the case of a net outcome, the employer must indeed still gross up on the basis of the data known to the employer... Gross amounts cannot be used in a situation where the parties have agreed on a net salary... In that case, you can only make progress by using net amounts...