Severance Pay

Severance pay (kıdem tazminatı) is one of the most important monetary claims in Turkish employment law. It grants an employee who has completed a certain minimum period of service and whose employment relationship ends on one of the grounds listed in the law a right to compensation linked to the length of service at the workplace. Accurate knowledge of the entitlement conditions, the calculation method and the statutory upper limit (the ceiling) is of great practical importance for both employers and employees, since errors in the calculation or in the classification of the termination ground may have very serious financial consequences for either party.

Contents

• What is severance pay and what is its legal basis?
• What are the conditions for entitlement to severance pay?
• In which cases of termination does the right to severance pay arise?
• How is severance pay calculated?
• What is the statutory upper limit (severance pay ceiling)?
• How are periods of service combined and what happens on a transfer of business?
• What should be considered with regard to tax and social security?
• How is the severance pay claim asserted and when does it become time-barred?
• What are the most frequent errors encountered in practice?
• Conclusion

What is severance pay and what is its legal basis?

The principal legal basis of severance pay is Article 14 of Labour Law No. 1475, which remains in force pursuant to Article 120 and Provisional Article 6 of Labour Law No. 4857 (İş Kanunu). This provision governs the grounds of termination that give rise to severance pay, the determination of the period of service and of the wage on which the payment is based, the application of the ceiling and default interest.

This article deals primarily with severance pay in employment relationships governed by Labour Law No. 4857. For employees covered by the Maritime Labour Law and the Press Labour Law, the special provisions applicable to them must be assessed separately.

Severance pay is compensation paid by the employer to the employee on the basis of the period the employee has worked for the same employer, provided that certain conditions are met. An employee who has worked for the same employer for many years may become entitled to severance pay if the employment contract ends on one of the grounds provided for in the law. As a rule, a period of service of at least one year is required. The amount of severance pay is determined by the employee's period of service and last wage.

The statutory provisions on severance pay cannot be amended to the detriment of the employee. A waiver by the employee of the right to severance pay in advance, or agreements restricting this right, are not valid. The 30-day wage period to be taken as the basis for each year of service may be increased in favour of the employee by the employment contract or a collective labour agreement; however, the annual amount of statutory severance pay may not exceed the severance pay ceiling. The legal nature of additional payments exceeding the ceiling, as well as their tax and social security consequences, must be assessed separately.

What are the conditions for entitlement to severance pay?

For the right to severance pay to arise, the following basic conditions must be met cumulatively:

• The employment relationship falls within the scope of Labour Law No. 4857 and the employee is able to benefit from Article 14 of Labour Law No. 1475.
• The employee's total period of service that can be included in the severance calculation amounts to at least one year.
• The employment relationship ends on one of the termination grounds listed in the law.

Periods during which the employment contract is suspended do not automatically terminate the employment relationship. However, the extent to which suspension periods such as illness, unpaid leave, strike or lockout are included in the period of service is determined separately according to the type of suspension and the relevant legislation and case law. Not every form of termination gives rise to a right to severance pay; the decisive element is the ground on which the employment contract ends.

In which cases of termination does the right to severance pay arise?

The employee becomes entitled to severance pay in the following cases:

Termination by the employer: Where the employer terminates the employment contract, severance pay is, as a rule, payable provided that the employee has at least one year of service. The main exception is a termination for just cause on account of conduct contrary to morality and good faith as regulated in Article 25/II of Labour Law No. 4857. In the case of termination by the employer with notice, and in terminations based on Article 25/I of the Law (health reasons), Article 25/III (compelling reasons) and Article 25/IV (absence due to the employee's detention in custody or arrest), the right to severance pay arises if the other conditions are met.

Termination by the employee for just cause: Where the employee terminates the employment contract on one of the just causes set out in Article 24 of the Labour Law, the employee may become entitled to severance pay. Non-payment of wages, working conditions that are hazardous to health or conduct of the employer contrary to morality and good faith may be cited as examples of such causes.

Military service: A male employee becomes entitled to severance pay upon termination due to compulsory military service.

Retirement and fulfilment of the retirement conditions other than age: An employee who terminates the employment contract in order to receive an old-age pension or a lump-sum payment retains the right to severance pay. In addition, the employee may terminate the employment contract after documenting, by means of a letter obtained from the Social Security Institution (SGK), that the retirement conditions other than the age requirement under the applicable social security legislation have been fulfilled. The required insurance period and number of premium days vary according to the date on which the employee was first insured.

Marriage (female employees): A female employee may terminate the employment relationship within one year of the date of her marriage and becomes entitled to severance pay. Taking up work in another job after the termination does not in itself extinguish this right. However, if it is shown in the specific case that the right to terminate on grounds of marriage has been exercised in clear breach of the principle of good faith, the prohibition of abuse of rights may come into play.

Death of the employee: In the event of the death of an employee with at least one year of service, severance pay is paid to the statutory heirs regardless of the cause of death.

By contrast, where the employee terminates the employment contract voluntarily without just cause, or where the employer terminates the employment contract with immediate effect on account of conduct contrary to morality and good faith as set out in Article 25/II of the Labour Law, the employee is, as a rule, not entitled to severance pay.

The expiry of a fixed-term employment contract and the termination of the employment relationship by the parties by way of a mutual termination agreement (ikale) are not among the statutory grounds of termination giving rise to severance pay. However, the parties may agree, within the framework of the mutual termination agreement, on a payment corresponding to or exceeding severance pay.

How is severance pay calculated?

For each full year of service with the employer, the employee is paid severance pay in the amount of 30 days' wages. As long as the one-year minimum service requirement has not been met, severance pay cannot be claimed merely pro rata for the period worked. Once one year has been completed, the months and days exceeding a full year are taken into account at the same rate. As a rule, the calculation is based on the employee's wage on the date on which the employment contract ends. Where the wage is not fixed but is determined on a piecework, per-unit, lump-sum or percentage basis, the special averaging method in Article 14 of Labour Law No. 1475 applies.

The gross wage including benefits as the basis of calculation

The basis of the calculation is not the bare wage but the gross wage including benefits (giydirilmiş brüt ücret). In addition to the basic wage, this wage comprises all payments in cash and benefits with a monetary value that are provided to the employee regularly and on a continuing basis. Examples of payments included in this respect are the following:

• Regular meal, transport and housing allowances, or the provision of a company car that may also be used privately
• Regularly paid premiums, bonuses and annual additional payments
• Contributions made by the employer to private insurance on behalf of the employee
• Other continuing payments having the nature of wages, such as heating or education allowances

By contrast, one-off payments or payments linked to a specific event – for example a one-time performance bonus or travel expense payments that merely reimburse costs – are not included in the basis of calculation. Continuing payments made annually or over longer periods are added to the wage pro rata for the relevant period. For the correct determination of the gross wage including benefits, benefits in kind must be taken into account at their monetary value and carefully documented.

Calculation example

Suppose, for example, that an employee whose employment contract ends in 2026 has worked for eight years and six months and that the last gross monthly wage including benefits is determined as TL 60,000. Since this wage is below the severance pay ceiling applicable on the termination date, severance pay amounts to a total gross of TL 510,000, consisting of 8 × TL 60,000 for the full years plus TL 30,000 for the remaining six months. No income tax or social security premiums are deducted from this amount, which constitutes statutory severance pay; stamp duty is deducted at the applicable rate.

What is the statutory upper limit (severance pay ceiling)?

The severance pay payable for each year of service is subject to a statutory upper limit. The ceiling is indexed to the maximum retirement bonus paid to the highest-ranking civil servant and is updated twice a year – as of 1 January and 1 July. If the employee's gross wage including benefits exceeds this ceiling, only the ceiling amount is taken as the basis for each year of service in the calculation.

As explained above, the 30-day wage period taken as the basis for each year of service may be increased by contract; however, the annual amount of statutory severance pay may not exceed the severance pay ceiling. Where an additional payment exceeding the ceiling is agreed, the legal nature of the excess amount and its tax and social security consequences must be assessed separately.

How are periods of service combined and what happens on a transfer of business?

In calculating severance pay, the periods during which the employee has worked for the same employer are taken into account. Periods spent at different workplaces of the same employer are combined. Employment with different legal entities within the same group of companies, by contrast, is not combined automatically merely because of the group relationship; the specific circumstances of the case, such as a transfer of a workplace or of the employment contract, joint employment, an organic link or a sham arrangement (muvazaa), are assessed separately. In the case of intermittent employment with the same employer, the manner in which the earlier period ended and whether severance pay was paid for that period are taken into account; a period that has been settled by payment of severance pay is not counted a second time.

On a transfer of a workplace, the employment relationship passes to the transferee with all rights and obligations. The period of service completed with the transferor is preserved for the employee and is taken into account by the transferee in the event of a subsequent termination. The transferor employer's liability for severance pay is limited to the period during which it employed the employee and to the wage level on the date of transfer; the transferee employer, on the other hand, is liable on the basis of the total period of service in accordance with the statutory principles. A transfer of a workplace does not in itself give rise to a right to severance pay for the employee.

What should be considered with regard to tax and social security?

Statutory severance pay calculated pursuant to Article 14 of Labour Law No. 1475 is exempt from income tax within the limits provided for in Article 25/7 of the Income Tax Law, and is exempt from earnings subject to premiums pursuant to Article 80 of Law No. 5510. Stamp duty is deducted from statutory severance pay at the applicable rate. The tax and social security treatment of amounts exceeding the statutory exemption limit, or paid as an additional benefit, as consideration under a mutual termination agreement or under any other designation, must be determined separately.

How is the severance pay claim asserted and when does it become time-barred?

Severance pay becomes due upon the termination of the employment relationship and is, as a rule, paid in a single payment; payment in instalments requires the employee's consent. If severance pay is not paid on time, interest at the highest rate applied to deposits accrues pursuant to Article 14 of Labour Law No. 1475, as a rule from the date on which the employment contract ended. Special circumstances, such as a valid instalment agreement or a limitation of the claim by the employee, may affect the start and scope of the interest.

The severance pay claim is subject to a five-year limitation period running from the termination of the employment relationship. With regard to severance pay not paid to the employee by the employer, completion of the mandatory mediation procedure before a claim is filed with the labour court is a procedural prerequisite; an action filed without prior application to mediation is dismissed on procedural grounds without examination of the merits.

What are the most frequent errors encountered in practice?

The errors most frequently encountered in practice, to which attention should be paid, are the following:

• Failure to take fringe benefits into account in calculating the wage including benefits, or incorrect assessment of their scope.
• Insufficient documentation of the ground for termination and failure to prove grounds falling under Article 25/II of the Labour Law.
• Exclusion from the severance calculation, without an assessment of the specific case, of earlier periods of employment with the same employer or of periods with different employers that must legally be combined.
• Failure to provide the employee with a reasonable additional benefit, or inability to show that the employee's will was formed freely, particularly where the proposal for a mutual termination agreement came from the employer.
• Failure to take the semi-annual changes in the severance pay ceiling into account in calculation and provisioning processes.

Conclusion

Severance pay is a mandatory claim in favour of the employee which arises depending on a certain minimum period of service and, in particular, on the manner in which the employment contract ends. Correct determination of the gross wage including benefits, correct calculation of the periods of service, consideration of the severance pay ceiling updated every six months and correct application of tax obligations are important in order to avoid loss of rights and disputes.

For employers, it is important to document the grounds for termination appropriately, to record the wage components transparently and to calculate the severance pay burden in advance in restructuring processes. Employees, for their part, should not overlook that the severance pay claim is subject to a five-year limitation period and that an application to a mediator must be made before filing an action.

GEMS Schindhelm advises employers and employees on the calculation and collection of severance pay and on the structuring of mutual termination agreements and termination agreements, and represents them in mediation and labour court proceedings. This article is intended for general information purposes only and does not constitute a legal opinion or legal advice; each dispute must be assessed separately in light of the specific circumstances of the case and the legislation in force.