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Reform of severance pay law

The Peer Review was held on 30th November and 1st December 2006 in Vienna, Austria, hosted by the Federal Ministry of Economics and Labour. In addition to the host country, a further 10 countries participated in the discussions as follows: Belgium, Croatia, Estonia, France, Germany, Greece, Hungary, Netherlands, Portugal and Turkey.

Reform of the severance pay law

Provision for some form of severance pay in Austria dates back to the early part of the 20th century (for white collar workers; blue collar workers were brought into scope around 50 years later). The previous system was non-contributory and based on length of service. On separation from the employer (unless initiated by the employee), private sector employees (who had worked for the employer for at least three years) were entitled to severance pay, starting at one month‚s wage per year of tenure, and increasing in steps to reach a maximum of one year of pay after 25 years. The system was seen as problematic: because of its low coverage (only around 16 per cent of separations in a year were, in fact, covered); because it was seen to provide a disincentive to worker mobility (because workers who had built up a high level of entitlement might be reluctant to move to a new job voluntarily, and lose that entitlement); because it encouraged opportunistic behaviour among employers (with a significant increase in worker separations during the period before critical thresholds of entitlement to severance pay, e.g. at three years); and because some employers (particularly small firms) could accumulate unsustainable levels of severance pay Œdebt‚.

Under the new legislation (introduced in 2002), in cases of a normal employment contract (with a duration longer than one month), employers pay a contribution equivalent to 1.53% of gross monthly pay into on of a range of special funds („Mitarbeitervorsorgekassen‰), which can be accessed (after a qualifying period of contributions ˆ currently three years) on job termination (for most reasons). Contribution periods from different employees are aggregated in the funds, and, when eligible for payment, the employee can choose between taking the payment, further investment in the fund, or transferral of the relevant sum into a pension insurance fund.

The new system aims to increase coverage, and to encourage (further) labour market flexibility in a labour market which already exhibits average levels of labour turnover in European terms, as well as contribute to the development of a Œsecond pillar‚ of retirement pensions.

Current employees have the option (with their employer‚s agreement) of joining the new system or staying with the old one, and the majority have so far decided to stay, although all new employees automatically join the new scheme.

The 3-year qualifying period for accessing the funds means that it is too early to assess the labour market impact of the scheme, and no evaluation has yet been conducted. The fact that already a third of employees have joined the new Œseparation account‚ system is, however, seen as an encouraging development. Discussion over the relative merits of the new approach have focused on, for example, whether the move away from severance pay as a Œtax on dismissal‚ to a savings account-based approach, might result in more individual (legal) disputes over termination. Some concerns have also been raised: e.g. over the relatively low level of employer contribution (determined through social partner negotiation, on the basis of the anticipated performance of the invested funds).

Aspects of Transferability

The Austrian reform generated a lot of interest among participating peer countries, although the national contexts of current employment protection legislation would determine, how well it could be accommodated. It was, however, seen as an innovative example of the Œflexicurity‚ approach, and the high level of co-operation among the social partners in introducing and administering the system was seen as remarkable. It was, however, noted that the previous Austrian severance pay system was unusual among peer countries in that severance pay was also paid in cases of terminations due to retirement; in comparison, the new model is likely to be more attractive to many Austrian employers than would be the case in countries where current severance pay is not payable on retirement. It was also felt, by some peer country contributors, that the effectiveness of the new system might be impaired by it being an instrument with multiple objectives (e.g. as a personal pension vehicle as well as compensation for job loss). Some participants also stressed that it was important to retain some aspect of the Œpunitive‚ or Œtaxation‚ element of severance pay (effectively abolished in the Austrian reform), which would encourage employers to internalise (some of) the external social costs of job loss (it was, however, noted that alternative mechanisms for this might also be developed, such as experience-rating of unemployment insurance, which do not have the mobility-impairing characteristics of traditional severance pay). Finally it was noted that it would be important to have a full evaluation of the labour market impact of the new system, which should include also an assessment of any indirect effects (e.g. whether there was any tendency for employers to shift the cost of the new system through lower wage increases in the medium-term), and whether the new system had contributed to a reduction in labour market dualism between Œinsiders‚ and Œoutsiders‚.


Discussion Paper - Helmut Hofer, IHS

Official Paper - Synthesis Research in collaboration with the Federal Ministry of Economics and Labour

Statements and Comments

Participating independent experts



University of Leuven



Institute of Public Finance

Estonia Lauri LEPPIK

PRAXIS Center for Policy Studies

France Jérôme GAUTIÉ

University Paris 1

Germany Silke BOTHFELD
Hans Böckler Stiftung
Greece Dimitris KARANTINOS


Hungary Ágnes HÁRS

Kopint-Datorg Economic Research Institute

Netherlands Alexandra BARIS

University of Amsterdam

Portugal Luis Miquel Gomes CENTENO S2E2
Turkey Hakan ERCAN Middle East Technical University

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