Turkey: An Evaluation Of The Draft Bill Of The Severance Allowance Fund

Last Updated: 9 September 2014
Article by Özge Mızrak

CURRENT PRACTICE OF SEVERANCE ALLOWANCE

The severance allowance, which is among the most important outcomes of a terminated labor contract, means the amount payable by the employer to the employee or his/her beneficiaries upon termination of the employee's labor contract for any reason after working for the minimum period set forth in the labor law.

The Supreme Court of Appeals defines severance allowance in a verdict as follows;

"Severance allowance" means the lump sum payable by the employer to an employee who has worked at the workplace(s) of that employer for a specific period as per the applicable legislation against his/ her past performance taking into account the age, difficulty in finding a new job as well as his/her contribution in that workplace upon termination of his/her labor contract."

The Labor Act No. 4857 contains no provision regarding severance allowance but proposes the establishment of a severance allowance fund by virtue of Temporary Article 6 of the Act. Severance allowance rights of employees have been reserved with the implementation of Article 14 of the former Labor Act No. 1475 until establishment of that fund. Relevant provisions of the former Labor Act No. 1475 still apply as the Severance Allowance Fund and has not passed into law despite the promulgation of the new Labor Act No. 4857 ha upon publication of the same in the Official Gazette dated 06/10/2003, issue No. 25134.

Entitlement to the severance allowance governed in the Labor Act No. 1475 requires satisfaction of a number of conditions including having a job subject to the Labor Act, its termination due to the reasons mentioned in the Labor Contract Act and being employed at that workplace at least for one year.

Currently, the labor contract of the employee must have been terminated due to the reasons defined below for entitlement to severance allowance as per Article 14 of the Labor Act No. 1475:

  • Immediate termination of the labor contract by the employee (Labor Act, Art. 14) for good cause
  • Termination of the labor contract by the employer (other than Labor Act, Art. 25/II)
  • Termination of the labor contract due to active military service
  • Termination of the labor contract in order to be entitled to old age pension, retirement pay or invalidity pension or a lump sum amount from relevant pension fund
  • Termination of the labor contract upon marriage, if a female employee
  • Leaving work voluntarily after completing the insurance period and the number of premium days other than retirement due to age limit
  • Termination of the labor contract due to death of the employee

WHAT DOES THE DRAFT BILL OF SEVERANCE ALLOWANCE FUND PROVIDE?

It was mentioned above that the Labor Act No. 4857 contains no provision regarding severance allowance but proposes establishment of a severance allowance fund and that the severance allowance rights of employees have been reserved with the implementation of Article 14 of the former Labor Act No. 1475 until the establishment of that fund. The issue of tying the severance allowance to a fund has been discussed regularly and maintained its place in the agenda so far. Our evaluation is based on the draft text as the draft bill has been prepared but not promulgated yet.

The Draft Bill of the Severance Allowance Fund consisting of 22 articles governs payment of severance allowance to the beneficiaries from a fund in accordance with specific procedures and rules.

In Article 12, paragraph 1-a of the ILO Convention 158 on termination of employment, the term "severance allowance" is defined as "a severance allowance or other separation benefits, the amount of which shall be based inter alia on length of service and the level of wages, and paid directly by the employer or by a fund constituted by employers' contributions". As per this definition, the severance allowance may be paid by a fund. Accordingly, it is stated that the general grounds of the draft bill on the regulations about the fund are consistent with the international norms.

It is suggested in the general grounds of the draft bill on why the severance allowance fund should be implemented that "the severance allowance which has become a heavy burden for the establishments in the course of time have caused them to suffer insolvencies particularly in times of crisis and therefore, some employers have tried not to pay severance allowance by using some methods such as increased labor turnover".

The current draft, which has been often discussed and shall probably be amended to a considerable extent, proposes the following regulations on the severance allowance fund:

Pursuant to the Labor Act No. 1475, the Maritime Labor Act No. 854 and the Press Labor Act No. 5953, the severance allowance fund covers the employees working on the basis of a labor contract, the employers who employ them and the beneficiaries of deceased employees. The draft bill, however, envisages containment of all employees. On the other hand, it is further ruled that the liabilities of the employers relating to the service periods before promulgation of the Labor Act shall continue to exist as per the former Act.

The Severance Allowance Fund is planned to become a public enterprise subordinated to the Ministry of Labor and Social Security, subject to the provisions of the private law, autonomous in financial and administrative terms and having a private budget and a legal personality. The fund shall be left out of the coverage of the budget and its revenues shall not be deducted any way. Besides, the fund shall be audited by the Prime Ministry's State Auditing Board and by Certified Public Accountants on a quarterly basis and the audit reports shall be published in the Official Gazette in order to avoid any use of its resources for other purposes as per Article 3 of the draft bill governing the structure of the fund.

Pursuant to Article 6 of the Draft Bill governing Notice, employers should notify the Fund of the employees or his/her beneficiaries entitled to a severance allowance within 7 days following the date of entitlement. Any over payment made by the Fund to those entitled to severance allowance as a result of the employer's failure in notifying the Fund accordingly shall be borne by the employer in default including any expense incurred therefor.

It is ruled in Article 7 of the Draft Bill that the employees covered by the Act shall be entitled to severance allowance in the following cases:

  • An employee who terminates his/her labor contract in order to be entitled to old age pension, retirement pay or invalidity pension or a lump sum amount from the relevant pension fund
  • An employee who applies to the relevant pension fund in order to be entitled to old age pension, retirement pay or invalidity pension or a lump sum amount upon termination of the labor contract by the employer
  • " An employee for whom the premium is paid for at least 10 years
  • Legal heirs of a deceased employee

As per the Draft Bill, an employee whose labor contract is terminated due to old-age or retirement pension, payment is stopped as he/she restarted working and so applied to the Fund for assignment of a pension to be calculated in accordance with Article 63, paragraphs 1 and 2 of the Act No. 506 shall be entitled to a severance allowance for the period his/ her premiums have been paid to the Fund after he/ she was paid his/her severance allowance.

Those for whom the social security support premium was paid shall be entitled to severance allowance only if the conditions of receiving invalidity pension are fulfilled or in case of death of the employee.

As per the Draft Bill, responsibility of severance allowances for the periods after the promulgation date of the Act shall remain with the Fund and the causes of entitlement are limited with old-age, retirement, invalidity, lump sum payment and death. Therefore, doing military service and termination of the labor contract by female employees within one year following marriage are not accepted as causes for entitlement to severance allowance.

Prescription for severance allowance is set out as 10 years in the Draft Bill. Therefore, entitlement to severance allowance of an employee (or his/her beneficiaries) who does not apply to the Fund for receiving the severance allowance within 10 years following actual date of entitlement shall prescribe. The Fund shall be obliged to pay only the amount of severance allowance fixed on the date of entitlement but not any interest. According to the new regulation, an employee covered by the Fund and employed at a workplace only one day shall be entitled to severance allowance provided that his/her premiums are paid to the Fund regularly for 10 years.

Pursuant to Article 8 of the Draft Bill governing the amount of severance allowance, an employee (or his/ her beneficiaries) shall be paid a severance allowance equal to thirty days salary of each full year for which the Fund is paid the corresponding premium. The same ratio applies to remaining days of any given year or those with a paid-up premium period less than one year. The severance allowance cap is also secured by this Article 8 according to which the minimum amount to be taken as a basis in calculation of severance allowance and collection of premiums is limited with the subsistence wage defined in Article 33 of the Labor Law and the maximum amount is limited with the maximum retirement bonus payable to the public servant highest in ranking pursuant to the provisions of the Retirement Fund Act No. 5434.

Article 13 of the Draft Bill requires the deduction of a certain amount from the wage of the employee not exceeding 3% of his/her monthly wage and depositing the same to the fund account. SGK shall be in charge of collecting the premiums but not be held responsible for any premium not paid by employers. Grounds of this Article give no clue as to why the ratio is taken as 3% and this situation causes some disputes between employees and employers on whether the fund shall function properly or the employees shall be paid the amounts they would be entitled to under the Draft Bill.

It is not clear yet if the draft bill on severance allowance that have been discussed for many years shall be promulgated in its current form or not, however, it is an obvious fact that the severance allowance fund should be regulated through an act to meet the expectations of both the employees and the employers.

Negotiations on the current severance allowance regulations continue in order to avoid more serious problems in practice, to maintain the current rights of employees and to introduce a system that would facilitate payment obligations of employers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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