**I. Definition and when it must be paid**

Severance pay has its origin and regulation in the Labor Code of 1943 and had its most relevant reform with the approval of the Worker Protection Law and its respective regulations. In the context of article 63 of the Political Constitution, severance pay aims to give workers an economic remuneration that allows them to meet their basic needs while they remain unemployed.

However, as stated in article 29 of the Labor Code, this benefit is received once the employment contract has expired, even if the worker immediately goes to work for the same employer or a different one; even if, without terminating the contract, a modification of the working conditions is made in detriment of the worker. In all these cases, unemployment aid accentuates its compensatory purpose.

Severance pay in Costa Rica is a compensation provided exclusively for workers hired for an indefinite period; that is, it does not include those employed for a fixed or specific term since another type of compensation is available for them in article 31 of the Labor Code.

Severance pay in Costa Rica is a compensation provided exclusively for workers hired for an indefinite period; that is, it does not include those employed for a fixed or specific term since another type of compensation is available for them in article 31 of the Labor Code.

1. An unjustified dismissal, which occurs when the employer cannot demonstrate the existence of a serious offense committed by the worker that warrants dismissal without employer responsibility.

2. A dismissal with employer responsibility. In this case, the employer consciously assumes the payment of severance pay, regardless of the reason for deciding to terminate the employment relationship.

3. The worker's resignation as a consequence of the demonstration of severe misconduct by the employer. Article 83 of the Labor Code gives an exemplary list of some cases in which this situation occurs, such as non-payment of full salary, serious danger to the safety of the worker or his family, and discrimination against the worker, among others. The reservation is made that it is essential to exhaust conciliatory means with the employer, that is, to try to solve the problem peacefully before the worker terminates the employment contract.

4. There are other particular situations provided for by legislation that may give rise to severance pay. For example, following article 85, paragraph e) and 684 of the Labor Code, it could be granted when a worker takes advantage of the benefit of "retirement." The reservation is made that these particular situations must be analyzed on a case-by-case basis.

Finally, it is worth clarifying that when the worker is part of a solidarity association ("Asociación Solidarista"), the amount of employer contribution received, according to articles 18, paragraph b) and 21 of the Solidarity Associations Law, is considered as part of the economic fund of severance payment for the benefit of the worker. If there is an unjustified dismissal, and this employer contribution paid by the solidarity association is less than what would correspond to the worker for severance pay, the employer must cover the difference. Likewise, the worker who resigns and anyone dismissed with employer liability has the right to withdraw that amount.

**II. Calculation of severance pay**

Three main elements must be considered to determine severance pay, using the following formula:**the amount of time worked multiplied by the number of days that correspond according to article 29 of the Labor Code, and what is obtained is multiplied again by the average daily salary. **

__Average daily salary: __We will start with the last one. First, the ordinary and extraordinary wages received by the worker in the previous 6 months that have been actually worked are added and divided by 6 to obtain a monthly "average". Once this monthly average is obtained, the daily average must be calculated.

Workers who receive their salary biweekly or monthly must be paid every day of the month at a rate of 30 days per month, regardless of the activity carried out, whether commercial or not. Therefore, for workers with biweekly or monthly pay, the monthly average of the last 6 months is divided by 30, and the daily average is obtained.

For workers who receive their salary on a weekly basis, a distinction is made between those who carry out commercial activities and those who do not:

- When your activity is non-commercial, divide the monthly average of the last 6 months by 26.

- When your activity is commercial, divide the monthly average of the last 6 months by 30.

The differentiation is because, by article 152 of the Labor Code, in commercial activities, the salary includes payment for the day of rest, and in non-commercial activities, the salary does not include payment for the day of rest.

Likewise, it is highlighted that the periods in which the worker did not work due to being incapacitated due to some illness should not be considered for the calculation since, during these periods, the worker receives a subsidy and not a salary. In this case, the salaries received before the disability are added until the 6 effective months of work are completed.

Subsidies are also considered to be the amounts that, due to a disability and in addition to the payment made to the legal percentage that must be assumed by the employer or the social security institutions (CCSS and INS), are made by the same employer.

__Amount of time worked:__If it has not reached 6 months, "the shorter fraction of time" will be considered as long as it is greater than 3 months. If the worker is fired before completing 3 months, he is not eligible for severance payment. Although it is not explicitly stated in the Labor Code, it has been considered that this is the case because the worker is in a "trial period" until before completing 3 months of the employment relationship.

__Number of days to be recognized according to article 29 of the Labor Code:__article 29 of the Labor Code establishes a table that details how many days of salary correspond to severance pay. The table is linked to the worker's seniority, that is, it will depend on the months and/or years worked.

__The first 2 assumptions are easy to understand. __Starting exactly at 3 months and before completing 6 months worked, 7 days of salary correspond to severance pay. Starting exactly at 6 months and before turning 1 year, it corresponds 14 days of salary for severance pay.

__The third assumption __is the one that requires a little precision. For each year completed, the value that each of the years worked will have is established, and that value is determined by a number of days of salary.

In this case, it is relevant to know whether or not there is a "fraction greater than 6 months". The worker receives an additional sum for that fraction of time if it is equal to or greater than 6 months; otherwise, he loses it. Consequently, and as an example, if a worker worked 2 years and 4 months, since the fraction is less than 6 months, it is lost and rounded to 2, but if he worked 2 years and 7 months, since the fraction is greater than 6 months is rounded to 3.

However, and for the purposes of the calculation, it must be taken into consideration that when "rounding" is applied, the value assigned to the fraction will not be the same as that corresponding to year 3 in the table, but rather the value of year 2. Said otherwise, although " rounding " increases the amount received in year 2, it does not allow it to go up to year 3.

**Practical examples:**

__Case 1: __A worker has a seniority of 3 years and 5 months and an average daily salary of ₡15,000. According to article 29 of the Labor Code, in "Year 3" each full year must be compensated with 20.5 days. Since, in this case, a "fraction greater than 6 months" is not reached, it is rounded to 3. The calculation would be as follows: 3 multiplied by 20.5, gives a partial result of 61.5 days and the result is multiplied in turn by ₡15,000. The amount obtained would be: ₡922,500.00, corresponding to the severance pay.

__Case 2: __A worker has a seniority of 4 years and 8 months and an average daily salary of ₡15,000. According to article 29 of the Labor Code, in "Year 4" each full year must be compensated with 21 days. In this case, it does reach a "fraction greater than 6 months" since it was 4 years and 8 months. By this, it is rounded to 5, but, even if it is rounded to 5, the multiplication by the number of days assigned per year as established in "Year 4" is maintained, which would be 21 days. The calculation would be as follows: 5 multiplied by 21 = 105 and the result is multiplied by ₡15,000. The amount obtained would be: ₡1,575,000.00, corresponding to the severance pay.

__The fourth assumption__ of article 29 of the Labor Code is that of year 1, which is not equivalent to the first year of work when the year has not yet been completed, but to what would happen after 1 year is completed and while the 2 years have not been met.

Unlike what is indicated from "Year 2" and following in the table where the fraction may imply receiving an additional sum, the norm did not include that same rule for year 1. Although it is evident that there is no objective reason that justifies this difference in treatment, which should have been corrected through legislative reform, it has been the courts of justice that have been responsible for fixing it. Consequently, the same rules that have already been examined are applied to consider or not the fraction greater than 6 months, in year 1.

__Practical example:__

__Case 3: __A worker has a seniority of 1 year and 7 months worked and an average daily salary of ₡15,000. According to article 29 of the Labor Code, in "Year 1" that year must be compensated with 19.5 days. In this case, he does reach a "fraction greater than 6 months", since it was 1 year and 7 months. By virtue of this, it is rounded to 2, but even if it is rounded to 2, the multiplication by the number of days assigned per year as established in "Year 1" is maintained, which would be 19.5 days. The calculation would be as follows: 2 multiplied by 19.5= 39 and the result is multiplied by ₡15,000. The amount obtained would be: ₡585,000.00 corresponding to the severance pay.

__The fifth and last assumption, __is that severance pay cannot be compensated for more than 8 years. That is, even if a worker were with the same employer working for 8 years or more, they could only be paid for a maximum of 8 years and although reference is still made to the "fraction greater than 6 months", it is unimportant.

__Practical example:__

__Case 4: __ A worker has a seniority of 9 years and 7 months and an average daily salary of ₡15,000. According to article 29 of the Labor Code, in "Year 9" each full year must be compensated with 22 days. It even reaches a "fraction greater than 6 months", since it was 9 years and 7 months. In "Year 9" each full year must be compensated with 22 days, but since no more than 8 years can be recognized, the calculation would be as follows: 8 multiplied by 22 = 176, and the result is multiplied by ₡15,000. The amount obtained would be: ₡2,640,000.00 corresponding to the severance pay. In this context, it is evident that the "rounding" of the fraction greater than or less than 6 months is unnecessary.

Article 30 of the Labor Code establishes that severance pay may not be "the subject of compensation, sale or assignment, nor may it be seized, except for half of it for alimony." That is to say, even if the worker owes a sum to the employer, the latter will not be able to "deduct" it from the severance pay. Likewise, severance pay can only be "seized" (withheld) in the case of alimony.

Finally, there is the following question. How long does the employer have to make the severance payment? The Labor Code does not establish a specific period, however, the judicial offices familiar with labor matters have agreed to indicate that payment must be immediate at the end of the employment relationship, that is that, from that moment on, interest and indexation are granted on the sum owed. Any other term that is applied is just a practice without a legal basis. However, some of them, as long as they include a reasonable and justified term or originate from an agreement of the parties, do not raise major controversy. Due to the above, it is recommended that employers take the necessary measures to stay within the said period to avoid administrative or judicial claims.

At Bufete Godínez y Asociados, we specialize in counseling and advising employers in labor and employment law. If you need any additional information, do not hesitate to contact us by clicking here.

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