The Labor Law of Serbia provides for severance pay in two cases: when an employee retires and when, due to operational reasons of the employer, the need for certain job positions ceases or there is a reduction in workload. However, in Serbia, besides these two types of severance pay stipulated by law, there is also the so-called incentive severance pay, which is not paid based on the Labor Law, but rather results from the mutual agreement between the employer and the employee.
Severance Pay Upon Retirement
According to Article 119, paragraph 1, item 1 of the Labor Law, the employer is obligated to pay severance to an employee upon retirement, in accordance with a general act, as an additional remuneration, in an amount not less than two average salaries. The general act refers to either a collective agreement or the employer’s internal regulations, while the average salary is considered to be the average salary in the Republic of Serbia according to the latest published data by the official statistical authority, i.e. the Statistical Office of the Republic of Serbia.
An employee is not entitled to retirement severance pay if the employment relationship has ended for reasons other than retirement (i.e., the exercising of rights to old-age, disability, or family pension). Therefore, regardless of the employee’s length of service with the last employer or whether the employment was based on a fixed-term or indefinite-term contract, if the employment ends due to retirement, the employee is entitled to severance on that basis.
As already stated, the minimum severance amount is two average salaries based on the latest published data of the Statistical Office of the Republic of Serbia. The employer may, through a general act (collective agreement or internal regulation), determine a different severance amount as long as it is more favorable than the legal minimum. If a lower amount is stipulated, the employer is still required to pay at least the statutory minimum of two average salaries.
It is also important to emphasize that, unlike severance paid in the case of redundancies — which the employer must pay before terminating the employment contract — severance upon retirement follows a different legal regime. This type of severance, which is considered other income from employment, is to be paid within 30 days from the termination of employment, in accordance with Article 186 of the Labor Law.
This difference in the payment deadline is significant, particularly for employers, as there is a common misconception in practice that this type of severance must also be paid before the employment ends, as is the case with layoffs due to technological, economic, or organizational changes.
Severance Pay Due to Collective Dismissal
According to the current Labor Law, in the case of terminating a number of employees employed for an indefinite term due to technological, economic, and/or organizational changes — commonly referred to as termination due to redundancy — the employer must follow a complex procedure. If, after implementing prescribed measures for managing redundancies, no new jobs are provided, the process of resolving redundancies formally begins with the adoption of a redundancy program. Note that not all employers are obligated to adopt such a program — only those who fall within two specific categories defined by the Labor Law. However, the program itself is a consequence, not the cause — the cause lies in the aforementioned changes that led to the reduced need for employees.
If, despite all undertaken measures, the employer resorts to terminating employment contracts as a last resort, such termination can only occur if the employee is first paid the appropriate severance.
The minimum severance pay to an employee declared redundant is the sum of one third of their salary for each year of service with the last employer, in accordance with Article 158 of the Labor Law. The same article further provides that the salary to be used in calculating the minimum severance is the average monthly salary paid during the last three months preceding the month in which the severance is paid.
In practice, issues may arise in applying this provision, since salaries are typically paid in the current month for the previous month. Therefore, in the event of termination due to redundancy, the employee may have received wages for only two of the three preceding months at the time severance is paid. In such cases, this provision should be interpreted to mean that the severance should be calculated based on the last three monthly salaries actually paid prior to the termination of employment, while the wage for the final month preceding the month of severance payment should be paid in accordance with Article 186 of the Labor Law.
Legally Prescribed Severance Amounts
Regarding the determination of severance amounts, the Labor Law stipulates that an employee declared redundant cannot receive a severance amount lower than one third of their salary for each completed year of employment with the employer. For retirement severance, the minimum is two average salaries.
First and foremost, when calculating severance, it is necessary to determine what is considered a salary or average salary. For employees declared redundant, the relevant salary is the average salary over the last three months prior to termination. For retirement severance, it is the average salary as published by the Statistical Office of the Republic of Serbia.
A frequent issue in practice has been whether the average salary used for calculating severance should be gross or net. The Labor Law does not clearly define this, which has led to differing interpretations among courts and employers. Article 105 of the Labor Law defines salary as an amount that includes taxes and contributions, while Article 159 refers to the salary paid to the employee, which created uncertainty about whether severance should be calculated based on gross or net salary.
However, the position of the competent ministry — which has since been adopted in court practice — has clarified the issue: the basis for severance calculation is the gross salary. This means the calculated, not necessarily paid, salary for the previous three months is used, and the amount includes taxes and contributions.
Accordingly, when calculating severance, the gross average salary is used. Since Serbian law provides for two types of severance pay (depending on how the employment relationship ends), there are distinct formulas for calculating the amount.
The formula for calculating severance for an employee declared redundant is more complex than that for retirement (which is simply two national average salaries). It requires determining the employee’s gross average salary over the past three months, taking one third of that amount, and multiplying it by the number of years the employee worked for the employer, to arrive at the severance amount the employer is required to pay.
In addition, issues may arise when determining the number of years of service with the last employer, as in practice, it is often unclear what exactly is meant by the term “last employer.” Particular confusion arises in cases involving status changes (such as mergers, acquisitions, or demergers), changes in capital ownership, the existence of related parties, as well as situations where the employer is the state. All these factors make it more difficult to interpret and apply the legal provisions accurately in specific cases.
It is also important to note that the prescribed formula yields the minimum severance pay amount that an employer is obliged to pay to the employee. Therefore, a general act or employment contract may stipulate a different method for calculating severance pay, provided that the resulting amount is higher than the statutory minimum obtained through the formula (in accordance with the in favor of the employee principle – in favor laborem).
Voluntary (Incentive-Based) Severance Pay
As stated in the introduction, it is increasingly common in practice for employers to offer employees a mutual termination of employment, accompanied by so-called incentive-based severance pay, rather than initiating the legally prescribed redundancy procedure. This payment is a form of compensation offered by the employer even though the employee has not been formally declared redundant. Employers often prefer this approach as it is procedurally simpler and legally safer — a mutual termination of employment is generally more difficult to challenge in court than a unilateral termination based on redundancy, as provided under Article 179, paragraph 5, item 1) of the Labor Law.
In such circumstances — where an employer seeks to reduce staff through mutual agreement, without formally declaring redundancies — it is crucial for employees to understand that this model primarily serves the interests of the employer. As explained above, this is a procedurally easier and legally more secure route for the employer. Therefore, if an employee is considering accepting mutual termination, they should pay particular attention to the terms of the agreement, especially the amount of the so-called incentive-based severance, to ensure fair compensation for the loss of employment and potential rights they may have had if formally declared redundant.
This naturally raises the question: what constitutes a fair and adequate amount of incentive-based severance pay in the context of mutual termination without a formal redundancy process? In this regard, it is reasonable to use the minimum statutory severance pay—as outlined in Article 158 of the Labor Law—as a reference point for negotiations, possibly increased in line with the employer’s internal policies or general act. Additionally, consideration should be given to the amount of unemployment compensation the employee would be entitled to under Article 67 of the Law on Employment and Unemployment Insurance.
Furthermore, an employee who mutually terminates their employment is not entitled to extended pension and health insurance coverage that would apply in the case of a formal redundancy, under Article 78, paragraph 1 of the same law. All these elements should be carefully considered by the employee when forming a counterproposal for the amount of incentive-based severance pay — assuming the employer has not already made one. If the offered amount is clearly lower than what would be legally owed in the event of a formal redundancy, the employee is encouraged to point out the financial and benefit losses involved, and to emphasize that a fair and professionally responsible approach would be to offer an amount that at least covers those entitlements.
If, however, the employer maintains their original offer that does not meet these criteria, the employee must decide whether to accept such mutual termination. It is important to understand that negotiating incentive-based severance is not merely a legal matter — it also concerns business ethics and mutual respect.
Author: Neda Stojanović, Senior Associate at Injac Attorneys
The information contained in this document does not constitute legal advice on any specific issue and is provided solely for general informational purposes.
