Severance Payment and New Severance Payment Scheme: New Momentum or Obstacle for the Austrian Labour Market?

WIFO studied the effects which two schemes to reform the severance payment currently proposed to Parliament would have on the Austrian labour market. Only a few terminated employment relationships currently meet the requirements to qualify for severance payment. An employee giving notice him-/herself is not eligible for severance payment. Eligibility rises in graduated steps with the length of stay in a company: no severance payment is due for employment of less than three years, but it amounts to one year's salary after 25 years of employment. In Austria, about one third of all employment relationships are terminated annually, with most of these employees not eligible for severance payment, since the currently applicable stepped rate acts to the detriment of employees who are employed by the same company for less than three years. Severance payment thus operates rather as a premium for employee loyalty. Two proposals have been submitted to Parliament which aim to bring the severance payment system more in line with high mobility rates and which simultaneously attempt to change severance payments into an old-age pension provision scheme (second pillar). The proposals furnished, respectively, by the SPÖ (Social Democratic Party) and ÖVP (Austrian People's Party) are contribution-based systems. In both models, the employee's entitlement to severance payment grows uniformly with the length of gainful employment. Even when an employee quits, the entitlement remains active in the severance payment fund, although the ÖVP's model precludes the employee from disposing of the money. Under the ÖVP's model, the employer pays contributions only for employees who have worked for the employer for more than a year. While this is an improvement over the current stepped model, it is still detrimental to the desired higher mobility of employees who would thus suffer a loss of entitlement. For mobile and seasonal workers in particular this model grants neither a bridging support nor any additional old age pension provision. After 300 contributory months (25 years), no more contributions need to be paid for the employee. The envisaged slow transition to the new system would reduce wage costs for older employees only in the 26th year, at a time when demographic projections forecast a severe shortage of workers. Seen from today, the capping will have a long-term effect in the loan and insurance industry, chemicals manufacturing industry, and energy and water utilities. With the maximum severance payment set at one year's salary, just as today, employees of these industries would not be worse off than today. The SPÖ proposal includes all employees in the system, regardless of the period of gainful employment and the type of termination. Employers need to make contributions to the severance payment funds for all employees, from the time they are first employed until the time they leave/retire. The model places greater emphasis on bridging and on additional old-age provision, since entitlements rise with the duration of gainful employment. Almost 71 percent of terminated employment relationships and 23 percent of continuing employment relationships have a duration of less than one year. Short term employment is particularly widespread in the construction industry, tourism, retail trade, data processing, loan and insurance businesses, and producer and other services. A reform of severance payments as envisaged by the SPÖ model would mean additional expenditure for employers, but would offer better security against unemployment and old-age provision to employees of these sectors, whereas this security would be lower if the ÖVP model were implemented.Umstellung des Abfertigungsrechtes: Impuls oder Hemmnis auf dem österreichischen Arbeitsmarkt?; Severance Payment and New Severance Payment Scheme: New Momentum or Obstacle for the Austrian Labour Market?