Termination of employment contracts and calculation of compensation - International Law Office

International Law Office

Employment & Labour - Turkey

Termination of employment contracts and calculation of compensation

July 28 2010

Introduction
Notice pay
Severance compensation
Compensation paid in the event of unfair termination


Introduction


Pursuant to Labour Law 4857, employers may terminate an employment contract for valid or just cause.

Terminations which are based on valid cause mainly relate to:

  • efficiency;
  • employee behaviour; or
  • the requirements of the business.

Terminations based on just cause relate to:

  • long-term absence due to health reasons;
  • immoral, malicious and dishonourable employee conduct;
  • force majeure; or
  • absence due to detention or arrest.

Permanent employment contracts may be terminated by employers for valid cause by observing a notice period. However, both fixed-term and permanent contracts may be terminated for just cause with no obligation to observe a notice period.

Employers need to base termination on a valid cause relating to the employee's efficiency or behaviour, or the requirements of the business, in order to terminate permanent contracts of employees covered by the job security provisions of the Labour Law. Under the Labour Law, employees benefit from the provisions if they have worked for at least six months for an employer with 30 or more employees. Nevertheless, employers are not obliged to base termination on a valid cause for employees who are not covered by the job security provisions.

Employers must pay compensation to employees whose employment has been terminated; this differs according to the cause of termination and the employee's seniority.

Notice pay


Termination by way of observing a notice period applies only to permanent contracts. Pursuant to the Labour Law, an employer which terminates a permanent contract without just cause should respect statutory notice periods or the notice period stated in the employment contract or collective agreement, or pay wages in advance corresponding to the notice period.

The statutory notice period is:

  • two weeks for a term of employment of less than six months;
  • four weeks for a term of employment of between six months and 18 months;
  • six weeks for a term of employment of between 18 months and three years; and
  • eight weeks for a term of employment of more than three years.

These notice periods are the statutory minimum, but may be increased by employment contracts or collective agreements in favour of employees. However, employees are not bound by the increased periods if they terminate their employment contracts with notice.

Notice pay is calculated based on the employee's current gross wage, plus other continuous benefits (either in monetary or monetarily measurable terms) to which the employee is entitled under the employment contract, collective agreement or the law. For instance, bonuses, premiums, family allowances, heating, clothing and health benefits which are provided regularly will be added to the employee's daily basic wage. However, sporadic payments and fringe benefits (eg, pay for work on weekly rest days and holidays, and pay for overtime work) will not be included in the calculation of notice pay. Also, further to decisions of the labour courts, performance-related bonuses and payments in direct proportion to the profitability of the company will not be taken into account.

Furthermore, benefits which are provided solely for business purposes, such as a company car, mobile phone or laptop, are not considered to be wage supplements and, therefore, will not be taken into consideration in the calculation of notice pay. However, benefits which are provided as a social subsidy - such as a travel card or fuel subsidy beyond amounts that are required for business purposes - are considered to be wage supplements and thus will be taken into consideration in the calculation of notice pay. Notice pay is subject to both income and stamp tax.

Severance compensation

Severance compensation must be paid by the employer to an employee who has completed at least one year's service and whose employment contract is terminated under certain conditions specified under the Labour Law.

Severance compensation is to be paid if the employer terminates an employment contract for reasons other than the employee's malicious, immoral or dishonourable conduct or other similar behaviour. Thus, severance compensation will be paid if an employment contract is terminated with a term of notice (valid cause) or without a term of notice (just cause) for reasons concerning the employee's health, absence due to detention or arrest or force majeure.

Severance compensation is set at 30 days' pay for each year of service. Any period in excess of each full year is to be compensated on a pro-rata basis. However, there is a statutory ceiling - currently TRY2,517.01 per year of service, as of July 1 2010. The 30-day period can be increased within the upper limit of that ceiling. The same rule that applies to the calculation of notice pay also applies to the calculation of severance compensation. Severance compensation is exempt from income tax, but subject to stamp tax.

Compensation paid in the event of unfair termination

On termination of a permanent employment contract, an employee covered by the job security provisions may file a lawsuit for reinstatement based on unfair dismissal. If the court rules that termination was unjustified because the alleged reason was invalid, the employer must either reinstate the dismissed employee or pay compensation for the lack or reinstatement.

If the employer does not reinstate the employee, compensation paid to the employee will be no less than four months and no more than eight months of the employee's wages. This compensation will be calculated on the employee's last basic wage. The employee will also be paid up to four months' total of his or her wages and other entitlements for the time he or she is not at work until the issuance of the labour court's final ruling. This payment will be made regardless of employee's reinstatement to work. However, the employee will have to return any severance compensation and notice pay he or she received at the time of termination upon reinstatement to work.

On termination of a fixed-term employment contract, an employee who does not benefit from the job security provisions may also file a lawsuit claiming abusive exercise of the right to terminate and seek so-called 'bad-faith compensation'. Bad-faith compensation is three times the amount of notice pay due.

For further information on this topic please contact Melek Onaran Yüksel or Katharina Cihan Akyürek at YükselKarkınKüçük by telephone (+90 212 318 05 05), fax (+90 212 318 05 06) or email (myuksel@yukselkarkinkucuk.av.tr or kakyurek@yukselkarkinkucuk.av.tr).


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