Legal analysis as regards the recent decisions of the supreme Administrative Council in terms of calculation of the employees severance fees in Iran
The present note has been prepared by Iran Best Lawyer in order to provide you with our legal analysis as regards the decision No. 2727 dated on December 10th, 2019 (the “Decision I”) and the decision No. 249 dated on May 27th, 2020 (the “Decision II”) of the Supreme Administrative Council of Iran regarding the manner of calculation of the severance fees of the employees in Iran.
The Decision I clarifies the applicable Iran Labor Law provisions (the “Law”) regarding the method of calculation of the severance fee as a compensation which have to be paid by the employer to an employee at the time of employment termination (the “Severance Fee”) while the Decision II aims at clarifying Decision I through the classification of short-term agreements into two different categories as follows:
- The short-term agreements for a duration up to one year (one year and less) and;
- The short-term agreements lasting more than a year.
Article 24 of the Law as legal ground for Severance Fee
According to Article 24 of the Law, “In the event of termination of the employment agreement, completion of definite works or expiry of definite employment agreement, the employer shall be required to pay to an employee who has worked on the job for one year or in excess of it under an employment agreement, an amount equivalent to one month salary for each year of continuous or alternate service1 (i.e. each year of seniority) at the rate of the last salary as the severance benefits.”
The different practical approaches taken by the employers in interpretation and implementation of Article 24 of the Law
Prior to the enactment of the Decision I, the following approaches were implemented by the employers as regards the payment of the Severance Fee:
Payment and settlement of the Severance Fee at the time of termination of employment relationship
In this approach, the Severance Fee is paid and settled merely at the time of termination of the employment relationship regardless of the type of agreement in terms of time and duration (i.e. definite or indefinite agreements).
As an example, an employee with five years of seniority, even via five separate one-year agreements will receive, at the time of termination of the last employment contract, his/her Severance Fee at the rate of the last salary of the last employment contract (i.e. the salary of the fifth year).
According to this interpretation, the employment is construed as a single relationship no matter the number of successive contracts.
Payment and settlement of the Severance Fee at the end of each definite agreement
In this second approach, the Severance Fee is paid and settled at the end of each definite term agreement2, even in case the employer is willing to continue his cooperation with the employee, by concluding successive definite term agreements.
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Terms of calculation of the employees severance fees in Iran
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