Termination Of Employment Contract And Rules For Payment Of Severance Pay

The employment relationship carries numerous rules and obligations for the employer and the employee. If the employment contract is terminated, many questions arise regarding the payment of severance pay. The mentioned rules and obligations are prescribed by the Labour Law. Below, Confida Croatia provides an overview of the most important rules and obligations.

When is severance paid?

A worker whose employer cancels the employment contract after two years of continuous work, and if the termination is not conditioned by the behaviour of the worker, leads to the worker being entitled to severance pay. The amount of severance pay is determined concerning the length of the previous continuous employment relationship with that employer.

Determining the amount of severance pay

The rule for determining the amount of severance pay stipulates that severance pay may not be agreed/determined in the amount of less than one-third of the average monthly salary earned by the worker in the three months before the termination of the employment contract, for each completed year of work for that employer.

The total amount of severance pay may not exceed six average monthly wages earned by the worker in the three months before the termination unless otherwise determined by law, collective agreement, labour regulations or employment contract.

Payment of severance pay without paying income tax

It is possible to pay severance pay without paying income tax and contributions. If the employer pays the amount of severance pay up to HRK 6,500.00 for each completed work year he avoids paying income tax. If he pays more than the specified amount, it is considered income from independent work, which is linked to the calculation of prescribed obligations as well as to the payment of wages.

Severance pay without payment of tax can also be paid to a worker whose employment has ended by agreement between the employer and the worker at the employer’s proposal, but under the condition that the worker fell into the category of redundant workers by Art. 127 of the Labour Act.

Specifying data in the JOPPD form

If non-taxable severance pay is paid, then the JOPPD form is submitted on the day of payment, and no later than the 15th day of the following month. At the same time, on page B in field 15.1. is entered by mark 26.

In contrast, there is a different procedure if non-taxable and taxable severance pay is paid at the same time. Then the JOPPD form is submitted on the day of payment, i.e. no later than the next working day. In field 6.1. code 0001 is entered in field 6.2. code 0025, and the calendar year is marked for the period.

Because of the euro’s arrival as the official currency in the Republic of Croatia, all amounts on the JOPPD forms marked until December 31, 2022, are reported in kuna, and those marked from January 1, 2023, are reported in euros. On the documents on the payment of severance pay from September 5, 2022, to December 31, 2023, the employer is obliged to state the amounts twice.

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