Austria: To Transfer Or Not To Transfer: That Is The Question

Austria has two systems of statutory severance payments. One applies to employment contracts that started before 2003 (Abfertigung Alt; old system) and one to contracts that started in 2003 or later (Abfertigung Neu; new system). Mixed systems or total transfers from the old system to the new system are possible, but not for long.

Under the old system, the employee, upon termination of employment and subject to certain conditions, has a claim against the employer for statutory severance payment. This claim (up to 12 monthly remunerations) is calculated based on the employee's lengths of service with the employer and his remuneration upon termination of the employment.

Under the new system, the employer pays monthly contributions to an external pension fund based on the employee's remuneration. When the employment ends, the employee has a claim against the fund.

However, the law also allows mixed systems or total transfers from the old system to the new system. But a transfer may be available only until 31 December 2012 depending on the circumstances.

So employers and employees with employment contracts that started before 2003 must quickly decide whether it would be advantageous for them to transfer.

Partial transfer of severance pay claims (Teilübertritt)

Generally, the old system continues to apply to employment agreements commenced before 2003. Employer and employee may, however, agree in writing for the new system to apply as of a certain effective date. Starting with that date, the employer must make severance pay contributions (Abfertigungsbeiträge) of 1.53% of the employee's monthly gross remuneration to an external pension fund.

Upon termination of the employment, and for the part of the severance subject to the old system, the years of service to consider when calculating the employee's entitlements (if any) are to be calculated until that date, too. The remuneration to consider in this respect, however, is to be calculated based on the employee's remuneration when the employment ended. For this part, the employee has a claim against the employer.

For the part of the severance subject to the new system, the employee has a claim against the external pension fund. The employee may dispose of the accrued amounts in different ways, subject to meeting certain criteria.

So, in such cases, both systems must be applied.

Total transfer of severance pay claims (Vollübertritt)

But, besides the partial transfer, a total transfer may also be available until 31 December 2012. In this case, the employer and employee agree in writing that a certain amount of money will be transferred to an external pension fund. However, the amount of monies to be transferred to the external pensions fund has to be agreed upon in writing between employee and employer. So, the transferred monies may also be lower than the value of (hypothetically) accrued claims under the old system until the date of the transfer.

Upon termination of the employment, only the new system applies. Thus, the employee has a claim against the fund only, not against the employer.

To transfer, or not to transfer: that is the question

Under the old system, the employee loses all entitlements for statutory severance payment if the employee terminates the employment. Thus, from an employee's point of view, the old system hinders mobility.

But experienced employees, especially those sought after by competitors, rarely terminate their employment if they risk losing their severance entitlements. So agreeing on a total transfer from the old system to the new system may decrease the employee's commitment to the employer.

The employee also loses all entitlement for statutory severance payment if the employer terminates the employment for cause and with immediate effect (berechtigte Entlassung).  Thus, if the employee gives the employer reason to terminate the employment for cause, the employer need not pay statutory severance to the employee, either. If, however, a total transfer had been agreed, the employee (even in a case of termination for cause) could, subject to meeting certain criteria, get the accrued (e.g., transferred) monies. It may thus be argued that also for this reason the old system favours the employer.

But there is a (financial) downside to the old system also from an employer's perspective. The entitlement of the employee is calculated based on the employee's remuneration at the last month of employment. Thus, even if the employee – after 25 years of employment - has reached the highest possible entitlement under the old system (12 monthly remunerations), the financial burden of the employer continues to increase with the increasing remuneration of the employee.

Furthermore, while the employee after 15 years is entitled to six monthly remunerations, after 25 years the entitlement increases to 12 monthly remunerations. Thus, the time after 15 years of continued employment with an employer is weighted higher by the system. In this case and for certain employees (for whom the employer expects substantial increases in their remuneration), it may be considered advantageous for employers to agree to a partial transfer.

Even though, in case of a total transfer, the amount to be transferred may be freely agreed between the parties, employers should be cautious about negotiating too hard as this may cause employee resentment and weaken the employee's commitment.

In the literature it is argued that an employment between employer and employee involving a disproportionate reduction of accrued (fictitious) entitlements in relation to the agreed sum may be contra bonus mores and thus void.

Conclusion

As one can see, there are quite some issues for both employer and employee to consider. If a total transfer might be interesting for either of them, they must act quickly: The deadline is 31 December 2012.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.