At the end of an employment relationship, it is very important to leave in order a series of documents and formalities established by law so that both the company and the employee end their relationship in good terms. Some of these procedures are settlement and the settlement.
In the world of work, you have most likely heard of settlement and liquidation, but sometimes they can get confused. That’s why here we share what are the differences between settlement and liquidationand how these payments are calculated.
What is the settlement?
The settlement It is defined as the payment that a worker must receive when an employment relationship ends, regardless of the reasons for which the employment contract ended. This payment can be made by check, bank transfer and even in cash, and you must receive a letter or document with all your data showing the breakdown of the concepts for which you are receiving payment, according to information from OCC.
What should the settlement include?
The settlement When terminating an employment relationship, you must include payment for the following concepts:
- The days worked and not paid in the month. For example, if you are paid fortnightly and you quit on the 12th, you should be paid for those 12 working days.
- Proportional part of the Christmas bonus.
- Proportional part of your vacations.
- Seniority premium, as long as the worker has been working for the company for more than 15 years.
- It can include other benefits such as: bonuses, vouchers, commissions, savings account or fund, utilities, etc.
How to calculate the settlement?
With this series of simple steps you will be able to calculate the amount that you should be paid for your settlement when you end an employment relationship. Imagine that an employee has these working conditions, the same ones that we are going to use for our example:
Monthly salary: 10,000 pesos
Daily salary: 333.33 pesos
Days pending payment: 12
Annual bonus: 15 days
Annual vacation: 8 days
Vacation premium: 25%
Days of the year elapsed: 160
- Multiply the unpaid days worked by the daily salary. For example, if you earn 10 thousand pesos per month, you would be earning 333.33 pesos per day. So if you quit on the 12th of the month, multiply those 12 days by 333.33. In this example, the total for the days worked would be 3,999.93 pesos.
- To calculate the part proportional bonus, first you must know how much you would be entitled to for working all year. To do this, multiply your daily salary by the days of the bonus according to the contract:
15 days x 333.33 pesos per day = 4,999.95 pesos
Next, divide that amount by the 365 days of the year, to find out how much you are entitled to per day:
4,999.95 pesos ÷ 365 days = 13.69 pesos per day.
Now multiply that amount by the days of the year elapsed:
160 days x 13.69 pesos = 2,190.40 pesos for bonus.
- Follow a similar procedure to calculate the proportional vacation: multiplies the daily salary by the annual vacation days:
333.33 pesos per day x 8 vacation days = 2,666.64 pesos
Divide that amount by the total days in the year to determine the value per day:
2,666.64 pesos ÷ 365 days = 7.3 pesos per day.
Multiply that result by the days worked:
7.3 pesos per day x 160 days = 1,168 pesos (proportional part for vacations).
To obtain the vacation cousinmultiply by that percentage the proportional part of the vacation:
25% vacation premium x 1,168 pesos = 292 pesos (proportional part vacation premium).
- Finally, add all those amounts and you will get the estimated amount for the settlement. Remember that, depending on the reasons for the end of the employment contract, the seniority premium could be included. If we continue with our example, this would be the approximate amount for the payment of the settlement:
Salary pending payment: 3,999.93 pesos
Bonus: 2,190.40 pesos
Proportional part of vacations: 1,168 pesos
Proportional portion of vacation premium: 164.34 pesos
Settlement estimated: 7,522.67 pesos
When is the settlement paid?
The employee must be paid for settlement under the following circumstances, according to the Federal Labor Law:
- Voluntary resignation of the worker, known as resignation termination
- Justified or unjustified dismissal of the worker, called severance pay
- When the contract ends due to a serious fault committed by the boss
- At the end of a temporary contract or a defined contract
- Disability due to illness
- Death of the worker
There are certain situations in which a justified dismissal exempts the employer from paying the settlement to the worker, according to the provisions of article 47 of the Federal Labor Law. Some of these are:
In which cases is the settlement not paid?
- Lying about qualifications or knowledge
- engage in acts of violence
- Damage company property
- Have more than three unexcused absences in 30 days
- Reporting to work under the influence of alcohol or drugs
What is settlement?
In the very definition of settlement the difference with the settlement is explained: the settlement the employee is paid when the termination of the contract is the responsibility of the boss or the company.
The settlement It is paid as compensation to compensate in a certain way for the damage that losing his job represents for the employee.
What should the settlement include?
According to OCC, the settlement must include payment for the following items:
- 3 months salary
- seniority bonus
- Salaries due in the case of unjustified dismissals, with a limit of 12 months from the notification of the dismissal
- 20 days of salary per year worked, in case of unjustified dismissal or if the company refuses to reinstate the employee in his position, after he has requested it before the Conciliation and Arbitration Board
How is the settlement calculated?
As in the previous exercise and with the same example, we will make a calculation that can indicate how much the employee should receive for settlementin case your dismissal requires it.
- Multiply what you earn per month by 3, so you will get the amount of what you should be paid for 3 months of salary:
10,000 x 3 = 30,000
- The seniority premium, if you have been working in the company for more than 15 years, it consists of the payment of 12 days of salary for each year of service. If the full year is not worked, the proportional part will be paid according to the time worked during the year.
Suppose that the employee has already worked for 16 years and 160 days. To calculate your seniority premiumwe multiply his daily salary by 12, leaving:
333.33 x 12 = 3999.96 pesos
The resulting amount that would be equivalent to one year, we multiply it by the 16 years that he has been working, it would be:
3,999.96 x 16 = 63,999.36 pesos
To find out the equivalent of the 160 working days, calculate how much you would be entitled to for working all year. To do this, multiply your daily salary by the 12 days of salary established corresponding to the seniority premium:
12 days x 333.33 pesos per day = 3999.96 pesos
Next, divide that amount by the 365 days of the year, to find out how much you are entitled to per day:
3999.96 pesos ÷ 365 days = 10.95 pesos per day.
Now multiply that amount by the days of the year elapsed:
160 days x 10.95 pesos = 1,752 pesos
Add it to the amount you got from the 16 years to get the total of the seniority premium:
63,999.36 + 1,752 = 65,751.36 pesos
- Finally, add those amounts and you will get the estimated amount for the settlement. Remember that, depending on the reasons for the dismissal and the conditions in which it is carried out. That is, in the event of unjustified dismissal or refusal of the company to reinstate the employee in his position, the wages due and the 20 days of salary for each year worked would be added. If we continue with our example, this would be the approximate amount for the settlement payment:
3 months salary: 30,000 pesos
seniority bonus: 65,751 pesos
Settlement estimated: 95,751 pesos
Is the difference between settlement and liquidation clearer to you?
Rocio Reyes Communicologist specialized in science journalism and digital marketing. Curiosity leads this being with a cat personality to find links where there seem to be none. Whenever I can, I like to contribute even a grain of what I have learned. Fan of the world of entrepreneurship and MMA.