Guide to Severance Allowance Calculation for Employees

Key takeaways

• Eligibility: Employees must have worked regularly for at least 12 months, and the termination must fall under the specific legal cases stipulated in the Labor Code.
• Formula: 0.5 x Average 6-month Salary x Years of Employment (excluding periods of Unemployment Insurance participation and periods where severance or job-loss allowances were already paid).
• Differentiation: It is critical to distinguish between Severance Allowance and Job-Loss Allowance—two distinct regimes with different payment levels and conditions.
• Compliance: Violations regarding payment deadlines or calculation errors may lead to labor disputes and harm corporate reputation.

Severance allowance is a mandatory financial obligation prescribed by law. Employers are required to pay this to employees upon the termination of an employment contract under legally defined circumstances. However, it is not a “default” benefit for every resignation. Accurately determining the timing and conditions of this obligation is key to effective workforce planning and financial risk mitigation.

Under the 2019 Labor Code, severance allowance applies to legal contract terminations, excluding cases of job loss due to structural/technological changes, economic reasons, or termination due to disciplinary action. Common scenarios include:

• Expiration of the labor contract.
• Completion of the contracted work.
• Mutual agreement to terminate.
• Unilateral termination by either party in compliance with legal procedures.

Who Is Eligible for Severance Allowance?

Not every departing employee is entitled to severance. Clarity on these regulations is vital for accurate financial forecasting and compliance. 

Basic Conditions:

1. Seniority: Regularly worked for the employer for a full 12 months or more.
2. Legal Termination: Termination must comply with Article 34 of the 2019 Labor Code.
3. Exclusions: Employees eligible for retirement pensions or those who have abandoned work for 05 consecutive working days without a justifiable reason.

HR Note: When processing exits, businesses must clearly distinguish between legal working time and any periods of disciplinary dismissal. Accurately defining each phase of employment is the foundation for calculating correct obligations, protecting the brand, and minimizing litigation risks.

How to Calculate Severance Allowance

The calculation follows the specific legal framework provided in Article 46 of the 2019 Labor Code and Decree 145/2020/ND-CP.

1. The Standard Formula

For all eligible employees, the severance package is calculated as follows:

• Average 6-month Salary: The average salary of the 6 consecutive months immediately preceding the termination, as stipulated in the labor contract. 
• Actual Years of Employment: Total employment duration minus the period of Unemployment Insurance participation and any periods for which severance or job-loss allowances have already been paid. 

Note: Fractions of a year are rounded—6 months or less counts as 1/2 year; over 6 months counts as 1 full year. 

2. Key Considerations

Identifying which income components are included in the calculation base is not just a compliance requirement but a factor in sustainable budgeting. A transparent salary structure that separates base pay from allowances and benefits helps control operational costs.

• Included: Job-based or title-based salary; salary allowances; and other additional payments with a fixed amount paid regularly each period. 
• Excluded: Overtime pay; bonuses; mid-shift meal allowances; transportation/telephone/housing supports; and other welfare benefits that are not fixed or regular. 

In M&A contexts, HR must conduct a thorough audit of employment history and prior payouts to ensure compliance and avoid duplicate payments for the same period of service.

3. Severance vs. Job-Loss Allowance

• Severance Allowance: 0.5 months’ salary per year. Applied for standard legal terminations. 
• Job-Loss Allowance: 1 month’s salary per year (minimum 2 months’ pay). Applied when job loss results from structural/technological changes, economic reasons, or corporate restructuring (mergers/consolidations) where the employee cannot be redeployed. 

4. Payment Procedures and Deadlines 

According to Article 48, employers must settle all payments within 14 working days of contract termination.

• Standard Deadline: 14 working days. 
• Extended Deadline: Up to 30 days in special cases (dissolution, restructuring, force majeure). 
• Tax Compliance: Payouts must comply with Personal Income Tax (PIT) regulations. 
• Consequences of Non-compliance: Delays may trigger labor inspections, administrative fines, and reputational damage. 

Frequently Asked Questions (FAQs)

1. Can an employee receive both Severance and Job-Loss allowances?

No. They cannot be paid for the same period of work. The specific reason for termination determines which single allowance applies.

2. What defines “structural or technological changes”?

Under Article 42, this includes organizational restructuring (mergers/dissolving departments), technology/equipment upgrades, or product structure changes that result in labor redundancy.

3. What if an employee refuses a contract renewal or a different position?

Refusal does not automatically disqualify an employee from severance. Eligibility depends on the legal grounds of termination. However, if an employer offers a suitable alternative position during restructuring and the employee refuses, the obligation must be assessed on a case-by-case basis based on documentation.

4. If an eligible employee passes away, who claims the payment? 

Severance becomes part of the deceased’s estate. Payment is made to legal heirs (spouse, children, parents) in accordance with the Civil Code 2015. HR should request legal inheritance documentation before disbursement.

Conclusion

Severance is a mandatory legal obligation. For large-scale enterprises or those with complex M&A histories, managing these calculations manually poses high risks. Standardizing internal processes and maintaining clean employment data are essential for financial accuracy and legal safety.