How to calculate severance pay for dismissal: a practical guide for SMEs

Dismissing an employee is never an easy decision, and getting it wrong can be costly. One of the areas where SMEs go wrong most often is in calculating severance pay for dismissal: applying the wrong number of days, forgetting the monthly salary cap or confusing severance pay with the final settlement (finiquito) can end in a lawsuit and a ruling of unfair dismissal. In this guide we explain, step by step and with examples, how to calculate severance pay according to the type of dismissal in Spain.

What is severance pay for dismissal?

Severance pay for dismissal is the sum of money the company must pay the employee when their contract is terminated at the employer’s initiative. Its amount depends on three variables:

• The employee’s daily salary.
• Their length of service (years and months worked at the company).
• The type of dismissal, which determines how many days of salary are owed per year.

It should not be confused with the finiquito (final settlement), which is a different matter: the finiquito covers what the company owes for work already done (outstanding salary, unused holidays, pro-rated extra payments). The finiquito is paid in almost any contract termination; severance pay only in the cases set out by law.

How is severance pay for dismissal calculated in Spain?

The general formula is straightforward:

Severance pay = daily salary × severance days per year × years worked

Let’s break down each element.

The daily salary

The daily salary is obtained by adding up all gross annual pay (base salary, supplements, pro-rated extra payments, regular commissions, etc.) and dividing it by 365 days.

Daily salary = gross annual salary ÷ 365

For example, an employee earning €28,000 gross per year has a daily salary of 28,000 ÷ 365 = €76.71/day.

Time worked

Full years of service are counted, and for periods of less than a year, they are pro-rated by month (rounding any incomplete month up). An employee with 4 years and 7 months will count as 4 years and 7 months of service for calculation purposes.

Severance days according to the type of dismissal

Here lies the key point: each type of dismissal has a different number of days per year worked and its own cap.

Severance days according to the type of dismissal

Unfair dismissal (despido improcedente)

This is a dismissal declared unjustified (because the grounds are not proven or there are formal defects). It is the most expensive one, and two periods must be distinguished because of the labour reform of February 2012:

• Length of service up to 11 February 2012: 45 days’ salary per year worked, capped at 42 months.
• Length of service from 12 February 2012 onwards: 33 days’ salary per year worked, capped at 24 months.

For contracts predating that date, both periods are calculated separately and added together, respecting the applicable maximum cap.

Objective dismissal (and collective dismissal / ERE)

This applies for economic, technical, organisational or production-related grounds, among others. The severance pay is 20 days’ salary per year worked, capped at 12 months. In addition, the employee must be given 15 days’ notice (or its financial equivalent).

Justified disciplinary dismissal (despido disciplinario procedente)

When a dismissal is based on a serious and culpable breach by the employee and is declared justified, it does not give rise to any severance pay. Only the finiquito is paid.

End of a temporary contract

At the end of a temporary contract (in the cases where the law recognises severance), 12 days’ salary per year worked are owed.

A worked example

Let’s look at a complete case. Imagine an employee with:

• Gross annual salary: €28,000 → a daily salary of €76.71.
• Length of service: 5 full years, all after 2012.
• Dismissal declared unfair (33 days/year).

The calculation would be:

€76.71 × 33 days × 5 years = €12,657 in severance pay.

If that same dismissal had been an objective dismissal (20 days/year):

€76.71 × 20 days × 5 years = €7,671.

As you can see, the difference between classifying the dismissal correctly or incorrectly is enormous. That is why it pays to document the grounds and procedures rigorously.

Common mistakes that prove costly

• Applying 45 days to the whole length of service. Since 2012, only the period before that date is calculated at 45 days.
• Forgetting the monthly caps. A calculation with no limit can incorrectly inflate the severance pay.
• Confusing gross with net salary. The calculation is always based on the gross salary.
• Not including all salary items. Commissions and pro-rated extra payments count towards the daily salary.
• Mixing up severance pay and the finiquito. They are separate concepts and must be itemised in the settlement document.

Length of service and hours: the basis of every calculation

The whole calculation depends on one piece of data that many SMEs have scattered across folders and Excel spreadsheets: each employee’s actual length of service and employment history. A well-kept record of hours and documents gives you that information instantly and without disputes.

With time-tracking software you have working days recorded from day one, and with a document management system you keep contracts, payslips and start dates in a single place. When the time comes to calculate severance pay or prepare a finiquito, you don’t have to reconstruct the history by hand: it’s all there and traceable.

Conclusion

Getting severance pay right is not just a matter of complying with the law: it is about avoiding financial surprises and lawsuits. Correctly identify the type of dismissal, apply the days and caps that apply, and always keep the exact salary and length of service to hand. With that data organised, the calculation stops being a problem.

This guide is for informational purposes only and does not replace advice from an employment law professional. When faced with a specific dismissal, always consult your advisor or lawyer.