Italy: new rules affecting terminations, mass redundancies, executives and mandatory severance (TFR)

30 March 2015

Caterina Rucci, Amedeo Rampolla

Terminations: relevant changes introduced at the beginning of March 2015

Under the general name of the "Jobs Act" (which had already been used one year ago when fixed-term contracts were liberalized), the number of potential reinstatement hypothesis has been significantly reduced and basically substituted by indemnities proportionate to the length of employment.

This change, which might not impress other EU countries where this kind of sanction is already commonplace, is a very relevant one for Italian termination law, which was based on reinstatement from  1970 when the "Workers' Statute" was introduced up until 2012, when Fornero, as Minister of Work and Social Policy in the Monti Government, introduced some controversial changes to termination and pension rules.

Now the Renzi Government is continuing in the same direction, at least for terminations.

Reinstatement - with the exception of executives, discrimination cases and other specific circumstances - had always only concerned employers with 15 or more employees, while a mere indemnity, ranging between 2 ½ and 6 months was provided below that threshold for unlawful terminations.

Now reinstatement is no longer the general rule: if a termination, both for objective and subjective reasons is not valid, the sanction will be an indemnity only, equal to 2 months' remuneration for each year of employment. A minimum of 4 months and a cap of 24 are provided, for either very short or very long employments.

Since for fewer than 15 employees an indemnity was already the rule (slightly changed by the new law), Italy has - 45 years later, abandoned the general sanction of reinstatement, and adopted the indemnity rule for almost any case of termination.

In contrast to Spain, which has had a similar system for many years, the indemnity is not mandatory in cases of termination (i.e. to be paid in any event), since it still depends on the illegitimacy of termination.

But similarly to Spain, the Italian Government has for the first time given a relevant financial contribution by providing that, if before any judicial case an offer is made and accepted in accordance with the relevant amounts, the indemnity will be 100% tax free, while any additional amount will be subject to ordinary tax rules: what this means is still controversial, since Italy had traditionally separated the taxation system for any amount paid in relation to the end of employment.

An indemnity is also provided for terminations whose reasons were not indicated, as well as for those that, despite negligence, were not preceded by the (mandatory) disciplinary procedure: in these cases indemnities are reduced to 1 month per year, capped at 12 and not less than 2, unless the Court deems higher indemnities for illegitimacy of termination should apply.

Reinstatement is therefore now limited to the following cases,

  • discrimination;
  • retaliation;
  • termination during maternity; and
  • non-written terminations.

Reinstatement will affect collective dismissals in one case only, i.e. if termination were not in written form, while if it is the information and consultation procedure that was violated or if the selection criteria were not respected, the usual indemnity of 2 months per year of service will apply in favour of concerned employees.

Executives are now included in collective dismissal procedures

The Italian State has decided to extend both the information and consultation obligations to executives' trade unions, as well as rules on selection criteria. This was in response to an ECJ decision, which remarked that Italy had not complied with the corresponding EU Directive, although the remark was not rendered in a preliminary ruling nor served to deny the applicability of the old rules.

On violation of any of these rules, the executives concerned might be awarded an indemnity ranging between 12 and 24 months.

The law also considers that collective agreements might provide for different rules (which would prevail over legal ones), as has been the case since 1985 for executives in the manufacturing sector, who were granted an indemnity equal to their notice, in any instance of restructuring.

Shortly before the new law, however, that agreement, together with the CBA for executives of that sector, was terminated by the employers' association, and the new one only provides for indemnities related to individual terminations, which have in the meantime been significantly reduced, along with notice period length.

No other executives CBA currently provides rules for collective dismissals, while it's quite easy to predict that the services sector executives CBA will also reduce its indemnities and notice on next renewal.

Last but not least, the changes affecting TFR

This change entered into force at the end of 2014, however, practical instructions for its application are only just coming out now.

TFR is a mandatory severance, paid in any case of termination (just cause included) and to any subordinate employee (including executives): it is considered as a "delayed" remuneration, since it's calculated as a percentage of what has been earned as salaries, bonus or commissions. TFR could only be paid in advance (i.e. before the end of employment) in very specific cases indicated by the law, and also limited to a certain percentage of employees of the same company.

These limitations were a guarantee for any other employee of the company. About 15 years ago, employees were also admitted to pay their TFR accruals into additional pension funds, enjoying in that case a more favourable tax regime. Also on final payment, at the end of employment, TFR has always been subject to separate taxation.

It is now possible for employees to opt for getting the TFR they accrue, paid monthly, together with their normal monthly salary: but what might be seen as an advantage (the employees no longer being obliged to accept a forced saving, unless a change of employment intervenes), is in reality convenient only for employees on the lowest tax rate: any other employees, in fact, since this part of TFR will be now subject to normal taxation, will be fully taxed on interest on the current payment, instead of enjoying separated taxation.

The same law has also introduced an increase in taxes due on those payments of TFR which go directly into pension funds and which had been greatly encouraged by former legislation, also by a convenient tax rate.

In other words: TFR might now increase monthly pay-slips, but it will be fully taxed and also advantages granted in order to encourage contributions to additional pensions funds have been reduced.