Severance and termination indemnities in Luxembourg

Employment termination in Luxembourg is governed by a clear legal framework that safeguards the rights of both employers and employees. This article summarizes the main rules around severance pay and other termination-related compensation.

1. Statutory severance

Eligibility criteria 

Severance pay in Luxembourg is governed by Article L.124-7 of the Labour Code. It applies to employees who are dismissed by their employer with notice — excluding cases of immediate dismissal for serious reasons (motif grave)— provided they have completed at least five years of service. 

Employees dismissed before reaching five years of service are not entitled to severance pay, unless such entitlement is provided for by an individual employment contract or a collective agreement. Additionally, employees who have applied for and received pre-retirement allowances are excluded from severance pay entitlement.

Calculation and payment of the severance 

In addition to the applicable notice, an employee is entitled to a severance pay calculated as follows. The amount of the severance depends on the length of service which is calculated up to the end of the notice period.

Collective bargaining agreements can stipulate additional severance pay. 

The calculation is based on the average gross salary received in the 12 months before the notice of termination, including sickness benefits, regular bonuses and supplements, but excluding overtime pay, gratuities and all allowances for incidental expenses. 

Severance pay may benefit from full or partial tax exemption, depending on the circumstances of the case and applicable tax provisions.

Severance pay is due when the employee actually leaves the company. 

Special rules for small employers

Instead of paying severance, employers occupying fewer than 20 employees may, in the letter of dismissal, opt to extend the period of notice to apply the following notice periods, calculated subject to the employee’s years of service:

2. Other termination-related indemnities

Indemnity for untaken annual leave: Employees are entitled to compensation for any accrued but untaken annual leave at the end of employment, regardless of the reason for termination.

Payment in lieu of notice: Note that, unlike some countries, Luxembourg does not provide for payment in lieu of notice—the notice period must be observed or extended as provided by law or applicable collective bargaining agreement.

Indemnity for irregular dismissal: If an employer does not comply with the statutory termination procedures — such as omitting the mandatory preliminary meeting or failing to observe the required notice formalities (for instance, notification by registered mail or hand delivery with acknowledgment of receipt)—, the employee may be entitled to an additional indemnity. This additional indemnity is generally limited to the equivalent of one month's salary. However, it is not awarded if the labour court determines that the dismissal was abusive, in which case other remedies may apply.

Indemnity for unfair dismissal: A dismissal is regarded as unfair, and contrary to social and economic reasons if it takes place unlawfully or if it is not justified by valid grounds. If the dismissal with notice is not based on a real and serious grounds or if the termination with immediate effect is not based on severe reasons (motif grave), Labour courts may award material and moral damages to the employee in addition to statutory severance pay and notice.

3. Conclusion

Luxembourg’s labour law aims to balance the interests of employers and employees by providing clear rules on severance pay and related indemnities. Understanding these rules helps both parties navigate terminations with confidence. Early legal advice is recommended to ensure compliance and protection of rights.