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Severance Payment based on the Iranian Labour Law

Guiding Principle

Labour law in Iran governs the employment of people working and living in Iran. The comprehensive Labour Law covers all labour relations in Iran, including hiring of local and foreign staff. The Iranian Labour Law is employee-friendly. Labour disputes are settled by a special labour council in the Ministry of Labour and Social Affairs. Any person who works in Iran is subject to the provisions of the Labour Law and in case of termination of employment, employees are entitled to receive severance payment.

A. Termination of Employment

The Iranian Labour Law (abbrev. IR-LL)[1] got into force on November 20, 1990. The Ministry of Labour and Social Affairs provides general supervision for observing the above law. The IR-LL provides regulations on termination of employment and the procedure for the payment of severance.

According to Art. 21 IR-LL, an employment agreement may be terminated in any of the following cases:

a) Death of employee;

b) Retirement of employee;

c) Total disability of employee;

d) Expiry of duration of limited employment agreements and their non-renewal explicitly or implicitly;

e) Completion of work in the contracts for specific task;

f) Resignation of employee;

g) Termination of employment in accordance with the terms and conditions of the employment agreement;

h) Reduced output and changes in the structure and organization of the jobsite dictated by the force of economic, social and political conditions as well as the requirements caused by vast changes made in technology, in accordance with the provisions of Article 9 of the Law Regulating Certain Provisions on Facilitating the Renovation of Iranian Industries (abbrev. IR-RCPFRII).

Based on Art. 25 IR-LL where an employment contract is concluded for a fixed term or for piece­work, neither party may unilaterally terminate the contract.

B. Retirment of Employee

In case the termination of an employment contract is resulting from the retirement of the employee, Art. 31 IR-LL, the employer shall pay the employee an amount equivalent to 30 days’ wages at his most recent rate of pay for each year of completed service. This amount shall be in addition to the employee’s retirement pension paid by the Social Security Organization.

According to Art. 31 IR-LL and also as per the Iranian Social Security Law[2] of June 24, 1975 (abbrev. IR-SSL), there is also another payment if an employee retires, which is the retirement pension, although the retirement pension should be paid by the Social Security Organization.

Under IR-LL employers shall insure their employees under the IR-SSL. The insured and the members of their families may, from the time that they are covered by the IR-SSL, make use of medical services in case they are injured by accidents or suffer from a disease. Moreover, the source of retirement pension is also the insurance premium.

The rate of insurance premium is 30% of basic salary; 7% of which would be received from the employee, 23% of which would be paid by employer. During the period of the employment of an employee, each month, the employer is obliged to deduct the amount of 7% from the employee’s basic salary and pay it to the Social Security Organisation alongside his proportion.

Under IR-SSL, pension is the sum paid to the insured to compensate the loss of full or part of the income of the insured and in case of his death to his dependents to provide for their livelihood. There are three types of pension in IR-SSL as follow:

1) Those insured who are incurable as diagnosed by the treating physician, shall receive disability pension.

2) Those insured who have paid their insurance premium for at least ten years before applying for retirement and in case they are a 60 year-old man or a 55 year-old woman, are entitled to receive retirement pension.

3) The qualified survivors of the deceased insured also shall receive a survivors pension in case of death of a retired insured or in case of death of an insured receiving total disability pension, or in case of death of an insured who during the last 10 years of his life, has paid at least one working year’s premium in the last year of his life or in cases where the insured dies due to an accident arising from work or due to occupational diseases.

Based on Art. 77 IR-SSL, the amount of retirement pension consists of 1/30 of the average wage or salary of the insured multiplied by the years in which the premium has been paid, provided that it does not exceed 35/30 of the wage or salary. The average of wage or salary for computing the retirement pension consists of the total wage or salary on the basis of which premium has been paid during the last two years divided by 24.

C. Resignation of Employee

According to IR-LL an employee who resigns (dismisses himself) is also entitled to receive severance payment. Any employee who resigns shall be required to provide his employer with written notice of his resignation, and to continue to work for one (1) month. In case the employee steps back from his decision of resigning from his employment in writing and within 15 days from the date of his resignation, the resignation shall be deemed to be null and void.

Furthermore, Art. 22 IR-LL provides:

“On termination of employment, all amounts due to a worker under his employment contract for the given employment period, shall be paid to the worker or, in the event of his death, to his legal heirs.”

D. The Calculation of Severance Payment

After informing the employee about termination of the contract and before signing the Employment Settlement Agreement, the severance payment has to be paid. Pursuant to Art. 24 IR-LL, in the event of termination of the employment, the employer shall be required to pay to the employee who has worked at least for one (1) year or in excess of it under an employment agreement, an amount equivalent to one (1) month salary for each year of continuous or alternate service at the rate of the last salary as severance payment.

Nevertheless, as per clause (h) of Art. 21 IR-LL and according to the new changes made in the Labour Law, the employees who will be discharged as a result of a shake off and restructuring of the jobsite due to economic and social developments, are required to be compensated according to Article 9 IR-RCPFRII. Art. 9 of the above law requires that a compensation of two (2) month’s last wages for each year of service shall be paid to the dismissed employees.

Fractions of a year of service are paid pro rata. Therefore, an employee with 5 years and 3 months services is entitled to receive (5.25 x last monthly salary) as the severance payment.

The severance payment is calculated on the basic salary (fixed wage). According to Art. 36 IR-LL, the fixed wage consists of the sum of the wage for a job and of the fixed benefits paid for that job. Social benefits and incentives, such as housing allowances, benefits in kind, family allowances, production-increase bonuses and shares of annual profits are not considered as part of the fixed wage and basic salary. Therefore, with regard to the employees with the fixed/variable remuneration, the severance payment is calculated based on the fixed monthly portion only.

E. Employment Settlement Agreement

Upon giving notice to the employee about his termination, an Employment Settlement Agreement should be signed between the parties. In case the employee receives all his due payments including the severance payment in full and also the Employment Settlement Agreement has been signed between employee and employer according to which the employee declares he has received all his due payments including his salary, severance payments, benefits etc. in full, then no claim shall be heard from employee at the labour council. Furthermore, there is no need to check the procedure regarding the employee’s termination as well as the severance payment by any authority.

However, some employees may wish to claim for their pension or any other due payment from the employer, they may refuse to sign the Employment Settlement Agreement and will refer the issue to the labour council. Usually the issue will be settled amicably between employee and employer at the labour council. The employee receives his pension or if his claim regarding any further due payments is convincing, he will additionally receive such due amounts.


[1] Iranian Labour Law was published in Official Gazette No. 124356 dated 03.01.1990.

[2] Social Security Law was published in Official Gazette No. 8894 dated 16.07.1975.

April, 2011 Zahra Tahsili
Meyer-Reumann & Partners – Dubai Office

The Impact of International Boycott Rules against Iran on the Iranian Business of the Foreign Establishment in the Islamic Republic of Iran

Guiding Principles

Iran is under several international sanctions over its refusal to suspend uranium enrichment. These sanctions have considerable influence on the Iranian business of those foreign establishments which are registered in Iran and/or conduct financial transaction with the Iranian market. Many foreign establishments have suspended their transaction with Iran and some of them proceed to close down their legal companies, branch or rep. offices in Iran.

A. International Sanctions against Iran
Iran is under several international sanctions over its refusal to suspend uranium enrichment. The United States, Europe and Israel fear that Iran wants to use nuclear technology to build a bomb but Tehran insists that its program is a peaceful drive to produce civilian energy. Sanctions against Iran notably bar nuclear, missile and many military exports to Iran and target investments in oil, gas and petrochemicals, exports of refined petroleum products, as well as the Iranian Republican Guard Corps, banks, insurance, financial transactions and shipping.

The influence of the international sanctions on the Iranian business of foreign establishments which are registered in Iran and/or conduct financial transaction with the Iranian market is studied in this article.

Sanctions against Iran have been imposed by the following bodies:

  • UN sanctions against Iran
  • Multinational sanctions against Iran
  • National sanctions against Iran

I. UN Sanctions against Iran
United Nations Security Council passed the following resolutions against Iran for failing to stop its uranium enrichment program:

  • United Nations Security Council Resolution 1737 – passed on 23 December 2006.
  • United Nations Security Council Resolution 1747 – passed on 24 March 2007.
  • United Nations Security Council Resolution 1803 – passed on 3 March 2008.
  • United Nations Security Council Resolution 1929 – passed on 9 June 2010.

The main provisions of the last resolution (i.e. Resolution 1929) are as follow:

  • Iran could not participate in any activities related to ballistic missiles.
  • A ban on all countries providing military vehicles, aircraft or warships and missiles or missile systems and related materiel to Iran;
  • A ban on training, financing or assistance related to such arms and materiel and restraint over the sale of other arms and material to Iran;
  • A travel ban on individuals listed in the annexes of the resolution, with exceptions decided by the Committee established in Resolution 1737; and
  • The freezing of funds and assets of the Army of the Guardians of the Islamic Revolution and Islamic Republic of Iran Shipping Lines.

UN sanctions include those activities related to the military fields and Iranian uranium enrichment programs. In case the above-mentioned banned activities are not in the scope of the activity of a foreign establishment registered in Iran and/or conduct transaction with Iranian market, no UN resolutions would be infringed.

II. Multinational Sanctions against Iran
European Union sanctions are the most important multinational sanctions against Iran.1 The European Union has imposed sanctions against Iran over Iranian nuclear program. These sanctions which have been described as the toughest EU sanctions imposed against any other country by European officials were last strengthened on 27 October 2010 within by the EU Council under Council Regulation (EU) No 961/2010. This replaces and updates the previous Council Regulation 423/2007 that was published on 27 July 2010. The new sanctions put restrictions on foreign trade, financial services, energy sectors and technologies and include a ban on the provision of insurance and reinsurance by EU insurers to the State of Iran and Iranian owned companies.

Council Regulation (EU) No 961/2010 (‘the Regulation’) implements additional restrictive measures against Iran, the main of which are as follow:

  • Freezing of funds and economic resources of specific Iranian persons and entities;
  • Restrictions on transfers of funds to and from an Iranian person, entity or body;
  • Vigilance over activities with Iranian banks;
  • Dealing with the Iranian banking sector;
  • Restrictions on Iran’s access to the EU’s bonds markets;
  • Restrictions on Iran’s access to the EU’s insurance and reinsurance markets; and
  • Restrictions on financing certain Iranian enterprises.

A copy of the Regulation can be found at:
http://www.hm-treasury.gov.uk/d/council_regulation_eu_961_251010.pdf
The Regulation imposes no ban on a foreign establishment, the activity of which does not involve the above mentioned restrictions. Nevertheless the Regulation places some restriction on financial and banking affairs of such foreign establishment. Article 21 of the Regulation sets out restrictions on the transfers of funds to and from an Iranian person, entity or body, and how transfers shall be processed.

Transfer value Requirements
€10,000 or less No requirements. These can be made as normal unless there are a series of transactions below €10,000 that appear to be linked. If this is the case, they should be notified to a competent authority.
More than €10,000 but less than €40,000 Must be notified in advance to a competent authority, whatever the transaction is for.
€40,000 or above If they relate to foodstuffs, healthcare, medical equipment or humanitarian purposes, they must be notified in advance to a competent authority. They do not require prior authorisation from a competent authority.
If they are for any other purpose, they must be submitted to a competent authority in advance for authorisation. They cannot be undertaken without prior authorisation.

‘Iranian person, entity or body’ is defined in Article 1 of the Regulation and means:

  • the State of Iran or any public authority thereof;
  • any natural person in, or resident in, Iran;
  • any legal person, entity or body having its registered office in Iran;
  • any legal person, entity or body, inside or outside Iran, owned or controlled directly or indirectly by one or more of the above mentioned persons or bodies.

Any foreign establishment registered in Iran is considered as Iranian entity in Iran, so the provision of Article 21 should be observed in all financial transaction of the foreign establishment.

III. National Sanctions against Iran
One of the most important national sanctions against Iran include an embargo on dealings with Iran by the United States and a ban on selling aircraft and repair parts to Iranian aviation companies. Since July 2010, Canada, Australia, South Korea and Japan have also set unilateral sanctions against Iran.

The Iran and Libya Sanctions Act of 1996 (ILSA) was a 1996 act of Congress that imposed economic sanctions on firms doing business with Iran and Libya. According to which all foreign companies that provide investments over $20 million for the development of petroleum resources in Iran, two out of seven possible penalties will be imposed against them by the U.S. On September 30, 2006, the act was renamed to the Iran Sanctions Act (ISA), as it no longer applied to Libya, and extended until December 31, 2011. As of March 2008, ISA sanctions had not been enforced against any non-US company; the act allows the president to waive sanctions on a case-by-case basis, though this waiver is subject to renewal every six months.

In June 2007, the U.S. state of Florida enacted a boycott on companies trading with Iran and Sudan, while New Jersey’s state legislature was considering similar action.
On June 24, 2010, the United States Senate and House of Representatives passed the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA), which President Obama signed into a law on July 1, 2010.

Major provisions of CISADA as summarized by the Congressional Research Service are as follow:

  • Amending the Iran Sanctions Act of 1996 to direct the President to impose two or more current sanctions under such Act if a person has, with actual knowledge, made an investment of $20 million or more (or any combination of investments of at least $5 million which in the aggregate equals or exceeds $20 million in any 12-month period) that directly and significantly contributed to Iran’s ability to develop its petroleum resources.
  • Directs the President to impose: (1) sanctions established under this Act (in addition to any current sanctions imposed under the Iran Sanctions Act of 1996) if a person has, with actual knowledge, sold, leased, or provided to Iran any goods, services, technology, information, or support that would allow Iran to maintain or expand its domestic production of refined petroleum resources, including any assistance in refinery construction, modernization, or repair; and (2) sanctions established under this Act if a person has, with actual knowledge, provided Iran with refined petroleum resources or engaged in any activity that could contribute to Iran’s ability to import refined petroleum resources, including providing shipping, insurance, or financing services for such activity.
  • Establishes additional sanctions prohibiting specified foreign exchange, banking, and property transactions.

U.S. sanctions mainly include those activities and services related to the petroleum resources. In case the scope of foreign establishments, registered in Iran and/or conduct transition with Iranian market, is not the above banned activities, the U.S. sanctions would not been infringed, although as it was referred some States like Florida and New Jersey enacted a boycott on companies trading with Iran in general.

B. Conclusion
Based on the conclusion was drawn in the last part, in case the Iranian business of the foreign establishment, does not involve any field related to the Iranian military fields, uranium enrichment programs and petroleum resources and furthermore all financial transaction of the foreign establishment be conducted by observing all aforementioned sanctions regulations against Iran, the foreign establishment would not violate the international sanctions laws, have been passed against Iran so far unless some U.S. States’ embargo regulation.

January, 2011 Zahra Tahsili, LL.M.
Meyer-Reumann & Partners – Dubai Office
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