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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
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