Termination under Article 331 of the Labour Code (so-called termination against compensation) is a commonly used mechanism in practice, especially where the parties seek a quicker and “clean” end to the employment relationship. One of the most frequently asked questions, however, is what happens if the compensation under Article 331 LC is not paid within the statutory deadline.
Following a recent client consultation regarding termination under Article 331 LC, a key issue once again became apparent – the fact that the validity of the termination is directly linked to the payment of the agreed compensation within one month.
What happens if the compensation is not paid
Under the Labour Code, if the employer fails to pay the agreed compensation within one month from the termination date, the legal ground for termination falls away. In practice, this means that the employment relationship is automatically reinstated by operation of law, as if it had never been terminated.
From the employer’s perspective, organisational changes may already have been implemented – restructuring, hiring a replacement, or eliminating the position. From the employee’s perspective, the offer for termination against compensation has been accepted and future plans have been made. This creates significant legal uncertainty and practical complications. On the one hand, the employment contract is deemed to remain in force and the employee may claim reinstatement. On the other hand, the employer may have already filled the role or reorganised the business. This situation is a clear trigger for employment disputes, including claims for remuneration after reinstatement.
Can compensation be paid in instalments
The issue becomes even more complex in cases involving senior or managerial employees, where the agreed compensation is substantial. In practice, the question often arises whether such compensation can be paid in instalments.
The law does not explicitly allow deferred or instalment payments. Article 331(3) LC is mandatory and links the effectiveness of the termination to the full payment of the compensation within the one-month period. The lack of case law allowing exceptions makes any agreement for instalment payments particularly risky for employers.
Practical solutions and associated risks
This places employers in a difficult financial and legal position. On the one hand, they must secure significant funds within a short period. On the other hand, failure to do so invalidates the termination under Article 331 LC, potentially leading to additional disputes, including claims for salary, compensation and reinstatement.
In practice, alternative mechanisms are often considered in an attempt to manage this risk, such as issuing a promissory note or agreeing on contractual penalties for delay. However, these solutions are not regulated under labour law and do not replace the statutory requirement. There is currently no case law confirming that such arrangements can preserve the effect of the termination if the compensation is not paid on time. As a result, they may create additional obligations without eliminating the core legal risk.
Need for legislative update
All of the above raises the question whether Article 331 LC requires modernisation. A more flexible approach would be to explicitly allow instalment payments, while providing that termination takes effect upon agreement or upon the first payment, with non-performance leading to other legal consequences, such as statutory interest or damages.
The topic is becoming increasingly relevant in practice, as this mechanism is widely used to settle employment relationships. In this context, the discussion on potential legislative change is not merely theoretical, but driven by real business needs.
If you need assistance with termination of employment, drafting agreements or assessing legal risks under Article 331 LC, you can contact me for a consultation.
You can find more information about my services here:
🔗 https://ivanovalegalsolutions.com/en/practice-areas/
For more practical insights on employment law, business and legal topics, you can also listen to my podcast “Let’s Talk Law”:
🔗 https://www.youtube.com/@DaSiGovorimNaPravo
This article is for informational purposes only and does not constitute legal advice. Each case requires an individual assessment based on its specific facts and circumstances.
