What Severance Pay Rules Must Employers Follow in Cayman Island?

Which Employees Qualify for Severance Pay?

• Employees with at least 12 months of continuous employment whose roles are made redundant under the Labour Act (2021 Revision).
• Employees terminated because the business closes, relocates, or restructures in a way that eliminates their position permanently.
• Employees dismissed for reasons not related to misconduct, poor performance, or other lawful grounds that disqualify them from severance.
• Fixed-term employees whose contracts are ended early by the employer for non-disciplinary reasons and who meet the minimum service requirement.
• Part-time employees who meet the continuity and minimum service thresholds and are terminated for a qualifying redundancy reason.
• Caymanian and non-Caymanian employees alike, provided they are legally employed and meet the statutory criteria for severance.

What Are the Legal Timelines for Paying Severance?

Under the Labour Act (2021 Revision), you are expected to pay severance as soon as reasonably practicable after the termination date, and in practice many employers align payment with the final paycheck. Your company should confirm the exact last day of employment, calculate severance based on the employee’s most recent basic wage and years of continuous service, and document the calculation clearly. While the law does not prescribe a long grace period, delays can be treated as non-payment of wages and attract enforcement action. To stay safe, aim to pay severance no later than the normal payroll cycle following termination, and earlier where possible. Always provide a written breakdown of severance, accrued vacation pay, and any other final entitlements.

What Penalties Apply if Severance Is Not Paid Correctly?

If your company fails to pay severance correctly in the Cayman Islands, you risk complaints to the Department of Labour and Pensions, formal investigations, and potential prosecution. Non-compliance can lead to orders to pay outstanding severance, fines, and in serious or repeated cases, criminal liability for the employer or responsible officers.

• Failure to pay severance can result in orders to pay arrears plus any applicable interest or penalties.
• The Labour Tribunal may impose fines for breaches of the Labour Act (2021 Revision).
• Persistent or willful non-compliance can expose directors or managers to personal criminal liability.
• Disputes can lead to legal costs, management time, and reputational damage with staff and regulators.
• Incorrect calculations may require back payments and adjustments across multiple former employees.

Does Outsourcing Employment via an EOR Change Severance Liability?

Using an Employer of Record (EOR) such as https://www.playroll.com/employer-of-record can shift day-to-day HR administration, but it does not remove the need to comply with Cayman Islands severance rules. In most EOR models, the EOR is the legal employer on paper, while your company directs the employee’s work and funding. The EOR will typically calculate and process severance in line with the Labour Act (2021 Revision), but your company ultimately bears the economic cost. You should ensure your EOR contract clearly allocates responsibility for compliance, dispute handling, and documentation around terminations. Even with an EOR, regulators and courts may look at the substance of the relationship if there is a dispute.

Be 100 Percent Compliant in Offering Severance with Playroll

Playroll helps your company navigate Cayman Islands severance rules by standardizing how you collect data, calculate entitlements, and document decisions. Our workflows are designed around the Labour Act (2021 Revision), so your team can see clearly when severance is triggered, which employees qualify, and how much is owed. You stay in control of business decisions, while we help you reduce the risk of miscalculations and missed deadlines.

When you use Playroll as your global employment partner, we coordinate with local experts to keep your policies, contracts, and termination letters aligned with current Cayman Islands law. We build severance logic into your payroll operations, ensuring final pay runs include statutory severance, accrued leave, and any agreed extras. That way, you can restructure or close roles with confidence that payments are accurate, timely, and well documented.