What Severance Pay Rules Must Employers Follow in Luxembourg?

Which Employees Qualify for Severance Pay?

• Employees dismissed by the employer with notice, other than for serious misconduct, may qualify for statutory severance.
• Severance generally applies once an employee has at least 5 years of continuous service with your company.
• Only employees on open-ended (CDI) contracts are typically covered by statutory severance rules.
• Employees who resign or whose fixed-term (CDD) contracts simply expire usually do not receive statutory severance.
• Employees dismissed for serious misconduct (faute grave or faute lourde) are excluded from severance entitlements.
• Collective redundancies and older long-serving employees may trigger enhanced severance protections and procedures.

What Are the Legal Timelines for Paying Severance?

Luxembourg law requires you to pay severance at the end of the employment relationship, usually together with the employee's final salary and accrued entitlements. In practice, this means payment is due on or before the normal payroll date covering the last working day or notice period. If the employee is released from work during notice, you should still calculate and settle severance promptly once the end date is reached. Any dispute over the amount does not allow you to withhold the undisputed portion. To stay compliant, document the calculation and payment date clearly in the termination letter and payroll records.

What Penalties Apply if Severance Is Not Paid Correctly?

If your company fails to pay severance correctly in Luxembourg, you risk financial, administrative, and reputational consequences. Employees can challenge the dismissal and the severance calculation before the labour courts, and judges can order back payments plus interest and, in some cases, damages. Non-compliance can also undermine the validity of the dismissal and expose you to broader employment claims.

• Courts can order payment of outstanding severance plus legal interest.
• You may face additional damages if the dismissal is found abusive or procedurally flawed.
• Legal disputes increase internal costs and management time spent on litigation.
• Repeated non-compliance can attract closer scrutiny from labour authorities.
• Your employer brand can suffer, making hiring and retention more difficult.

Does Outsourcing Employment via an EOR Change Severance Liability?

Using an Employer of Record (EOR) such as a provider found at https://www.playroll.com/employer-of-record does not remove the need to follow Luxembourg severance rules. In an EOR model, the EOR is the legal employer on paper and is responsible for calculating and paying statutory severance to the employee. However, your company typically funds these costs under the commercial agreement and remains the de facto decision-maker on dismissals. If the EOR or your team mishandles a termination, both parties can face disputes, with your company often bearing the financial and reputational impact. You should therefore ensure the EOR's processes, contracts, and documentation align with Luxembourg's Labour Code.

Be 100 Percent Compliant in Offering Severance with Playroll

Playroll helps your company navigate Luxembourg's severance rules by standardizing how you collect data on service length, salary components, and termination reasons. Our team tracks changes to the Labour Code and local practice, so your severance calculations reflect the latest statutory thresholds and any enhanced protections. We also help you structure notice periods, garden leave, and mutual agreements in a way that reduces the risk of later disputes.

Beyond calculations, Playroll builds compliance into your workflows: from template termination letters to clear approval steps before a dismissal is confirmed. When you use Playroll as your global employment partner, you get consistent documentation, on-time final payments, and transparent cost breakdowns for each termination. That means fewer surprises, cleaner audits, and a smoother offboarding experience for your team and your employees.