Difference Between Finiquito and Severance Pay in Spain

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When an employment relationship comes to an end in Spain, it is extremely common for doubts, fears, and confusion to arise regarding the financial concepts the worker is entitled to receive. Frequently, the terms "finiquito" (settlement agreement/final pay) and "indemnización" (severance pay) are used as if they were synonyms. This generates misunderstandings that can lead to the loss of legitimate financial rights or unnecessary legal conflicts. Understanding the legal nature of each of these concepts, regulated mainly in the Real Decreto Legislativo 2/2015, de 23 de octubre, por el que se aprueba el texto refundido de la Ley del Estatuto de los Trabajadores (hereinafter, Estatuto de los Trabajadores or ET / Workers' Statute), is essential for any worker or employer in the Spanish labour market. In this article, we will analyse in depth their differences, how they are calculated, the legal deadlines to claim, and the practical steps to sign these documents with total legal certainty.

1. What is the finiquito? The settlement and final balance of accounts

The finiquito, technically referred to in the labour field as the "recibo de saldo y finiquito" (receipt of balance and settlement), is the document that certifies the termination of the employment relationship and details the liquidation of the outstanding amounts that the company owes the worker up to the last day of their service provision.

Its legal basis is implicitly found in *Article 49.2 of the Estatuto de los Trabajadores***, which establishes that the employer, upon the termination of the contract, when notifying the workers of the termination or, where appropriate, the notice period of the termination, must accompany a proposal of the liquidation document of the amounts owed.

The fundamental characteristic of the finiquito is that you are always entitled to it, regardless of the reason why the employment relationship ends. Whether it is due to voluntary resignation of the worker (baja voluntaria), justified disciplinary dismissal (despido disciplinario procedente), objective dismissal (despido objetivo), end of a temporary contract, or retirement, the company has a legal obligation to pay the finiquito.

Concepts included in the finiquito

The finiquito usually includes the following accrued and unpaid concepts:

• Salary for the days worked in the month of termination: If the contract ends on the 15th of the month, those 15 days of salary must be paid.
• Accrued and untaken holidays: The worker generates a right to holidays for each day worked (generally 30 calendar days or 22 working days per year). If, at the time the contract is terminated, not all of them have been taken, the company must pay for them in cash in the finiquito (and pay social security contributions on them).
• *Proportional part of extraordinary payments (prorrateo): If the extra payments (pagas extras*) are not prorated monthly, the proportional part accrued since the last payment of each extra pay (summer pay and Christmas pay) up to the effective date of the dismissal or termination must be paid.
• Productivity bonuses, incentives, or commissions: Accrued amounts pending liquidation.
• Overtime: Hours worked by the employee that have not been previously compensated or paid.

2. What is severance pay? Compensation for job loss

Unlike the finiquito, severance pay (indemnización por despido) is financial compensation that the law grants to the worker to repair the damage caused by the non-voluntary loss of their job. It is not a payment for services rendered, but a legal compensation.

Therefore, you are not always entitled to severance pay. For example, if the worker submits a voluntary resignation (baja voluntaria), they will not be entitled to receive any severance pay. Nor is severance pay received if the dismissal is classified as a justified disciplinary dismissal (despido disciplinario procedente) due to a serious and culpable breach by the worker, regulated in *Article 54 of the Estatuto de los Trabajadores***.

The amount of severance pay depends directly on three factors regulated by Spanish labour regulations:

1. The worker's daily salary (including the proportional part of the extraordinary payments).
2. The worker's length of service (antigüedad) in the company (calculated by full months, with any fraction of a month counting as a full month).
3. The cause of the termination of the employment contract.

Types of dismissal and their corresponding severance pay

• *Objective dismissal (Despido objetivo - Articles 52 and 53 of the ET): Caused by economic, technical, organisational, or production reasons. It entitles the worker to severance pay of 20 days of salary per year worked, with a maximum limit of 12 monthly payments*.
• *Unfair dismissal (Despido improcedente - Article 56 of the ET): When the company dismisses the worker without justified cause or without complying with formal requirements, and a judge or the company itself in conciliation recognises it as such. It entitles the worker to severance pay of 33 days of salary per year of service, with a limit of 24 monthly payments. For contracts signed before 12 February 2012, the length of service period prior to that date is calculated at a rate of 45 days per year, with a limit of 42 monthly payments*.
• End of a temporary contract (Article 49.1.c of the ET): Entitles the worker to severance pay of 12 days of salary per year of service (applicable to training or relief contracts according to their specific regulations).

3. Key differences between finiquito and severance pay

For greater clarity, we summarise the essential differences in the following comparative table:

| Criterion | Finiquito | Severance Pay (Indemnización) | | :--- | :--- | :--- | | Legal nature | Liquidation of outstanding salaries and accrued rights. | Compensation for the involuntary loss of employment. | | When is it paid? | Always, in any type of contract termination. | Only in dismissals (excluding justified disciplinary ones) or end of temporary contracts. | | Taxation (IRPF) | Subject to personal income tax (IRPF) withholding in its entirety. | Exempt from IRPF up to the legal limits (€180,000 in dismissals). | | Social Security contributions | Subject to Social Security contributions (except for untaken holidays, which contribute via a complementary liquidation). | Exempt from Social Security contributions. | | Calculation | Sum of concepts accrued day by day (holidays, extra payments, days worked). | Days of salary per year of service according to the type of dismissal and length of service. |

4. Legal deadlines and key amounts you must know

In Spanish labour law, deadlines are extremely strict and preclusive. Missing a deadline to claim means losing the right irreversibly.

• Deadline to challenge a dismissal: It is 20 working days (días hábiles - Saturdays, Sundays, and public holidays do not count). This period runs from the day following the effective date of the dismissal, as established by *Article 59.3 of the Estatuto de los Trabajadores** and the Ley Reguladora de la Jurisdicción Social* (LRJS / Law Regulating Labour Jurisdiction).
• Deadline to claim finiquito amounts: If the company hands you the finiquito but does not pay it, or if there are outstanding concepts to be paid, the statute of limitations to claim these amounts is 1 year (Article 59.1 of the ET).
• Severance pay limits for unfair dismissal: As a general rule, the maximum cap is 24 monthly payments for contracts entered into after the 2012 reform.
• Taxation: Mandatory severance payments are exempt from IRPF up to the limit of 180,000 euros, according to Article 7.e) of the Ley del Impuesto sobre la Renta de las Personas Físicas (LIRPF / Personal Income Tax Law). The finiquito, being deferred salary, is fully taxed.

5. Practical calculation examples

Below, we present two practical scenarios to understand how these amounts are calculated in real situations within the Spanish labour market.

Example 1: Objective dismissal of Carlos (Length of service after 2012)

Carlos works at a consulting firm in Madrid. He was hired on 1 January 2021 and is subject to an objective dismissal for economic reasons with an effective date of 31 December 2023. His gross monthly salary is €2,000, with prorated extra payments. He has taken all his holidays for the year.

• Calculation of length of service: From 01/01/2021 to 31/12/2023 there are exactly 3 years (36 months).
• Calculation of daily salary: His annual salary is €24,000 (€2,000 x 12 months). The daily salary is €65.75 (€24,000 / 365 days).
• Calculation of severance pay (20 days per year):
• 3 years x 20 days = 60 days of severance pay.
• 60 days x €65.75/day = €3,945 of severance pay (exempt from IRPF).
• Calculation of the finiquito: Since the dismissal is at the end of the month, he has already received his monthly salary, has prorated extra payments, and has taken his holidays. His finiquito will be €0 (or will simply reflect a zero balance), but he will receive his severance pay of €3,945.

Example 2: Unfair dismissal of María (With outstanding holidays)

María works at a clothing store in Barcelona. She is unfairly dismissed on 15 October 2023 after exactly 2 years of service. Her salary is €1,200 gross per month plus 2 extra payments of €1,200 each (not prorated). She has 10 days of accrued and untaken holidays remaining. She has not received her salary for the 15 days worked in October.

• Calculation of daily salary with extra payments:
• Annual salary: (€1,200 x 12) + (€1,200 x 2) = €16,800.
• Daily salary: €16,800 / 365 days = €46.02/day.
• Calculation of severance pay (33 days per year):
• 2 years x 33 days = 66 days of severance pay.
• 66 days x €46.02/day = €3,037.32 (exempt from IRPF).
• Calculation of the finiquito:
• Days worked in October (15 days): 15 days x (€1,200 / 30) = €600.
• Untaken holidays (10 days): 10 days x (€1,200 / 30) = €400.
• Proportional part of extra payments (semi-annual accrual since 1 July, 107 days of accrual for the Christmas pay): approx. €350.
• Total gross finiquito: €1,350 (subject to IRPF withholdings and contributions).
• Total settlement received by María: She will receive a transfer for the sum of the net finiquito plus the severance pay: €1,350 (gross finiquito) + €3,037.32 (severance pay).

6. Step-by-step practical procedures in the event of dismissal or termination

If you are notified of a dismissal or the termination of your contract, you must act with caution and strictly follow these steps to protect your rights:

1. Receive the dismissal letter and settlement documents: Always demand a signed and stamped copy from the company of the dismissal letter (carta de despido) and the finiquito proposal.
2. Sign with the note "NO CONFORME" (NOT IN AGREEMENT): If you have the slightest doubt about the amounts offered or the justification of the dismissal, sign the finiquito receipt and the dismissal letter by writing by hand next to your signature the phrase "No conforme" and add the actual date and time of signing. This allows you to collect the money the company offers you immediately without losing the right to legally claim the difference or challenge the dismissal.
3. Request the presence of a workers' representative: Article 49.2 of the ET recognises your right to request the presence of a legal representative of the workers (union representative or member of the works council) at the time of signing the finiquito receipt. If the company refuses, state this on the document itself.
4. *Submit the Conciliation Petition (Papeleta de Conciliación): If you do not agree with the dismissal or the finiquito amounts, you must submit a conciliation petition before the Servicio de Mediación, Arbitraje y Conciliación* (SMAC / Mediation, Arbitration, and Conciliation Service) of your Autonomous Community within the 20 working days deadline for the dismissal. This procedure suspends the expiration period.
5. Lawsuit: If no agreement is reached during the conciliation act, you must file a lawsuit before the competent Juzgados de lo Social (Labour Courts) before the remaining part of the 20 working days period expires.

7. Mistakes you must avoid

• Signing in blank or without the "No conforme" note: If you sign the finiquito without adding "No conforme", Spanish jurisprudence may interpret that the document has a "liberating effect" (efecto liberatorio), meaning you declare that the company owes you nothing and you waive your right to take subsequent legal action.
• *Confusing working days (días hábiles) with calendar days (días naturales): The 20-day* deadline to challenge a dismissal consists of working days (excluding Saturdays, Sundays, and national, regional, or local public holidays). Do not leave your claim to the last day.
• Not claiming out of fear of losing unemployment benefits: The right to receive unemployment benefits (paro) arises from the legal situation of unemployment you are left in after the dismissal, regardless of whether you decide to sue the company or not. In fact, you have 15 working days to apply for paro at the SEPE (State Public Employment Service) after the effective date of the dismissal.
• Accepting verbal promises of payment: Any agreement for deferred payment of the severance pay or finiquito must be in writing, preferably validated before the SMAC or the court, so that it has direct executive force if the company defaults.

8. Frequently Asked Questions (FAQ)

Am I entitled to severance pay if I leave the company voluntarily?

No. Voluntary resignation or resignation (dimisión) terminates the contract by decision of the worker, so it does not generate any right to severance pay. However, you are entitled to receive the finiquito with the liquidation of untaken holidays, the proportional part of the extra payments, and the days worked in the current month.

What happens if the company does not pay my finiquito on my last day of work?

The company is obliged to make the finiquito available to you on the same day the termination of the employment relationship becomes effective. If it fails to do so, it incurs a delay. You have a period of 1 year to legally claim these amounts, and you can also demand a 10% annual interest for late payment on the outstanding salary concepts, in accordance with *Article 29.3 of the Estatuto de los Trabajadores***.

Is severance pay taxed by the Tax Agency (Hacienda)?

As a general rule, the mandatory severance pay established in the Estatuto de los Trabajadores is exempt from IRPF, provided it does not exceed the limit of 180,000 euros. Any amount exceeding this limit will be subject to taxation. Likewise, to maintain the exemption, there must be a real disassociation of the worker from the company for at least three years.

Can I collect unemployment benefits (paro) if I sign the finiquito as "No conforme"?

Yes, of course. Signing as "No conforme" is a safeguard of your civil and labour rights to be able to claim in court, but the dismissal remains fully effective. Therefore, you are in a legal situation of unemployment and can process and collect your unemployment benefit before the SEPE without any impediment.

9. In summary

• The finiquito is the liquidation of outstanding accounts (holidays, extra payments, days worked) and is always paid, whatever the cause of the termination.
• The severance pay (indemnización) is financial compensation for job loss and is only received in certain cases, such as objective or unfair dismissals, or the end of temporary contracts.
• The deadline to challenge a dismissal and start the procedures to claim severance pay is extremely short: only 20 working days.
• The deadline to legally claim outstanding amounts in the finiquito is 1 year.
• To protect your rights in case of any doubt, always sign the dismissal and liquidation documents by adding the handwritten note "No conforme".

General legal information, not personalised legal advice. For your specific situation, ask your question for free at AbogadoAI — answers grounded in Spanish law (BOE), in English.

This is general information, not legal advice. Verify on the BOE or consult a lawyer for your specific case.