Severance payments in Peru are governed by a structured legal framework designed to protect employees while providing clarity for employers. Understanding how these payments are calculated is essential for compliance, risk management, and informed decision-making. This guide outlines the key components, formulas, and practical considerations involved in calculating severance entitlements under Peruvian law.

Legal Framework

Peruvian law provides protection against arbitrary dismissal, primarily through the Labour Productivity and Competitiveness Law (LPCL). Employees are generally entitled to compensation if they are dismissed without a legally recognised cause. This compensation is not discretionary, it follows a defined statutory formula.

Types of Severance and Related Benefits

It is important to distinguish between different payments that may arise upon termination:

1. Compensation for Arbitrary Dismissal (Indemnización por Despido Arbitrario)

This is the primary severance payment when an employee is dismissed without just cause.

2. Compensation for Length of Service (Compensación por Tiempo de Servicios)

Although not strictly severance, compensation for length of service acts as a form of unemployment protection fund and must be settled upon termination.

3. Accrued Benefits

Includes unpaid vacation, bonuses (gratifications), and other proportional benefits.

In practice, what is commonly referred to as “severance” consists of different components that arise upon termination. The most important is the compensation for arbitrary dismissal, which applies when the employer cannot justify the termination under the law. Alongside this, employees are also entitled to receive accrued labor benefits, including unused vacation, proportional statutory bonuses, and the release of their compensation for length of service, which functions as a form of unemployment protection savings.

Compensation for Arbitrary Dismissal

For employees under indefinite-term contracts, the compensation is calculated based on length of service and remuneration. The law establishes that the employee is entitled to one and a half monthly salaries for each year of service. Periods shorter than one year are calculated proportionally, and the total compensation is capped at the equivalent of twelve monthly salaries.

Formula:

Severance = Monthly Salary × 1.5 × Years of Service

Example:

• Monthly salary: PEN 3,000
• Length of service: 4 years

Severance = 3,000 × 1.5 × 4 = PEN 18,000

In practical terms, this means that an employee earning PEN 3,000 per month with four years of service would receive PEN 18,000 as severance compensation. The calculation is straightforward, but its application requires careful verification of both salary components and the exact duration of employment.

In the case of fixed-term contracts, the logic differs. If an employer terminates the contract before its agreed expiration without just cause, the employee is entitled to compensation equivalent to one and a half monthly salaries for each remaining month of the contract. This often results in higher payouts when contracts are terminated significantly before their end date.

Formula:

Severance = Monthly Salary × 1.5 × Remaining Months of the Contract

Example:

• Monthly salary: PEN 3,000
• Remaining term: 6 months

Severance = 3,000 × 1.5 × 6 = PEN 27,000

Determining the Remuneration Base

A critical aspect of severance calculation lies in defining the “monthly salary” used as the basis for compensation. Peruvian law adopts a broad concept of remuneration, which includes not only the base salary but also any regular and habitual payments such as commissions or fixed bonuses. By contrast, extraordinary or non-recurring payments are typically excluded.

This distinction is frequently the source of disputes, particularly in industries where variable compensation forms a substantial portion of total earnings. Proper classification of payments is therefore essential to ensure accurate calculations.

Compensation for Length of Service and Other Accrued Benefits

Although compensation for length of service is not technically severance compensation, it becomes payable upon termination and must be considered as part of the overall settlement. Employers are required to deposit this compensation twice a year, and any outstanding amount must be paid at termination. Additionally, the employee gains immediate access to the accumulated funds.

Formula:

Compensation for Length = (Monthly Salary + 1/6 Gratification) × Months Worked / 12

Example:

Monthly salary: PEN 3,000

Length of service: 4 years

Severance = (3,000 + 3,000 / 6) × 4 × 12 / 12 = PEN 14,000

The calculation of compensation for length of service incorporates both the monthly salary and a proportional share of statutory bonuses, making it a separate but related financial obligation that must be handled correctly.

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Termination for Just Cause

Where an employer terminates employment based on a legally valid cause, such as serious misconduct, no severance compensation is owed. However, this does not eliminate the obligation to pay accrued benefits. Employees remain entitled to receive pending compensation for length of service, unused vacation, and other proportional entitlements.

Given the legal scrutiny applied to dismissals for cause, employers must ensure that such decisions are well-documented and supported by evidence, as improper classification may trigger severance liability.

Special Employment Regimes

Peruvian law also recognises special labor regimes that modify severance entitlements. Employees working under micro and small enterprise frameworks (MYPE), for example, may be subject to reduced benefits depending on the employer’s registration status. Similarly, during the probationary period, typically the first three months of employment, termination does not give rise to severance compensation.

These variations highlight the importance of identifying the applicable labour regime before performing any calculation.

Final Considerations

While the formulas governing severance in Peru are relatively clear, their correct application depends on a detailed understanding of employment contracts, compensation structures, and statutory requirements. Even small errors in calculation or classification can lead to significant legal exposure.

For employers, proactive compliance and careful documentation are key to avoiding disputes. For employees, reviewing the components of their final settlement ensures that all entitlements are properly recognised. In both cases, specialised legal advice can provide clarity and reduce risk in what is often a sensitive and high-stakes process.

How We Can Assist

We provide comprehensive legal and advisory services to both employers and employees in connection with employment termination and severance matters under Peruvian law. Our team is equipped to advise on regulatory compliance, contractual obligations, and dispute mitigation in line with local legal standards and best practices.

For Employers

We assist employers in ensuring lawful, compliant, and risk-managed terminations through the following services:

• Review and Drafting of Employment Agreements, with tailored provisions addressing termination, notice periods, severance obligations, and post-employment restrictions.
• Legal Advisory on Termination Procedures, including analysis of grounds for termination, statutory requirements, and calculation of severance and other final entitlements.
• Preparation of Termination Documentation, such as termination notices, mutual separation agreements, and payment acknowledgments.
• Compliance with Regulatory Filings, including support with required submissions to the relevant township labour office and coordination of official translations.
• Risk Management and Dispute Avoidance, offering guidance on handling employee grievances and minimising legal exposure.
• HR Training and Internal Policy Development, ensuring management teams are equipped to handle employment matters in accordance with Peruvian law.

For Employees

We also support individual employees in understanding and asserting their rights upon termination. Our services include:

• Review of Employment Contracts and Termination Letters to assess legal compliance and determine eligibility for severance and other benefits.
• Calculation of Entitlements, including severance pay, notice period compensation, unused leave, and other contractual benefits.
• Advisory on Dispute Resolution Options, including informal negotiation, mediation, and formal complaint processes through the Ministry of Labour and Employment Promotion.
• Representation in Legal Proceedings, should a dispute arise regarding wrongful termination or non-payment of entitlements.
• Assistance with Settlement Agreements, ensuring the employee’s rights are protected during any negotiated exit.

Our aim is to ensure that both employers and employees are fully informed of their legal rights and obligations, and that the termination process, when necessary, is carried out lawfully, fairly, and with minimal risk of dispute.