Terminating an Employee in Portugal: The Steps and How Severance Is Calculated

The first thing to understand about ending an employment relationship in Portugal is that an employer cannot simply decide to let someone go. Job security is a constitutional right (Article 53 of the Constitution prohibits dismissal without just cause), so there is no at-will employment and no clean "we are parting ways" that an employer can execute unilaterally without either a proven reason or a proper procedure. That single fact changes what an employer has to plan for. There are only a handful of lawful grounds to dismiss someone against their will (misconduct, collective redundancy, extinction of a job, and unsuitability), each carries a mandatory procedure, and a dismissal that lacks a valid ground or skips a procedural step is ruled unlawful regardless of how reasonable the underlying business decision was. The cost gap is large and specific: a lawful redundancy pays severance of 14 days per year of service, while an unlawful dismissal can mean reinstatement with full back pay, or court-set compensation of 15 to 45 days per year of service, on top of back pay to the date of judgment. So the order that matters is the lawful routes out, the procedure each one requires, and then how the severance is calculated.

The routes out, and which ones an employer controls

There are several ways an employment contract in Portugal can end, and they are not equally available to the employer. Mutual agreement (revogação) is the cleanest: both sides sign, the terms are negotiated, and the employee keeps a seven-day window to change their mind unless the signatures are certified in person. A fixed-term contract can end by expiry (caducidade) if the employer gives non-renewal notice in time. An employee can resign (denúncia) with notice, or, if the employer has breached its obligations, terminate for cause.

The routes the employer initiates against an unwilling employee are the constrained ones, and each needs a documented justification: dismissal for just cause tied to the worker's conduct (despedimento por facto imputável), collective dismissal, dismissal for the extinction of a job (extinção do posto de trabalho), and dismissal for unsuitability (inadaptação). The last three are the "objective" dismissals, the Portuguese equivalent of redundancy, and they are the ones that trigger statutory severance. A conduct dismissal handled correctly triggers none.

Follow the procedure, because the procedure is the case

For a conduct dismissal, the procedure is not a formality wrapped around the decision; it is the decision. The employer issues a written statement of charges (nota de culpa) within 60 days of learning of the conduct. The worker has 10 business days to respond and may ask for witnesses to be heard. The employer must then actually conduct the investigation the worker requests (the Constitutional Court struck down the provision that once let employers refuse), and issue a written, reasoned decision within 30 days of the response deadline. If a works council exists, its opinion is requested. Miss a step and a dismissal that had a real underlying reason can still be ruled unlawful on procedure alone.

The objective dismissals have their own path: a written communication to the workers' representatives and the Ministry of Labour, a consultation period of at least 15 days, objective and non-discriminatory selection criteria (an employer cannot invent its own, per the Constitutional Court's 2013 ruling), and then notice and severance. Across every route, the rule is the same: the employer must prove a valid reason and follow the required procedure, and a dismissal that fails on either point is unlawful even when the underlying business decision was sound.

Notice periods

For the objective dismissals, the employer's notice period depends on tenure: 15 days for up to a year of service, 30 days from one to five years, 60 days from five to ten, and 75 days beyond ten (Article 363). Payment in lieu is allowed. A conduct dismissal for just cause has no notice period. Going the other way, an employee resigning gives 30 days' notice under two years of service and 60 days at or above two years.

How severance is calculated

Statutory severance (compensação) applies to the objective and collective dismissals, and the current rate, set by the 2023 Decent Work Agenda, is 14 days of base pay plus seniority payments (diuturnidades) for each full year of service, with the daily rate being the monthly figure divided by 30 and fractions of a year pro-rated (Article 366).

Here is the part that makes Portuguese severance intricate rather than merely arithmetic: the 14-day rate only applies to service from May 2023 onward. Earlier service is paid at the rate that was in force at the time, and those rates have to be summed across a single career. Service before November 2011 accrued at 30 days a year. From November 2011 to September 2013 it was 20 days. From October 2013 to April 2023 it was 18 days for the first three years and then 12. So a long-tenured worker's severance is a series of different rates applied to different slices of their tenure, and computing it means knowing the exact dates of each period.

A worked example makes this concrete. Take an employee hired in October 2015 and dismissed by job extinction in June 2026, on €3,000 a month. Their service falls into three rate periods. October 2015 to September 2018 earns 18 days a year, or 54 days. October 2018 to April 2023 earns 12 days a year, about 55 days. May 2023 to June 2026 earns 14 days a year, about 44 days. That totals 153 days, and at €100 a day (€3,000 divided by 30) the severance is €15,300. Someone hired after May 2023 is far simpler: a single 14-day rate applies across their whole tenure.

Two caps apply. The monthly pay used in the calculation is capped at 20 times the minimum wage, which in 2026 is €18,400 a month, and the total is capped at 240 times the minimum wage, €220,800. For most employees neither cap changes the result; they only reduce the figure for very high earners. Separately, when the employer chooses not to renew a fixed-term contract, the expiry compensation is 24 days per year of service, higher than the 14-day dismissal rate.

The final pay everyone is owed regardless

Severance is only one part of what an employer pays out. On any exit, whatever the reason for it, the employee is also owed what they have already earned: outstanding salary up to the last day, the proportional share of the 13th-month (Christmas) and 14th-month (holiday) subsidies, and payment for any annual leave they had accrued but not taken, including the holiday-subsidy amount attached to those unused days. Because Portugal pays across 14 months, these proportions are not a rounding detail; a mid-year exit can owe a meaningful chunk of two extra months of pay. This final pay is due whether the person resigned, was dismissed for cause, or was made redundant.

The expensive outcome: an unlawful dismissal

This is why the procedure matters so much. If a dismissal is ruled unlawful, the framework changes from Article 366 to a different and more expensive one. The employee can be reinstated with full back pay from the dismissal to the final judgment, or can take compensation in lieu of reinstatement set by the court at 15 to 45 days of pay per year of service, with a floor of three months, and up to 30 to 60 days a year with a six-month floor in small companies or for senior roles. And the back pay accrues until the case reaches final judgment, which can be a long time. So the difference between a lawful redundancy at 14 days a year and an unlawful dismissal at a court-set 15 to 45 days a year, plus back pay, is large, and it turns entirely on whether the employer's grounds for the dismissal, and the procedure it followed, both hold up in court. That is why, in Portugal, the money question and the lawfulness question cannot be separated.

How severance is taxed

Severance in Portugal is exempt from social security contributions. For income tax the payment is split into an exempt part and a taxable part. The exempt amount equals the employee's average monthly pay over their last 12 months of work multiplied by their years of service; any severance above that figure is taxed as employment income. Company directors and administrators are the exception, and their severance is fully taxable. The other final-pay components, the 13th and 14th months and the vacation amounts, are subject to both income tax and social security in the normal way.

What this means for anyone running Portuguese payroll

There is no unilateral, reason-free termination in Portugal; every employer-initiated exit needs a justification and a procedure, and the procedure is where lawful and unlawful part ways. Lawful redundancy severance is 14 days a year for recent service, but a long-tenured worker's figure is a sum across four historical rate regimes, so the calculation depends on exact dates, not just a total tenure. Every exit also triggers proportional 13th and 14th month pay and accrued vacation. And the caps, tied to the minimum wage, change each January.

The rules are knowable in advance; the hard part is the arithmetic. Computing a severance means splitting a worker's service across up to four historical rate periods by exact date, adding the proportional 13th and 14th months and the unused-vacation payout, and applying the correct minimum-wage caps for the year. Done by hand, a small date error is easy to make and hard to spot until the worker challenges the figure. Flux applies these rules per worker, using the right rate for each period of service and the current caps, so a termination produces a number the employer can defend rather than an estimate.