Liquidation is a term used to indicate the payment an employee receives from its employer as compensation when the employer has used its right to put an end to the labor contract for no reason (no fault by employee), that is, a payment upon dismissal. Such payment is calculated depending on the seniority of the employee. The longest the employee has been working for the employer, the larger the liquidation amount is.
For many years an important group of free zone companies simulated putting an end to all employees’ labor contracts as dismissals without cause (or just a few of them, depending on the company’s strategy) and they would normally pay liquidation rights as of December 31st. Immediately, the following January, it was simulated as if such employees were hired again and in this manner there was no seniority accumulation. This practice of paying severance benefits to its workers annually and collectively for each calendar year of work has been called annual liquidation.
In 2003 the Supreme Court established that all payments made as liquidation when there was a simulated dismissal (that is, the employee actually continued to work for the employer immediately after liquidation), was not to be considered as a final liquidation, but an advanced payment to be deducted from the actual liquidation to take place when the employer decided to dismiss the employee without cause for real. This meant that the calculation of liquidation payments had to take into consideration the actual entry date, not the last liquidation date.
Now, this was not very convenient for employers as now they were not saving any money by liquidating every year.
Then comes a group of free zone company owners and propose Law 187-07 that seeks to put an end to this practice by establishing that all amounts received and accepted by employees up to January 1st 2005 for the concept of liquidation shall be considered as a definitive liquidation payment; therefore, all employees that up to Jan 1st 2005 had received their respective liquidation payments were considered as actually dismissed as of the date of their last liquidation, whether it was simulated or not. Employment entry date is reset and employers are liability free up to such date. A fresh start.
The spirit of law 187-07 is to banish simulated annual liquidations. However, for those companies that have liquidated their employees in 2006 and forward, such amounts shall not be considered as final liquidation, but as an advanced payment to be deducted from the actual liquidation payment to take place when the employer decided to dismiss the employee without cause for real.
Take in mind that in case there is a reason for dismissal (one of the reasons allowed by the Labor Code) or if the employee quits its job, no liquidation shall be paid.