‘Pay to quit’: No public money when they pay you to quit

There are many ways in which employees, whether satisfied or dissatisfied with their jobs, can resign or be terminated, but recently one strategy has attracted special attention. This is the trend of paid resignations, pay to quit, where the employer offers to pay the employee a certain amount of money if they voluntarily resign. This method of leaving a company is by no means new. Back in 2014, Jeff Bezos introduced such a program in which he offered employees between two thousand and five thousand dollars to resign in order to retain only the most ambitious at Amazon and get rid of the lazy. This was at a time of tremendous growth and transformation for the company, but in 2022, Amazon suspended the pay to quit program.

In Croatia, however, we do not have a company as large as Amazon, and indeed, there are no provisions in Croatian legislation, specifically in the Labor Law that regulates employment relationships, that would govern paid resignations. This, of course, does not mean that such ‘agreements’ do not exist in domestic companies, despite the fact that employees cannot receive any form of compensation after resigning, as they would if, for example, they were terminated. For instance, they cannot claim severance pay unless the employer terminated the employment contract due to the employee’s behavior, which is not the case with a paid resignation, or unemployment benefits, except in the case of extraordinary termination caused by the employer’s behavior, which is also not the case.

From a tax perspective

Who can claim unemployment benefits if they decide to register with the employment office is clearly regulated by the Labor Market Act.

– An unemployed person whose employment relationship has ended due to their fault, will, or in agreement with the employer does not have the right to cash benefits – note the Croatian Employment Service (HZZ).

The emphasis is on the last point, the consensual termination of the employment contract, because despite mutual agreement, in that case, the employee does not acquire the right to unemployment benefits. Thus, in that situation, there is no difference between a consensual resignation and a ‘regular’ resignation by the employee. Since the strategy of paying resignations in Croatia is not explicitly regulated by legal provisions, attorney Stjepan Lović points out that ’employers and employees rarely resort to this method of terminating the employment relationship in practice.’

– It should also be noted that such termination of the employment relationship, if employers commit to paying a significant compensation, is not favorable from a tax perspective because the tax burden they must bear on such compensation is much greater than what they would bear if they paid the employee severance pay, or in the case of a business-related termination – explains Lović.

Why it is beneficial for employers

—

Stjepan Lović

photo Rene Karaman

—Lović also points out some positive aspects of this practice.

– Such termination of the employment relationship can reduce the employer’s costs in the long term because by paying compensation for resignation, they terminate the employment relationship with an employee who was otherwise employed indefinitely and whom they could not terminate the employment contract until a legally prescribed reason occurred. In this way, the employer can also encourage disengaged employees or those with poor work results to resign on their own. In that case, they receive a greater compensation than what they would be entitled to by law – explains Lović.

When it is favorable for the employee

In that situation, Bezos himself once found himself, so why not some of our entrepreneurs or ambitious startup founders. Lović explains that such termination of the employment relationship can also be financially beneficial for the employee.

– Namely, in the practice of paying resignations, the employee could negotiate a compensation amount freely, much higher than the legally prescribed severance pay, thus compensating for both severance pay and unemployment benefits – adds Lović.

A solution for mutual benefit, one might say. Or?

To ensure nothing goes wrong

To guarantee that the employee will receive some money from the employer, it is possible to conclude an agreement in which, simply put, the employee promises to resign, and the employer promises to pay a financial compensation. How? Well, aside from the provisions of the Labor Law that relate to the termination of the employment relationship and the termination of the employment contract, which has been explained so far, Lović says that pay to quit could also be considered in the context of the provisions of the Obligations Act, which applies subsidiarily to all contractual relationships, including employment.

– According to the Labor Law, the employment relationship can, among other things, cease based on an agreement concluded between the employer and the employee, as well as the employee terminating the employment contract. In this regard, the provisions of the Obligations Act prescribe the freedom to regulate obligations, according to which participants in legal transactions freely regulate their obligations, but they must not regulate them contrary to the Constitution of the Republic of Croatia, mandatory regulations, and societal morals. Therefore, both the employer and the employee are authorized, for example, to conclude an agreement whereby the employee commits to resigning from the employment contract, and the employer will pay the employee compensation for that. In that case, the employment relationship would cease with the employee’s resignation based on the agreement made with the employer – explains Lović regarding this situation.

It is important to note that the employee is not obliged to conclude such an agreement with the employer and in that case, they again fall under the Labor Law and the Labor Market Act.

With the beginning of 2025, some amendments to the Labor Market Act concerning cash benefits during unemployment have also come into effect.

Necessary changes

For instance, for individuals under thirty years of age, the required time spent working in the last twenty-four months, or two years, is reduced from nine to six months, but there are currently no specific, larger changes regarding the payment of resignations.

Whether paying resignations is a good or bad solution, whether it has a positive or negative outcome for the potentially ‘affected’ parties, each employee and employer will assess for themselves. Lović’s opinion is that detailed legal regulation could resolve the dissatisfaction of both parties, employees and employers, and even free up jobs for other workers. Clearly, the issue of dissatisfaction needs to be addressed.

– For example, the employer would find it easier to terminate relationships with employees who do not achieve satisfactory results, but for whom the conditions for terminating the employment contract through regular and extraordinary termination have not been met. In that case, an employee who is not satisfied with their job can also terminate the employment contract and receive a certain compensation that they would not otherwise be able to obtain in the form of severance pay upon termination of the employment contract – concludes Lović.

—

—