Seniority allowances in Portugal: when are they due and what precautions should companies take?

What are seniority allowances?

Portuguese case law has characterised seniority allowances as additional monetary payments intended to reward an employee’s continued service with the same company or within the same professional category. Traditionally, their rationale lies in the absence of, or limited opportunities for, progression to higher professional levels.

In practice, they usually correspond to an additional amount paid on top of the basic salary, which becomes due after a certain period of service. For example, a specific amount may be payable for every three, four or five years of service, up to a maximum number of seniority allowances.

However, the Portuguese Labour Code does not establish a general and automatic entitlement to seniority allowances applicable to all employees.

When are employees entitled to seniority allowances?

The existence of such an entitlement should first be determined by reference to the rules applicable to each employment relationship.

Seniority allowances may arise from:

1. a collective bargaining instrument, including a collective bargaining agreement or company agreement;
2. the individual employment contract;
3. another agreement entered between the employer and the employee; or
4. potentially, relevant company practices or customs, although this matter should be assessed with caution.

Recent case law has reiterated that employees may be entitled to seniority allowances where they are provided for in their individual employment contract or in a collective bargaining agreement applicable to the employment relationship.

Against this background, before concluding whether such an entitlement exists, it is essential to correctly identify the applicable collective bargaining instrument, including any applicable extension ordinances, and to analyse the relevant provisions.

How are seniority allowances calculated?

There is no single method for calculating seniority allowances. The instrument establishing the entitlement will generally determine:

1. the length of service required for each seniority allowance to become due;
2. the amount of each allowance;
3. the maximum number of seniority allowances that may be accumulated;
4. the length of service to be considered for calculation purposes;
5. the professional categories or groups covered; and
6. any special rules relating to career progression or changes in professional category.

For example, a particular collective bargaining agreement may provide for one seniority allowance for every five years of service, while another may establish a different frequency and different limits.

For this reason, length of service with the company alone is not sufficient to calculate the entitlement. The specific rules established by the source providing for the seniority allowance must be analysed.

Can a basic salary above the applicable minimum absorb seniority allowances?

This is a particularly relevant issue in practice.

The fact that an employee receives a basic salary higher than the minimum established in the salary scale of a collective bargaining agreement does not automatically mean that the seniority allowances are included in that salary.

The Portuguese Supreme Court of Justice has previously held that the fact that a company pays basic salaries above the minimum rates established by collective bargaining, with the intention of including other payments provided for in the applicable collective bargaining instrument, is not in itself sufficient to demonstrate that the parties agreed to incorporate seniority allowances into the employee’s overall monthly remuneration.

This makes the wording of employment contracts and remuneration clauses particularly important, as well as the manner in which the different components of remuneration are identified on payslips.

Can seniority allowances be withdrawn once acquired?

Caution is also required in this regard.

Once a seniority allowance becomes due under the rules applicable to the employment relationship and is regularly incorporated into the employee’s remuneration, it acquires a remunerative nature and benefits from the corresponding legal protection.

The Portuguese Supreme Court of Justice has recognised that, once seniority allowances become due under the applicable collective bargaining provisions, their regular and certain nature means that they form part of the employee’s remuneration as an additional component of the basic salary and therefore benefit from the legal protection afforded to remuneration.

For this reason, their unilateral removal, reduction or absorption into other remuneration components must be carefully assessed, taking into consideration, among other matters, the principle of non-reduction of remuneration and the specific rules of the applicable collective bargaining instrument.

What is the relevance of seniority allowances to other employment rights?

The classification of seniority allowances as remuneration may have consequences extending beyond their monthly payment. For example, they may be considered for the purposes of calculating compensation due upon dismissal.

Accordingly, depending on the specific legal framework applicable, this component may need to be considered when determining other remuneration-related employment entitlements.

For this reason, incorrectly identifying or paying seniority allowances may not only result in monthly salary differences but may also have a knock-on effect on other employment-related claims.

What precautions should companies take?

An analysis of seniority allowances should form part of any employment law audit of a company’s remuneration structure, particularly where collective bargaining arrangements apply.

Companies are advised to:

1. identify the collective bargaining instrument applicable to each group of employees;
2. confirm whether the relevant instrument provides for seniority allowances and under what conditions;
3. verify the relevant length of service of each employee and the dates on which the various seniority allowances became, or will become, due;
4. compare the amounts due with the amounts actually paid;
5. review employment contracts, amendments and payslips to determine how the various components of remuneration are identified;
6. carefully assess situations in which the company considers seniority allowances to have been absorbed into remuneration exceeding the minimum rates established by collective bargaining;
7. analyse the impact of any discrepancies on other employment-related entitlements; and
8. maintain a monitoring system capable of automatically identifying when new seniority allowances become due.

In summary:

Seniority allowances are not a universal entitlement applicable to all employees. Their existence, amount, frequency and limits depend primarily on the source establishing them, with the applicable collective bargaining instruments being particularly important.

However, where seniority allowances are effectively due and have accrued, they have a remunerative nature and benefit from the corresponding legal protection. Their removal, reduction or intended absorption into other salary components should therefore be subject to careful legal analysis.

For companies, periodic review of this matter is therefore an important employment law compliance measure, enabling potential remuneration liabilities to be identified at an early stage and ensuring that the salary structure remains aligned with employment contracts and the applicable collective bargaining rules.

The Employment Law Department of Belzuz Abogados, S.L.P. – Sucursal em Portugal, comprising lawyers with extensive experience in reviewing remuneration policies and interpreting collective bargaining instruments that provide for the payment of seniority allowances, is available to assist companies with these matters.