What you will learn in this article
- All types of compensation upon employment termination under Art. 220-228 of the Labour Code and when each applies
- How the calculation base is determined and what amounts to expect at different salary levels
- In which cases the employee owes compensation to the employer, rather than the other way around
- How termination compensation is taxed and what social security contributions apply
- What the limitation periods are for bringing claims
- What practical steps to take if the employer refuses or delays payment
Overview of the legal framework
Compensation upon termination of employment contracts is regulated in Section III of Chapter X of the Labour Code — Art. 220-228 LC. These provisions determine when, by whom, and in what amount compensation is owed under different grounds for termination.
Three principles underpin this framework:
Principle of compensation. The payments are intended to compensate losses caused by the termination — loss of income, failure to observe a contractual term, inability to use accrued leave. They are not penalties for the party that terminates the contract; they have a compensatory nature.
Principle of reciprocity. The Labour Code provides for compensation from both sides. The employer owes compensation upon dismissal, retirement, wrongful termination, and withholding of documents. The employee owes compensation for failure to observe the notice period and upon disciplinary dismissal.
Principle of a uniform base. All compensation under Art. 220-225 of the Labour Code is calculated on the same basis — the gross remuneration for the last full month worked. The specific rules for determining this base are established in Art. 228 LC and in the Regulation on the Structure and Organisation of Remuneration.
Relevant legislation
- Regulation on the Structure and Organisation of Remuneration (NSORZ) — determines which elements are included in the gross remuneration for compensation purposes
- Personal Income Tax Act (ZDDFL) — governs the taxation of compensation payments
- Social Insurance Code (KSO) — determines whether social security contributions are due
- Council of Ministers Decree No. 243 of 13.11.2025 — sets the minimum monthly wage for 2026 at BGN 1,213 (EUR 620.20)
Changes relevant for 2025-2026
From 01.06.2025, the paper employment record book has been replaced by an electronic employment record in the National Revenue Agency (NRA) register. This change affects compensation under Art. 226 LC — for withholding of documents. Employers have until 01.06.2026 to finalise paper employment record books and return them to employees. After that date, compensation for “withholding an employment record book” will apply in more limited situations, since the electronic record cannot be physically withheld by the employer.
All types of compensation upon employment termination
The table below consolidates all compensation provided for in Art. 220-226 of the Labour Code.
Compensation owed by the employer
| Article LC | Type of compensation | Amount | Conditions |
|---|---|---|---|
| Art. 220(1) | Failure to give notice | Gross remuneration for the unobserved notice period | The employer terminates the contract without observing the full or partial notice period |
| Art. 221(2) | Termination without notice under Art. 327 | Gross remuneration for the notice period (indefinite-term) or actual damages (fixed-term) | The employee terminates under Art. 327 LC due to the employer's culpable conduct |
| Art. 222(1) | Unemployment | Gross remuneration for no more than 1 month | Dismissal due to closure of the enterprise, staff reduction, decrease in workload |
| Art. 222(2) | Illness | Gross remuneration for 2 months | Contract terminated under Art. 325(1)(9) (due to illness) |
| Art. 222(3) | Retirement | 2 months’ gross remuneration or 6 months’ (if 10+ years with same employer in last 20 years) | Upon acquiring the right to a pension for length of service and age; paid once only |
| Art. 224 | Unused paid annual leave | Average daily gross remuneration for each unused day | Owed upon every termination, including disciplinary dismissal |
| Art. 225(1) | Wrongful dismissal | Gross remuneration for the period of unemployment, but no more than 6 months | The dismissal is recognised as wrongful by a final court judgment |
| Art. 225(2) | Lower pay after wrongful dismissal | Difference in salaries for no more than 6 months | The employee took a lower-paid job after the wrongful dismissal |
| Art. 226(1) | Failure to issue or delay in issuing documents | Actual damages | The employer failed to issue or delayed the necessary documents upon termination |
| Art. 226(2) | Withholding employment record book | Actual damages + gross remuneration for the entire period of withholding | Unlawful withholding of the employment record book after termination |
| Art. 226(3) | Incorrect entries in the employment record book | Actual damages | The employer entered incorrect data in the employment record book |
Compensation owed by the employee
| Article LC | Type of compensation | Amount | Conditions |
|---|---|---|---|
| Art. 220(2) | Failure to give notice | Gross remuneration for the unobserved notice period | The employee terminates the contract without observing the notice period |
| Art. 221(1) | Disciplinary dismissal | Gross remuneration for the notice period (indefinite-term) or actual damages for the remaining term (fixed-term) | The employee is dismissed for disciplinary reasons under Art. 330(2)(6) LC |
Detailed breakdown by type
Compensation for failure to give notice (Art. 220 LC)
When either party terminates the employment contract without observing the full or partial notice period, they owe the other party compensation equal to the gross remuneration for the unobserved portion.
The notice period depends on the type of contract:
- Indefinite-term contract — 30 days, unless the parties have agreed on a longer period (up to 3 months)
- Fixed-term contract — 3 months, but no more than the remaining term of the contract
- Contract with a probation clause — the party in whose favour the probation is agreed may terminate without notice; the other party owes notice under the general rules
Note that compensation may be for a partial notice period. For example, if the notice period is 30 days and the employer observed 10 of them, compensation is owed for the remaining 20 days.
Compensation for unemployment (Art. 222(1) LC)
This compensation is owed upon dismissal on grounds where the employee bears no fault for the termination — closure of the enterprise, staff reduction, decrease in workload, and others. The amount equals the gross remuneration for the period the employee remained unemployed, but for no more than 1 month.
A collective bargaining agreement or a Council of Ministers act may provide for a longer period. In practice, collective agreements in certain industries stipulate 2 or 3 months.
To receive the compensation, the employee must prove they remained unemployed (for example, by registering with the Employment Agency).
Compensation upon retirement (Art. 222(3) LC)
Retirement compensation is one of the most significant in financial terms. It is owed as a one-time payment upon termination of the employment contract after the employee has acquired the right to a pension for length of service and age.
The amount depends on the length of service with the last employer:
- 2 months’ gross remuneration — general case
- 6 months’ gross remuneration — if the employee has worked for the same employer for at least 10 of the last 20 years before termination
This compensation is owed only once, regardless of how many times the employee has terminated and resumed their employment relationship.
Compensation for unused paid annual leave (Art. 224 LC)
Upon termination, the employee is entitled to monetary compensation for unused paid annual leave, proportionate to the time recognised as length of service. This compensation is owed regardless of the grounds for termination, including disciplinary dismissal.
The compensation is calculated on the basis of the average daily gross remuneration, multiplied by the number of unused leave days. The minimum paid annual leave is 20 working days.
Compensation for wrongful dismissal (Art. 225 LC)
If a dismissal is recognised as wrongful by a final court judgment, the employer owes compensation for the period during which the employee remained unemployed due to the wrongful dismissal, but for no more than 6 months.
If the employee took a lower-paid job during that period, the compensation equals the difference in salaries, again for no more than 6 months.
This compensation requires court proceedings. The deadline for challenging the dismissal is 2 months from the date of termination.
How compensation is calculated (Art. 228 LC)
Determining the calculation base
Under Art. 228(1) LC, the base for calculating compensation is the gross remuneration received by the employee for the last calendar month preceding the month of termination, during which at least 10 working days were worked.
If in none of the months preceding the termination at least 10 working days were worked, the compensation is determined on the basis of the gross remuneration agreed in the employment contract.
The gross remuneration for compensation purposes includes:
- Basic salary
- Supplementary remuneration of a permanent nature (for length of service and professional experience, for educational and academic degrees, etc.)
- Supplementary remuneration for night work and overtime (if accrued on a regular basis)
One-off bonuses, benefits in kind, and non-permanent supplementary payments are not included.
Calculation examples (at the 2026 minimum wage)
The following examples are calculated at the 2026 minimum monthly wage — BGN 1,213 (EUR 620). At higher salary levels, the amounts increase proportionally.
| Type of compensation | Formula | Amount (BGN) | Amount (EUR) |
|---|---|---|---|
| Failure to give notice (1 month) | 1 x gross | 1,213 | 620 |
| Unemployment (1 month) | 1 x gross | 1,213 | 620 |
| Illness (2 months) | 2 x gross | 2,426 | 1,240 |
| Retirement (2 months) | 2 x gross | 2,426 | 1,240 |
| Retirement (6 months, 10+ years of service) | 6 x gross | 7,278 | 3,721 |
| Wrongful dismissal (max. 6 months) | up to 6 x gross | up to 7,278 | up to 3,721 |
| Unused leave (20 days) | 20 x average daily gross | ~1,106 | ~565 |
Example 1: Dismissal due to staff reduction
An employee with a gross salary of BGN 2,500 (EUR 1,278) is made redundant under Art. 328(1)(2) LC. The employer does not observe the 30-day notice period. The employee has 15 unused leave days.
| Compensation | Calculation | Amount (EUR) |
|---|---|---|
| Failure to give notice (Art. 220) | 1 x BGN 2,500 | 1,278 |
| Unemployment (Art. 222(1)) | 1 x BGN 2,500 | 1,278 |
| Unused leave (Art. 224) | 15 x BGN 113.64 (average daily) | 871 |
| Total | 3,427 |
The average daily gross remuneration is calculated as BGN 2,500 / 22 working days = BGN 113.64.
Example 2: Retirement with 12 years of service with the employer
An employee with a gross salary of BGN 3,000 (EUR 1,534) retires. They have worked for the same employer for 12 of the last 20 years. They have 5 unused leave days.
| Compensation | Calculation | Amount (EUR) |
|---|---|---|
| Retirement (Art. 222(3)) | 6 x BGN 3,000 | 9,203 |
| Unused leave (Art. 224) | 5 x BGN 136.36 | 349 |
| Total | 9,552 |
Example 3: Wrongful dismissal (after court judgment)
An employee with a gross salary of BGN 1,800 (EUR 920) is wrongfully dismissed. After 4 months, the court overturns the dismissal. During those 4 months, the employee did not work.
| Compensation | Calculation | Amount (EUR) |
|---|---|---|
| Wrongful dismissal (Art. 225) | 4 x BGN 1,800 | 3,681 |
| Unused leave (Art. 224) | calculated separately | depends on days |
| Total for Art. 225 | 3,681 |
Payment deadline
Under Art. 228(3) LC, termination compensation must be paid no later than the last day of the month following the month of termination, unless a different deadline is agreed in a collective bargaining agreement.
For example, if the employment contract is terminated on 15 March 2026, the compensation must be paid no later than 30 April 2026.
In case of delay, the employer owes statutory interest on the unpaid compensation.
When the employee owes compensation to the employer
The Labour Code provides for two situations in which the compensation obligation runs in the opposite direction — from the employee to the employer.
Failure to give notice by the employee (Art. 220(2) LC)
If the employee terminates their employment contract without observing the notice period, they owe the employer compensation equal to the gross remuneration for the unobserved period. In practice, this occurs when the employee decides to leave “from one day to the next” without serving the 30-day notice period.
The employer may deduct this compensation from the employee’s final salary or from the unused leave compensation, but only with the employee’s express consent. Otherwise, the employer must pursue the claim through court proceedings.
Disciplinary dismissal (Art. 221(1) LC)
If the employee is dismissed for disciplinary reasons, they owe the employer compensation in the amount of:
- Indefinite-term contract — the gross remuneration for the notice period
- Fixed-term contract — the actual damages for the remainder of the contract term
In practice, the employer must pursue the claim through court proceedings or reach a voluntary agreement with the employee.
Can the employer set off claims unilaterally?
Unilateral set-off of compensation owed by the employee against amounts owed to the employee (salary, unused leave compensation) is not permitted without the employee’s written consent. Remuneration under employment law benefits from enhanced legal protection and may be deducted forcibly only by court order.
Tax treatment of compensation
The tax treatment of termination compensation is regulated by the Personal Income Tax Act (ZDDFL) and the Social Insurance Code (KSO).
Compensation subject to income tax
Most termination compensation is subject to 10% income tax:
- Compensation for failure to give notice (Art. 220 LC)
- Compensation for unemployment (Art. 222(1) LC)
- Compensation for illness (Art. 222(2) LC)
- Compensation upon retirement (Art. 222(3) LC)
- Compensation for wrongful dismissal (Art. 225 LC)
Special regime for unused leave compensation
Compensation for unused paid annual leave under Art. 224 LC is subject to 10% income tax, but no social security contributions are due on it (neither from the employer nor from the employee).
Social security contributions
As a general rule, termination compensation is not insurable income and no social security contributions are due on it. The exception is wrongful dismissal compensation under Art. 225 LC, on which social security contributions are due for the period of unemployment.
Tax calculation example
An employee receives compensation for unused leave under Art. 224 LC in the amount of BGN 1,200 (EUR 614):
| Amount | |
|---|---|
| Gross compensation | BGN 1,200 (EUR 614) |
| Social security contributions (employee) | BGN 0 |
| Income tax (10%) | BGN 120 (EUR 61) |
| Net amount | BGN 1,080 (EUR 552) |
Limitation periods
Timely assertion of claims is essential. Missing the limitation period means the compensation can no longer be collected through enforcement.
Limitation period for compensation — 3 years
Under Art. 358(1)(3) LC, claims for monetary amounts arising from the employment relationship are subject to a 3-year limitation period. The period starts running from the day the claim became due.
Limitation period for challenging a dismissal — 2 months
The claim for declaring a dismissal wrongful and overturning it must be filed within 2 months from the date of termination (Art. 358(1)(2) LC). This is a preclusive period, and after it expires the employee’s right is extinguished irrevocably.
Practical advice on limitation periods
- If the employer has not paid owed compensation, do not wait — assert your claim promptly
- For challenging a dismissal, you have only 2 months — if you suspect unlawfulness, seek legal assistance immediately
- Limitation periods are not interrupted by out-of-court negotiations or written demands — only by filing a court claim
Frequently asked questions
Conclusion
Termination compensation is a safeguard ensuring that both parties to the employment relationship are protected when it ends. Knowing the types of compensation, how they are calculated, and the deadlines for bringing claims is essential — whether you are an employer seeking to comply with the law and avoid disputes, or an employee seeking to receive what is owed.
If you have questions about a specific case of employment termination, the amount of compensation owed, or deadlines and procedures — contact us for a consultation. The Innovires Legal team will help you assess your rights and take the right steps.
This article is for informational purposes and does not constitute legal advice. The content is current as of March 2026 and reflects the legislation in force at that date. For specific legal questions related to your situation, we recommend consulting a lawyer. Innovires Legal assumes no liability for actions taken solely on the basis of the information in this article.
Need assistance?
The Innovires team can advise you on employment termination compensation — from both the employer’s and the employee’s perspective.