Setting aside the yearly accrual and revaluing the fund

A joinery in Treviso has one employee on annual pay of 27,000 €. Every year it sets aside 2,000 € of TFR for him: 27,000 divided by 13.5. On 31 December the fund already built up, 10,000 €, grows by at least 150 € from the fixed part of the rate alone. The rest depends on an index that only ISTAT publishes.

A debt that grows every year

The trattamento di fine rapporto, or TFR, is a sum the employer owes the employee when employment ends. It is not paid month by month and never shows in the net pay on the payslip: it builds up year after year in a fund held by the business until the employment comes to an end.

Article 2120 of the Italian Civil Code, read in the consolidated version published by the Gazzetta Ufficiale, opens with a rule that admits no exception: whenever an employment relationship ends, the employee is entitled to a severance payment.

The word whenever has a history. In 1968 the Constitutional Court struck down the exclusion of the payment on dismissal for misconduct or voluntary resignation, and in 1971 the exclusion for service lasting less than a year. The consolidated text records both rulings beneath the article.

For a small business the consequence is an accounting one before it is a legal one. TFR is a debt certain to exist and uncertain only in its date: whatever the reason employment ends, resignation included, the day will come when it has to be paid in full. It pays to treat it that way from the first month.

The yearly accrual: pay divided by 13.5

The method fits in one sentence. The payment is computed by adding up, for each year of service, an amount equal to and in any case not above the pay due for that year divided by 13.5. Each year adds its own accrual to those already built up.

The divisor of 13.5 gives an easy rule of thumb: the yearly accrual is worth a little less than one month of pay, since twelve months' pay divided by 13.5 comes to less than a full month. The phrase in any case not above sets a cap: the accrual may not exceed that ratio.

For part years the accrual shrinks in proportion. The Code adds a rounding rule: a part month of 15 days or more counts as a whole month. An employee hired on 10 March therefore accrues all of March; one hired on 20 March does not.

What counts as qualifying pay

The figure divided by 13.5 is not just any line on the payslip. The second paragraph of article 2120 defines it, unless collective agreements provide otherwise, and the definition is wider than basic pay on its own.

Three tests can be read into that definition. The link with the job: the sum is paid because the work exists. Regularity: a recurring amount goes in, a one-off payment does not. Pay character: repaying an expense incurred for the business is not pay and stays out.

Benefits in kind deserve particular care. A benefit that is not paid in money, but is tied to the job and recurs, enters the base at its money equivalent. Forgetting it lowers the yearly accrual, and the error repeats itself every year until someone notices.

The clause on collective agreements must be taken seriously. The agreement applied in the business may leave out or bring in items differently from the general rule. Before setting up the calculation in the payroll software, read its section on severance pay, because that is where the real base is found.

The third paragraph covers a frequent case. Where work is suspended during the year for one of the causes in article 2110, or by a full or partial suspension with wage supplementation, the pay counted is the equivalent of what the employee would have earned had the job run normally.

In practice, a period of suspension covered by those causes does not reduce the TFR accrual. The fund keeps growing as if the employee had worked, and the pay divided by 13.5 is the notional pay, not the amount actually paid during the months of absence.

Revaluing the fund on 31 December

The accumulated fund does not stand still. The fourth paragraph provides that the payment, leaving out the year's accrual, is increased on a compound basis on 31 December each year by a rate made of two parts: a fixed 1.5% and 75% of the rise in the ISTAT consumer price index.

Two details matter. The year's accrual is not revalued in the year it arises: it joins the base only the following year. And the increase is compound: one year's revaluation is added to the fund and is itself revalued in later years, like interest that has been capitalised.

Written out, the rate is 1.5% + 75% × rise in the index against the previous December. Applied to the fund at the previous 31 December, it gives the year's revaluation. The Agenzia delle Entrate page describes the same rule in terms of a coefficient with a fixed share and a variable share.

Compounding is easiest to see by following a fund over three years, with no need to know the index. Call t the rate for a year and F the starting fund. Each 31 December the fund is multiplied by one plus the rate, and only then receives the new accrual, which waits for the following year to be revalued.

The ISTAT index: the part this course leaves unquantified

The index the Code refers to is the consumer price index for blue- and white-collar households, established by ISTAT. What matters is not its level but its rise: the change recorded in December compared with December of the year before.

This course gives no value for the index, as a matter of method. ISTAT's pages, read with the source-checking tool, serve navigation only and no figures. A value quoted here without such a reading would be a number copied from a secondary source, which is exactly what the course refuses to do.

The linked calculator follows the same rule: it neither knows nor estimates the index, and asks for it as an input. Whoever runs payroll takes it from ISTAT's official release or from their labour consultant, and enters it once a year.

The formula still lets you reason before the index is known. With no rise at all, the rate falls back to the fixed 1.5%. Each percentage point of rise adds 0.75 points to the rate. The fund is therefore revalued by at least 1.5%, and by more when prices go up.

Leaving during the year

Where employment ends before 31 December, the revaluation is worked out for the part year. The fifth paragraph says which index to use: the rise in the ISTAT index is the one recorded in the month employment ends, compared with December of the previous year.

Here too a part month of fifteen days or more counts as a whole month. The course calculator handles the yearly revaluation at 31 December and warns that the leaving case, with the index of the month of departure, calls for a separate calculation.

For the accrual in the year of departure, the proportional reduction already described applies. The calculator applies it like this: annual pay, divided by 13.5, multiplied by the months of service and divided by twelve, with months already rounded under the fifteen-day rule. Counting the months correctly is up to the user.

TFR kept in the business and TFR paid to a pension fund

Everything above applies to TFR that stays with the employer. The Agenzia delle Entrate page points out that portions paid in full into supplementary pension schemes are not kept in the business and are outside the TFR revaluation mechanism.

For the employer the difference is concrete. Portions paid to a pension fund leave the in-house fund: they are not revalued by the business and, as the second module shows, they give rise to no substitute tax. The TFR record must therefore be kept per employee, with where each portion goes.

A TFR record for each employee

TFR is computed per employee, not per business. Each worker has their own qualifying pay, their own start date and their own choice of where the portions go. A record with one row per employee and per year makes the calculation checkable and sets up the work of the second module.

The total of the revaluation column, over funds kept in the business only, is the figure needed for the substitute tax. Updating the record every 31 December means that in February the number on which the balance is computed is already to hand.