By Michele Sacchi – Of Counsel, Labour Law Department
During a recent engagement, a company asked us whether it could suspend the payment of statutory severance indemnities due to certain former employees. The company alleged that the employees had engaged in conduct that had seriously harmed its interests. According to the company’s reconstruction of the events, that conduct had caused financial damage potentially exceeding the amounts accrued by the employees as “Trattamento di Fine Rapporto (“TFR”)”, the statutory severance indemnity payable under Italian law. The issue therefore required an immediate assessment: did the company have to pay the TFR in full, or could it withhold the relevant amounts pending recovery of its damages? The case, handled by the Labour Law Department of Bacciardi Partners, raises a practical question for many businesses: can an employer set off its claim for damages against the TFR owed to an employee?
The General Rule: The Employer Must Pay the TFR
As a general rule, TFR constitutes an employee’s entitlement and becomes payable upon termination of employment. An employer cannot unilaterally suspend payment merely because it believes that it has suffered damage or intends to bring a future claim for compensation. A general allegation of negligence, disloyalty or misconduct does not provide sufficient grounds for withholding payment. If the employer lacks an adequate legal and factual basis, the employee may take legal action to recover the amount due, including through payment order proceedings. The company may then be required to pay not only the TFR, but also interest, monetary revaluation and legal costs. An important exception may, however, apply through the mechanism known under Italian law as improper, or “non-technical”, set-off.
The Exception: Improper Set-Off
Ordinary set-off applies to reciprocal claims arising from separate legal relationships. Improper set-off applies instead when the parties’ respective claims and liabilities arise from the same legal relationship. In practical terms, it requires an overall assessment of the amounts owed by each party to the other. Within an employment relationship, the employee’s entitlement to TFR may therefore be assessed against the employer’s claim for damages arising from a breach of the employee’s duties of care, fairness, good faith or loyalty. The Italian Supreme Court has repeatedly held that, when both claims arise from the same employment relationship, the employer’s claim for damages may be assessed against the TFR owed to the employee. The court may therefore determine the respective amounts and calculate the final balance, even where one claim has a remuneration-related nature and the other has a compensatory nature. The Italian Supreme Court established this principle, among others, in Orders No. 10132/2018 and No. 1513/2019 and recently reaffirmed it in Order No. 15725/2025.
When Can an Employer Defensibly Withhold TFR?
Improper set-off does not grant employers an unrestricted right to “freeze” TFR payments. An employer may defend the withholding only when the damage genuinely arises from a breach of obligations connected with the employment relationship and concrete evidence supports the employee’s liability. Before taking this decision, the company must accurately reconstruct the relevant facts, collect the available documentation and identify the nature and amount of the damage according to serious and verifiable criteria. The company must also formally assert its claim for damages and be prepared to prove it in court. The withholding does not definitively resolve the matter, and the employee retains the right to challenge it. The company must also examine the applicable national collective bargaining agreement. Certain agreements make the employer’s right to claim damages conditional upon compliance with specific procedural requirements, such as formally notifying the employee of the alleged misconduct or imposing a disciplinary sanction. By contrast, withholding TFR exposes the company to significant risk when the alleged damage remains hypothetical, has not been reasonably quantified or cannot be linked with sufficient clarity to the employee’s conduct.
How Employers Should Assess the Withholding of TFR
As a general rule, the employer must pay the TFR upon termination of employment and cannot suspend payment on the basis of a general allegation against the employee. Improper set-off may justify the withholding when both the employee’s TFR entitlement and the employer’s claim for damages arise from the same employment relationship. However, the employer must support this approach with a specific assessment of the available evidence, the actual quantification of the damage and the company’s ability to defend its position before a court.
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In the case examined by our Labour Law Department, these factors required a particularly careful assessment. The analysis concerned not only the abstract availability of set-off, but also whether the company could adequately support the withholding from both an evidentiary and procedural perspective. The key question is therefore not simply whether an employer may withhold TFR. The employer must instead determine whether it already holds sufficient evidence to demonstrate that, following an overall assessment of the amounts owed by each party, the final balance is genuinely in the employer’s favour.
The Labour Law Department of Bacciardi Partners assists companies in assessing the legal requirements for withholding TFR and in managing the related disputes, including court proceedings.
By Michele Sacchi – Of Counsel, Labour Law Department