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Unlawful Termination: Navigating the Employer’s Risky Road Ahead

16/02/2026

Updated: April 2026 | Next review: October 2026

An employer terminates an employee. The reason is valid, but the procedure is not followed. The court awards damages for unlawful termination in the amount of 18 monthly salaries, plus statutory default interest for the three years the dispute lasted, plus the opposing counsel's fees. The total exceeds the annual budget of the entire HR department. This scenario is not the exception.

In practice, I see employers consistently underestimate one issue: they understand when they may terminate an employee, but not how. That difference is expensive. Every missed step in the termination procedure opens the door to a lawsuit, and labor disputes in Serbia last on average two to three years,¹ during which interest accrues month by month.

This article covers what unlawful termination costs an employer: the amounts a court may award, how they are calculated, and the situations in which those figures increase dramatically. For the broader topic of employment cessation and redundancy, see our article covering mass layoff scenarios.

up to 36 monthly salaries may be awarded as damages for unlawful termination in a single court proceeding, before interest and costs. (Labor Law, Article 191)

Contents

When is termination of employment unlawful?
What are the consequences of unlawful termination?
Employee seeks reinstatement: what is the compensation?
Employee does not seek return: damages up to 18 salaries
What if the employee finds new employment after termination?
Reinstatement is not possible: damages up to 36 salaries
Employer has grounds but erred in procedure: damages up to 6 salaries
Unused annual leave
Fines: from RSD 800,000 to RSD 2,000,000
Do interest and costs exceed the principal claim?
Reputation risk
How to avoid damages for unlawful termination?
Frequently asked questions

1. When is termination of employment unlawful?

TL;DR: Termination is unlawful when no legal grounds for the cessation of employment existed, or when grounds existed but the procedure was not followed. Both scenarios trigger the employee's right to damages. The distinction between the two affects only the amount the court may award, not the employer's liability itself.

Unlawful termination of employment exists in two forms that produce very different outcomes in terms of damages. A detailed overview of all grounds and procedures is available in our article on termination of employment.

The first form: the employer lacked legal grounds for termination. There was no breach of work duty, conditions for redundancy were not met, or the employee was in a legally protected category. The court annuls the termination and opens the full range of damages.

The second form: grounds existed, but the procedure was not carried out properly. The warning was not served in the prescribed manner, the decision contains formal errors, or the deadline to respond was not given. The court again annuls the termination, but the awarded damages are lower.

Employers often make one mistake: they believe that if they have a good reason, the procedure does not matter. That attitude generates the largest number of disputes.

TL;DR: Unlawful termination arises either when grounds are missing or when procedure is disregarded. Both lead to court. The amount of damages depends on which of these scenarios applies.

2. What are the consequences of unlawful termination?

TL;DR: Unlawful termination may result in the employee's reinstatement, compensation for lost wages, damages of 6, 18, or 36 monthly salaries, payment of tax and social contributions, compensation for unused annual leave, statutory default interest, court costs, and fines of up to RSD 2,000,000. Several consequences may arise in the same dispute.

Under the Serbian Labor Law, unlawful termination may result in a combination of the following consequences:

reinstatement of the employee, if the employee so requests;
compensation for lost wages for the period from termination to enforcement of the judgment;
damages of up to 6 salaries when grounds existed but the procedure was not followed;
damages of up to 18 salaries when the employee does not wish to return to work;
damages of up to 36 monthly salaries when reinstatement is not possible;
payment of tax and mandatory social insurance contributions for the non-working period;
compensation for unused annual leave;
statutory default interest on every awarded amount from the moment damage occurred;
court costs, including attorney fees and court fees;
fines of RSD 800,000 to RSD 2,000,000 for misdemeanor liability.

The employee may initiate several court proceedings either simultaneously or consecutively. In the first proceeding, the employee may seek only a declaration that the termination was unlawful, and in a separate subsequent proceeding claim damages. Each proceeding carries separate costs and each extends the period over which interest accrues.

TL;DR: Consequences of unlawful termination stack. Every procedural error or every unjustified ground for termination can trigger several items at once. The total cost of a disputed termination regularly exceeds what a properly conducted procedure with legal counsel would have cost.

3. Employee seeks reinstatement: what is the compensation?

TL;DR: When employment was terminated without legal grounds and the employee seeks reinstatement, the court orders the return to the position and payment of lost wages for the full period from termination to reinstatement. Tax and social contributions are included in lost wages, but meal allowance, holiday allowance, and bonuses are not. The amount is reduced by wages earned from another employer during that time, but only if that work was registered.

When the court establishes that employment was terminated without legal grounds, and the employee seeks to return to work, the employer is obliged to reinstate the employee to a position corresponding to their qualifications and to pay damages in the form of lost wages.

What counts as lost wages, and what does not?

Compensation covers the amount of lost wages increased by tax and mandatory social insurance contributions for the entire period during which the employee did not work. The reference salary is the one earned in the month preceding termination.

Lost wages do not include: meal allowance during work, holiday allowance for annual leave, bonuses, awards, and other payments based on business performance.

A useful picture: lost wages function like an insurance policy. They cover what the employee was guaranteed to receive each month. They do not cover premiums that depended on business results, because those premiums were never guaranteed.

TL;DR: Reinstatement does not mean the cost to the employer is lower. Reinstatement comes with payment of full lost wages for every month the dispute lasted, plus tax and contributions, plus court costs.

4. Employee does not seek return: damages up to 18 salaries

TL;DR: When the employee does not seek reinstatement, the court may award damages of up to 18 monthly salaries. The specific number of salaries depends on the length of employment with the employer, the employee's age, and the number of dependents. In addition to this compensation, the employee retains the right to lost wages for the period between termination and judgment.

An employee's decision not to seek reinstatement does not mean the employer is safe from payment. The court will award damages of up to 18 monthly salaries as a substitute for the reinstatement obligation. This compensation is cumulative: alongside it, the employee may claim lost wages for the period between termination and judgment, plus tax and contributions, plus statutory default interest.

The amount between 1 and 18 salaries is not set automatically. The court considers the duration of employment with the employer, the employee's age, and the number of dependents. Longer service, older employees, and more dependents generally lead to a higher award.

TL;DR: Even when the employee does not wish to return, the employer may be obliged to pay up to 18 salaries plus lost wages for the dispute period plus interest. Those three items together easily exceed the employee's annual earnings.

5. What if the employee finds new employment after termination?

TL;DR: New employment is a mitigating factor for the employer, but only if the work with the new employer was registered. Damages for lost wages are reduced by the amount earned with the new employer. If the new salary exceeds the old one, the difference is zero, but other components of damages still apply.

Employment with another employer after termination does not erase the former employer's liability. It affects only the amount of lost wages.

Example A: An employee earned RSD 100,000 per month with the employer. After termination, the employee took a new job paying RSD 60,000. Lost wage compensation is RSD 40,000 per month from termination to payment, plus tax and contributions on that difference. The employee also retains the right to seek reinstatement to the former position. The former employer saves RSD 60,000 per month compared to a situation where the employee found no new employment at all.

A key detail employers often overlook: the reduction applies only to registered work. If the employee worked unofficially with the new employer, the former employer cannot realistically prove it. The court will in that case award the full amount of lost wages without reduction, regardless of the employee's actual circumstances.

TL;DR: New employment reduces lost wages proportionally to the new salary, but only for registered work. Unregistered work remains outside the employer's defense in court proceedings.

6. Reinstatement is not possible: damages up to 36 salaries

TL;DR: When the court finds termination unlawful but also finds that continuation of employment is not possible, it may award damages of up to 36 monthly salaries without reinstatement. The impossibility of return must be proven by the employer. Typical grounds: permanently disrupted relations arising during litigation, abolition of the position due to organizational changes, or employee illness preventing work.

This is the scenario with the highest financial risk for an employer. The court finds the termination unlawful but accepts that reinstatement is not realistically feasible. Damages may then reach up to 36 monthly salaries, with lost wages, statutory default interest, and tax and contributions accruing alongside. A particular situation arises when termination is given as termination of employment due to redundancy, where organizational changes must be especially carefully documented.

Reasons the court may accept as grounds for impossibility of return:

permanently disrupted relations between employee and employer, whether arising during litigation or before the disputed termination;
organizational changes at the employer resulting in the elimination of the position, without the possibility of transfer to a suitable alternative;
onset of illness or condition in the employee preventing continued work.

Important: the burden of proof rests with the employer. It is not enough to claim that return is not possible. The employer must prove it. Organizational changes must be documented. Disrupted relations must be specifically substantiated. Without adequate evidence, the court will order reinstatement rather than award damages of 36 salaries.

TL;DR: Damages of 36 salaries is the most expensive variant, but it is not automatic. An employer seeking its application must prove objective impossibility of continued employment. That requires preparation and documentation.

7. Employer has grounds but erred in procedure: damages up to 6 salaries

TL;DR: When grounds for termination exist but the procedure was not followed, and the employee seeks reinstatement, the court rejects the reinstatement request and awards damages of up to 6 monthly salaries. Typical formal errors: warning not served, no deadline for response given, decision lacking all mandatory elements. Six salaries may seem manageable, but with interest, costs, and potential fines, the actual cost is significantly higher.

This scenario is perhaps the most frustrating for an employer: the reason for termination is clear and valid, but due to a formal omission the court annuls the decision. The employee's reinstatement request is rejected, but damages of up to 6 salaries still follow.

Example 1: An employee arrives at work visibly intoxicated. The employer immediately issues a termination decision. The ground is entirely justified. But the procedure was not followed: before issuing a termination decision for breach of work discipline, the employer was required to issue a written warning and give the employee a deadline of at least eight days to respond. Without that step, the decision is formally unlawful regardless of how obvious the reason was.

Example 2: The employer followed all the steps, served the warning, and gave the deadline to respond. But the termination decision was not properly drafted: it does not cite the specific statutory provisions breached, the operative part is imprecise, and the reasoning is incomplete. The decision may be annulled on the basis of those formal deficiencies alone, despite a valid reason for termination.

Both examples illustrate the same issue: it is not enough to be right. You must also act correctly. The termination procedure functions as a mandatory protocol: skip one step and the entire procedure fails, however valid the reason behind it.

TL;DR: Formal procedural errors cost up to 6 salaries in damages, plus dispute costs. A common mistake: an employer with a valid reason thinks procedural steps can be skipped. They cannot.

8. Unused annual leave

TL;DR: When employment ends, the employer is obliged to pay monetary compensation for all unused days of annual leave. The compensation is calculated based on the average salary over the preceding 12 months and paid proportionally to the number of unused days. The right to a pro-rated portion of leave arises after one full month of work.

Unused annual leave is not an item that disappears with termination. The end of employment triggers the obligation to pay monetary compensation for all unused days, regardless of the reason for termination and regardless of whether the termination was lawful or not.

Compensation is calculated based on the average salary over the preceding 12 months and paid proportionally to unused days. An employee who has completed only one full month with the employer has already acquired the right to a pro-rated portion of annual leave.

In practice: employers going through larger waves of dismissals often underestimate this item. The sum of unpaid leave for a larger group of employees can be a significant amount that accrues in parallel with all other costs of the termination procedure.

TL;DR: Compensation for unused annual leave is not optional, it is a statutory obligation. It arises automatically at the end of employment and does not depend on the lawfulness of the termination.

9. Fines: from RSD 800,000 to RSD 2,000,000

TL;DR: The Labor Law provides for a fine of RSD 800,000 to RSD 2,000,000 for an employer who terminates employment contrary to statutory provisions. The fine is imposed regardless of whether the employee has filed a lawsuit. It may apply even in situations where the employee has not initiated court proceedings but the Labor Inspectorate has found the violation.

Misdemeanor liability is a separate item added to all other costs. The Labor Inspectorate may initiate misdemeanor proceedings independently of whether the employee has filed a court claim.

The specific fine amount depends on the assessment of the competent authority, within a range of RSD 800,000 to RSD 2,000,000. In addition, in misdemeanor proceedings the responsible person in the legal entity may also be penalized, not only the company.

An employer already facing a court dispute and all associated costs may simultaneously receive a decision on a misdemeanor fine. Both proceedings run in parallel, each with its own costs and deadlines.

TL;DR: Fines do not preclude court proceedings. They can arise separately and may be imposed even when the employee has not filed a lawsuit. The sum of a court judgment and a misdemeanor fine can be surprisingly high.

10. Do interest and costs exceed the principal claim?

TL;DR: Yes, they can. Statutory default interest runs from the moment damage arises (that is, from the month in which the employee did not receive their salary), separately for each month. In disputes lasting two to three years, the sum of interest can be significant. In addition, the losing party bears the opposing party's costs, including attorney fees. The total cost regularly exceeds the amount of the principal claim.

Labor disputes in Serbia last a long time. According to data regularly published by the Belgrade First Basic Court, labor disputes last on average between two and three years at first instance, not counting any appellate stage.¹ Similar figures are confirmed by the annual reports of the Second Basic Court² and the Third Basic Court in Belgrade.³

During that time, statutory default interest accrues for each month the employee did not receive a salary, from the moment of termination until payment. Interest does not run on the total amount from the date of the lawsuit, but separately for each month, which means earlier months carry more interest than later ones.

Under the Civil Procedure Act, the party that loses the dispute bears all costs of the opposing party: attorney fees per the attorney tariff and court fees. Those amounts should be added to the principal claim and interest.

An employer who loses pays twice over: their own attorney for the entire duration of the dispute, plus the opposing party's attorney per the court-confirmed tariff, plus all court fees, plus interest, plus the principal. The total easily exceeds what is stated in the statement of claim.

TL;DR: Court dispute costs accumulate over years. Interest, attorney fees, and court fees may ultimately exceed the amount the employee originally claimed. The faster and cheaper solution is always a properly conducted procedure.

11. Reputation risk

TL;DR: A judgment finding unlawful termination becomes publicly accessible and can be found through search. For companies that actively recruit, particularly in the IT sector, a single public labor dispute can affect the ability to attract candidates. For startups and companies seeking investors, the reputational signal can be more serious than the financial one.

Financial consequences of unlawful termination can be measured. Reputational ones, as a rule, cannot.

In industries with high employee turnover, such as the IT sector, the pool of potential candidates is narrow and information travels fast. A former employee who won their case willingly shares that experience. Platforms such as LinkedIn and Glassdoor make that information permanently accessible.

For startups facing mass dismissals during restructuring, a labor dispute that becomes public may damage relations with investors who monitor the company's operational risk. This is a risk that does not enter any financial projection but has real business consequences.

To reduce the risk of negative comments from former employees, consider concluding non-disclosure agreements with employees as part of a standard exit procedure.

TL;DR: Reputational damage from unlawful termination is not abstract. For companies that actively recruit, it manifests in longer time-to-fill for open positions, lower offer acceptance rates, and difficulty attracting senior candidates.

12. How to avoid damages for unlawful termination?

TL;DR: Preventive measures operate at three levels: preparation of internal acts that precisely regulate grounds and procedures for termination, proper application of the statutory procedure in each specific case without exception, and consideration of alternative solutions before initiating the termination procedure. Each level reduces the risk of a dispute. Together, they nearly eliminate it.

The Labor Law provides a wide range of grounds for termination: from lack of required knowledge and skills, failure to achieve work results, to various forms of breach of work duties and work discipline. In addition, employers may provide for further grounds for termination of employment in their internal acts within the limits the Law permits, of which they are often unaware.

Well-drafted internal acts do two things simultaneously: they provide the legal basis for termination and strengthen the employer's position in any subsequent dispute. A Rulebook on Work that clearly defines what constitutes a breach of work discipline is not a formality. It is a defense in the courtroom.

Before initiating a termination procedure, I recommend considering the available alternatives to termination of employment: mutual termination, transfer to another position, salary reduction due to reduced workload. Each of these options may be more appropriate than termination in a specific situation and eliminates the risk of a dispute.

TL;DR: Damages for unlawful termination are most effectively avoided before termination is given: through sound internal acts, a properly conducted procedure, and consideration of alternatives. Once a dispute begins, options narrow and costs rise.

Frequently asked questions about damages for unlawful termination

How much is compensation for unlawful termination?

The amount depends on specific circumstances. If termination was given without legal grounds and the employee does not seek reinstatement, damages may reach up to 18 monthly salaries. If the court finds unlawfulness but reinstatement is not possible, damages may reach up to 36 salaries. In addition, the employee has the right to compensation for lost wages for the entire dispute period, plus statutory default interest. The total amount the employer pays is regularly significantly higher than the number of salaries stated in the judgment. More on this on our employment law page.

Can an employee obtain both reinstatement and damages?

Yes. In the same proceedings the employee may seek annulment of the termination decision, reinstatement, and damages in the form of lost wages. These are cumulative claims that do not exclude one another. The 18-salary compensation, however, is not cumulative with reinstatement: it is awarded only when the employee does not wish to return.

What happens if the employer has grounds for termination but makes an error in procedure?

The termination can still be annulled. The existence of grounds does not cure a procedural defect. A court that finds a formal irregularity will annul the decision regardless of the justification of the reason. In that case, if the employee seeks reinstatement, the court will reject that request and award damages of up to 6 monthly salaries. Six salaries may seem a minor consequence, but with interest and dispute costs the total cost is always higher.

How long do court disputes over unlawful termination last?

Based on available annual reports of first-instance courts in Serbia, labor disputes last on average between two and three years at first instance.¹ If either party files an appeal, the proceedings are extended. For the entire duration of the dispute, statutory default interest runs on the amount of lost wages, increasing the total cost each month. More on the statutory framework on our employment law page.

Can a company be fined even if the employee has not filed a lawsuit?

Yes. Misdemeanor liability and fines of RSD 800,000 to RSD 2,000,000 may be imposed even without a court dispute brought by the employee. The Labor Inspectorate may establish the irregularity during routine inspection and initiate misdemeanor proceedings regardless of whether the employee takes any action.

Book a consultation on employment law

Damages for unlawful termination are rarely the only consequence. In disputes lasting years, costs accumulate on several fronts at once. Each of those grounds can be prevented by proper preparation before termination is given.

Our employment law team helps employers establish procedures that are lawful, documented, and enforceable. If you are facing a termination procedure or want to review your existing internal acts, book a consultation with an employment law attorney.

About the author

Jelena Đukanović, Partner
Jelena is a partner at Zunic Law focusing on employment law and personal data protection. She advises companies in Serbia and the region on all aspects of employment: from drafting employment agreements, carrying out termination procedures and collective bargaining, to representing employers in labor disputes before Serbian courts. Member of the Zunic Law team since 2019, partner since 2025. Recognized as Global Leader and Thought Leader for employment law and personal data protection in consecutive editions of the international directory Who's Who Legal.

¹ Annual Report, Belgrade First Basic Court, available at: prvi.os.sud.rs
² Annual Statistical Data, Belgrade Second Basic Court, available at: drugi.os.sud.rs
³ Old Case Resolution Programme, Belgrade Third Basic Court, available at: treci.os.sud.rs