End of service compensation
3-12-2006 | IslamWeb
Question:
Salam Malaycum, An employee is fired from is work and receives a compensation (legally stated, the employee pays forced by the law), or when he/she negociates the liquidation of the labor relation and receives a compensation. Are those compensations haram? Thanks in advance. Saalm Malaycum
Answer:
All perfect praise be to Allaah, The Lord of the Worlds. I testify that there is none worthy of worship except Allaah, and that Muhammad is His slave and Messenger. We ask Allaah to exalt his mention as well as that of his family and all his companions.
There are two types of end of service compensations:
1- If the work contract is still valid and did not expire, in this case, the employer is obliged to pay the employee the remaining wages for the remaining period of the contract, and if they agree on a given amount, then this is permissible, as the Prophet 
said: "Reconciliation is permissible among the Muslims, except a reconciliation which makes what is lawful forbidden, or renders what is forbidden lawful, and the Muslims should fulfil their conditions, except a condition which makes what is lawful forbidden, or renders what is forbidden lawful." [At-Tirmithi] In principle, the hiring contract between the employer and the employee is a contract which both parties are obliged to abide by, and it is not permissible to break it unless there is a sound religious reason.
2- If the work contract is expired, in this case, if the compensation which is mentioned in the law at the end of the work contract is something accepted and commonly known by customs and by the people, then it is permissible for the employee to take it even if it is not mentioned in the contract, because what is known and accepted by the customs is like what is conditioned as a condition; this is something known in Islamic religion. However, if it is not a common custom that is accepted by people, then it is not permissible to take it just because the law permitted it, as this money is not lawful unless the employer willingly gives it as he is the one who gives it. This is the principle in all compensations. Allaah Says (what means): {O you who believe! Eat not up your property among yourselves in vanities, but only [in lawful] business by mutual consent.}[Quran 4:29]. In this second case, if the employee has the right in compensation and reconciles with the employer on a given amount, then it is permissible as already explained, but if he has no right for it, then it is not permissible for him to reconcile with the employer based on a law which permits him the compensation, as this money is not lawful unless the employer agrees to it.
Allaah Knows best.