Severance pay upon termination – everything you need to know

The Severance pay upon termination For many employees, severance pay from their employer is a given. However, this is often a misconception, as there is no statutory right under German law to which employers are always obligated. This may be shocking for employees. However, it does not mean that employees cannot receive severance pay after being terminated by their employer. This often depends on a certain degree of negotiating skill and the specific circumstances of the individual case.

This article highlights the most important aspects on the topic of severance pay. It explains when severance pay is considered, how it is legally regulated, and why there is no automatic entitlement to severance pay. The article also shows under which Requirements a severance payment is negotiated and which factors can influence the amount.

In addition, the article addresses tax and social security regulations and describes the possible effects of severance pay on the receipt of unemployment benefits. As an employee, you will receive a comprehensive overview of how and under what conditions severance payments are negotiated in practice.

What is severance pay?

A severance payment is a benefit provided by the employer for the Loss of jobSeverance pay is generally considered if the employer has terminated the employment or if there is a termination agreement that includes severance pay. Remuneration of the employer, but no remuneration.

In common usage, severance pay is closely related to Termination Employees receive severance pay when they lose their job due to dismissal. This means the employee loses their social security benefits and is at risk of becoming unemployed.

Therefore, court settlements and termination agreements often state the following with regard to severance pay:

“The employee shall receive compensation for the loss of his job in accordance with Section§ 9, Section 10 Consumer Protection Act in the amount of…“

The severance payment is therefore a Special service as compensation for job loss.

When am I entitled to severance pay?

A common misconception is that employees “automatically“ are entitled to severance pay if the employer terminates the employment. Legally speaking, employees are generally entitled no claim There is simply no legal regulation that requires this. Neither the German Civil Code (BGB) nor the German Dismissal Protection Act (KSchG) contain provisions that make severance pay mandatory – at least as a general rule. dismissal for operational reasons after § 1a KSchG You can find details below.

The Dismissal Protection Act It primarily serves to protect against unjustified dismissals and to preserve the employment relationship. It protects the employee from socially unjustified dismissals, so that in the event of an unjustified dismissal he can sue for continued employment and does not automatically receive severance pay.

So in Germany there are no severance pay claim in case of termination. What we do have in Germany, however, is a Protection of existing rightsThis means that if you are dismissed, the entire process is initially geared toward getting your job back. Because if you, as an employee, are in the right and win the unfair dismissal case, you will get your job back and not receive any severance pay.

Dismissal protection proceedings often end with a settlement and severance pay

However, the labor court procedure is designed so that there is no judgment at all, but rather that the employee and employer reach an amicable agreement beforehandTherefore, a dismissal protection process begins with a Conciliation hearing, which is intended solely to promote amicable settlement. Furthermore, if an amicable settlement is reached and the case is terminated by compromise, no court costs are incurred.

From experience, it can be said that most dismissal disputes do not end with a judgment in which the employee wins and then (perceives) to lose. In many cases, the end result is an amicable and mutual termination, in which Comparison. And in this comparison, the employment relationship is finally regulated and usually also finishedThe employer is often willing to pay severance pay, especially if the reasons for dismissal are not clear and cannot be proven in court.

More about Dismissal protection suit You can find out more in this article.

Why does it make sense for the employer to pay severance pay?

But let’s get to the point: Why do employers even pay severance pay to employees upon termination if they aren't legally obligated to do so? Even if they lose the unfair dismissal case, they would never have to expect to pay severance pay (with one exception). Just a reminder: German termination law protects the continued existence of the employment relationship and generally does not offer any protection against severance pay!

But for employers it is often the lesser evils, to pay severance pay. It is legally and financially simply safer and faster than the path without severance pay. There are two main reasons for this:

Risk of default of acceptance after termination

After notice of termination by the employer, employees often file a complaint within three weeks This leads to a often lengthy legal disputes, which is at least several months, but can also drag on for over a year, especially if the case goes to the second instance, the State Labor Court. In the meantime, the notice period expires, and the employee is generally not re-employed.

The risk for the employer is that the termination will prove to be ineffective proves to be unfounded, e.g. due to formal errors or insufficient grounds for termination, and the employment relationship has not been terminated. In this case, the employer would Delay in acceptance This means that he would not have accepted the work of the employee despite the existing employment relationship. The employer would then have to pay the wages for the entire period count, even though he didn't work.

To avoid this financial risk, employers often choose to voluntary payment a severance payment to safely end the employment relationship and the dismissal protection process.

Reemployment of workers

Another risk that causes employers to pay severance pay to employees in the event of termination is obvious: in the event of a loss in court, not only financial disadvantages. In this case, it is also legally established that the employment relationship persists – at least until no other decision is made in the second instance.

This means that the employer is generally obligated is to continue to employ the employee. And a good Specialist lawyer for labor law will regularly also file a request for continued employment on behalf of his client as an additional application. If it then turns out that the termination is invalid, the employee usually wins even with the request for continued employment. The consequence: The employee can enforce employment, even through enforcement measures.

This isn't exactly in the employer's best interests. It even contradicts the employer's interests, since the employer didn't issue a dismissal for operational, conduct, or personal reasons without good reason.

The employer’s interests may speak in favor of severance pay

By terminating the employment, the employer has clearly expressed his interests: He wants to terminate the employment relationship finish and the employee no longer take backThis situation of interests applies to all three possible reasons for termination – behavioral, personal and operational reasons – similar, although for different reasons.

However, since a possible favorable judgment in the dismissal protection process can enforce continued employment, the employer will want to pursue a legally secure and swift separation from the employee. This is possible through a settlement to which both parties to the employment contract agree. agree The greater the desire for separation, the more likely the employer will be willing to agree to a high severance payment in a settlement.

Which terminations result in severance pay?

At a dismissal for operational reasons Employees often have the best chances of receiving severance pay, as the dismissal has nothing to do with their behavior or their person, but rather with operational reasons However, it is often difficult for employers to defend dismissals for operational reasons in court, as they prove It must be established that the job has been eliminated and that no alternative employment opportunities exist. Furthermore, the employer must conduct a social selection process among the affected employees, which can be prone to errors.

More on the topic Dismissal for operational reasons, read here.

At a dismissal for misconduct, where the employee violated his duties The chances of receiving severance pay are often lower, especially in cases of serious violations. However, errors made by the employer during termination, such as insufficient warnings or formal errors, can increase the chances of receiving severance pay.

At a dismissal for personal reasons the reason lies in the person of the employee, for example, in the case of sickness-related absences or inadequate performance. The employer perceives the relationship between work performance and compensation as disrupted and wants to avoid financial burdens or operational disruptions through termination. However, the legal hurdles are particularly high for dismissals due to sickness, and employers are more likely to pay severance pay if the prognosis is positive.

In addition to illness-related reasons, dismissal for personal reasons can also occur in the case of “Low performers", or with employees who are unable to perform their work due to incarceration or loss of their driving license. In these clear-cut cases, there is little interest in severance pay. In less clear-cut cases, however, there is often scope for negotiation of a settlement with severance pay. Experience has shown that dismissing low performers is a particularly difficult undertaking for employers.

In summary, the probability of a severance payment depends heavily on the Type of termination and circumstances The chances are higher for dismissals for operational reasons, whereas dismissals for conduct-related or personal reasons are more complex from a severance pay perspective, and the prospects of success for a severance payment depend on the legal and formal details of the individual case.

In which cases are employees still entitled to severance pay?

While there is no general legal entitlement to severance pay, there are always situations in which such a claim may arise. These are specific, individual cases that do not apply to every termination by an employer.

For example, there are employment contracts in which it has been agreed that in the event of termination by the employer, a severance payment of the agreed amount is to be paid. If the employee is then terminated by the employer, the employee is entitled to such a Clause in the employment contract a claim to the severance payment. But only then. Such clauses are, for example, in Managing director employment contracts as social security in the event of dismissal is not uncommon.

Other cases include:

• A severance payment claim may arise from a Social plan , which is negotiated between the employer and the works council to mitigate economic disadvantages for employees in the event of major operational changes. Such operational changes can include plant closures, divisions, staff reductions, or relocations. The social plan is intended to compensate or mitigate the financial losses of the affected employees through severance payments. In certain cases, a union can also negotiate a collective social plan.
• In addition, an employer can offer severance pay in the event of a dismissal for operational reasons pursuant to Section 1a of the KSchG if the employee in return no This must be clearly stated in the termination notice, and the employee has a legally enforceable right to severance pay if they do not file a lawsuit. However, this only applies if such severance pay is offered in the termination letter; otherwise, it is not valid.
• Dismissal protection proceedings do not always proceed smoothly. There are certainly employers who play unfairly during the process and make it unreasonable for the employee to continue working with them. If the dismissal is ineffective, the employee has the option of filing a complaint in accordance with Section 9 of the German Dismissal Protection Act (KSchG). Application for dissolution If the employment relationship is unreasonable, the employment court will terminate the employment relationship and order the employer to pay reasonable severance pay in the amount of up to 12 gross monthly salaries. A similar severance payment claim also exists in the case of an unjustified or immoral extraordinary termination without notice (Section 13 paras. 1 and 2 KSchG).
• In addition, an employee can damages after Section 628 para. 2 German Civil Code if the employee terminates the employment relationship without notice due to the employer's breach of contract. In this case, however, this is not a traditional severance payment, but compensation for the employer's breach of contract.

Your contact persons for termination and severance pay

Lawyers Raphael Lugowski and Hamza Gülbas represent clients nationwide – with a focus on severance pay, protection against dismissal and termination agreements.

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How much severance pay do you get after termination?

The Amount of severance pay depends on various factors The so-called Standard severance payment, which provides for half a gross monthly salary per year of employment in the case of dismissals for operational reasons according to Section 1a of the KSchG. However, this standard severance payment is not prescribed by law, but serves only as a first landmarkWhether and to what extent severance pay is ultimately paid depends on various factors.

These include:

• Length of service and Amount of salary: Length of service typically increases severance pay. This is because length of service serves as a benchmark for calculating the actual severance payment. Salary, like length of service, is the key reference for severance pay. This is primarily because the value of the employment relationship increases with increasing salary.
• Labor market situation and labor market opportunitiesIf the employee's chances of finding a new (equivalent) job in the foreseeable future after being dismissed by the employer are good, this will likely have a negative impact on the amount of severance pay. Conversely, employees with a long history of unemployment and significant financial disadvantages may argue for a higher severance pay if unemployment is high due to a lack of jobs.
• IndustryExperience has shown that there are industries where higher severance payments are paid than in others. In the medical sector, for example, severance payments above a factor of 1.0 are regularly paid. This also applies to the banking sector, the automotive industry, and the chemical industry, especially for larger companies. In other industries such as the catering industry, skilled trades, or logistics, however, severance payments are not necessarily as high, and in some cases are even far below it. However, it is difficult to derive a general rule from this. The individual case is crucial.
• Negotiation skills and negotiation psychologyThe negotiating skills of the employment law specialist and the client play a decisive role in determining the amount of severance pay. It is important to approach the employer not only legally, but also emotionally and psychologically, and to understand their interests and motives. Targeted communication that addresses the employer's needs and expectations can help convince the employer.

How should employees not behave after being fired?

For employees, termination always represents a stressful situation Depending on the reason for termination, one may be offended, doubt one's performance and abilities, angry or simply disappointed.

These are all human and understandable reactions to being fired. However, if you weren't given notice without notice or were given a permanent layoff, you still have to work during the notice period. Especially if you're angry with your employer, you might think about doing particularly poor work during the notice period, being particularly rude to colleagues or customers, "backing up" company emails or customer lists, or making it clear to individuals what you really think of them.

Subsequent termination without notice

However, it is better not to engage in such behavior. On the one hand, it can permanently annoy the employer and ruin the chance of receiving severance pay in the unfair dismissal proceedings. On the other hand, depending on the severity of the offense, it can entitle the employer to impose a extraordinary termination without notice In the unfair dismissal proceedings, the discussion will no longer be about severance pay, but rather about getting the termination without notice off the table.

ThereforeAfter receiving notice of termination, avoid any behavior that could make you vulnerable. It's also important that your attorney doesn't present any facts during the trial that aren't verifiably true, or facts that the employer could perceive as defamation or slander. You also shouldn't add unnecessary fuel to the fire. This could entitle the employer to file a motion for termination during the trial. Or to adopt a defiant stance.

You should keep your true intentions to yourself!

Another "Severance pay killer" is the disclosure of your true intentions as an employee. Even if you are no longer interested in working for the employer, you should keep this to yourself for now. This is information that no one else should know. Except for your Employment law attorney, of course – otherwise he would possibly act against your interests in the dismissal protection proceedings.

What this means for you and your behavior in concrete terms:

• After receiving your notice of termination, you should not tell your employer that you are no longer interested in the job and will not return.
• You should also not reveal your true intentions to your colleagues.
• If you have found a new job during the unfair dismissal process, keep it to yourself for now.

In the unfair dismissal process, there is only one person who speaks for you: Your lawyerMany statements ("I definitely don't want to work there anymore"; "Continue working with employer A? Over my dead body"; "I have something new anyway") can lead to you losing everything. And that happens relatively quickly when emotions run high.

How much are the social security contributions on a severance payment?

The advantage of a severance payment is that it exempt from social security contributions because no social security contributions are levied on them.

Social security contributions are only payable on the remuneration paid in return for work performed. However, a severance payment is not compensation for past work, but serves as Compensation and bridging for future loss of income after the termination of the employment relationship. The employee may view the severance payment as recognition for past service, but he or she has already received wages for this service.

Is severance pay tax-free?

Although the severance payment is not subject to social security contributions, it is generally subject to taxSince 2006, severance pay has been tax-deductible like a normal salary payment and taxed at the recipient's individual tax rate. This means that the severance payment is subject to income tax in its entirety, which can result in a significant tax burden.

However, the so-called Fifths rule after Section 34 (2) No. 2 Income Tax Act (EStG)This regulation stipulates that the severance payment is extraordinary income and thus receives preferential tax treatment. Under the fifths rule, the severance payment is divided into five parts and taxed over five years. One-fifth of the severance payment is then added to regular annual income to determine the tax rate that would apply to this portion. This tax rate is then applied to the total severance payment by multiplying the fifth by five.

This method spreads the tax impact across the severance payment, which is particularly useful if the severance payment is paid out in one lump sum and would otherwise result in a disproportionately high tax burden. The fifths rule can thus help reduce the tax burden on the severance payment by mitigating the progression of the German tax system.

Is a severance payment taken into account when receiving unemployment benefits?

As employment lawyers, we are repeatedly asked by employees whether severance pay will be credited toward unemployment benefits. Employees fear this could be the case, and that if so, their severance pay will dwindle over the months.

But don’t worry: As a rule, the severance payment is not credited or offset against your entitlement to unemployment benefits. However, there is one exception that you should be aware of. It will be offset against your entitlement to unemployment benefits if you exceed the notice period for your employment contract. shortened In that case, the law assumes that the severance payment is a dismissal payment, financed from the salary saved by shortening the notice period.

Employees face the risk of being dismissed or Termination agreement But there is another threat to unemployment benefits. Anyone who terminates their employment contract in a socially unacceptable manner could face Lockout time in unemployment benefits and a reduction in entitlement.

Conclusion

• No legal claim: There is generally no legal entitlement to severance pay. The severance pay must either be contractually agreed upon, agreed upon in a social plan, or negotiated through a settlement in the context of a dismissal protection process.
• Severance pay is usually a matter of negotiationSeverance payments are often negotiated to minimize risks for the employer, such as the risk of back pay for delayed employment or the continued employment of the terminated employee after a lost lawsuit. Although there is no obligation to pay severance payments, employers will often agree to a severance payment to legally terminate the employment relationship.
• Amount of severance payThe amount of severance pay depends on various factors, with the standard severance pay of half a gross monthly salary per year of employment pursuant to Section 1a of the German Dismissal Protection Act (KSchG) serving as a guideline. However, this provision is not binding and serves merely as a basis for negotiation.
• Influencing factors: The amount of severance pay depends on various factors, such as length of service, salary, industry and negotiation opportunities.
• Taxes and social security contributionsSeverance payments are not subject to social security contributions, but are subject to tax. The fifths rule allows the tax burden to be spread and reduced, which is advantageous for larger severance payments and mitigates tax progression.
• Unemployment benefitSeverance payments are generally not counted towards unemployment benefits unless the notice period has been shortened.

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