Severance pay in labour law

Severance pay in labour law is one of the key issues when terminating an employment relationship. Whether after a dismissal, as part of a cancellation agreement or in the case of a social plan - the question of severance pay concerns employees and employers alike. Lawyer Martin Reichelt in Dresden will provide you with comprehensive advice on your severance payment claims and negotiate the best possible solution for you.

Is there an entitlement to severance pay?

One of the most common misunderstandings in labour law: In Germany, there is no general statutory entitlement to severance pay in the event of dismissal. The Dismissal Protection Act protects your job, not your wallet. The aim of an action for protection against dismissal is basically continued employment - not severance pay.

Nevertheless, severance payments are very often made in practice. The reason: for both sides, an amicable solution with a severance payment often makes more economic sense than a protracted legal dispute with an uncertain outcome.

When is a severance payment made?

There are various constellations in which employees receive severance pay:

Severance pay in dismissal protection proceedings

The most common case: The employee raises a Action for unfair dismissal, and as part of the proceedings, the parties agree on a settlement with a severance payment. Over 60 per cent of all dismissal protection proceedings end in this way. The amount of the severance payment is negotiated freely - this is where legal experience and negotiating skills pay off.

Severance pay according to § 1a KSchG

In the event of dismissal for operational reasons, the employer can offer the employee a severance payment in the letter of dismissal if the employee waives the right to bring an action for unfair dismissal (Section 1a KSchG). In this case, the amount is 0.5 gross monthly salary per year of employment. You should definitely have a lawyer check whether this offer is appropriate - there is often more in it.

Severance pay in the cancellation agreement

In a termination agreement, the severance payment is agreed as consideration for the amicable termination of the employment relationship. The amount is purely a matter of negotiation. Caution: A termination agreement harbours risks, in particular a possible Blocking period for unemployment benefit. Be sure to seek advice before signing.

Severance payment from social plan

In the event of operational changes (e.g. mass redundancies, site closures), the works council and the employer can agree a Social plan in accordance with Section 112 BetrVG, which provides for severance payments for the employees affected. Employees are entitled to the redundancy payment as a legal claim.

Settlement by judgement of dissolution

In rare cases, the labour court can terminate the employment relationship at the request of the employee in return for payment of a severance payment (Section 9 KSchG). The prerequisite for this is that the dismissal is invalid but the employee cannot reasonably be expected to continue the employment relationship. The severance payment can be up to 12 monthly salaries for older employees who have been with the company for a long time, up to 18 months' salary (§ 10 KSchG).

Severance pay in labour law - amount and calculation

The most common benchmark for calculating a severance payment is the so-called Standard settlement:

0.5 gross monthly salary × number of years of employment = severance payment

In addition to the standard severance payment of 0.5 gross monthly salaries per year of employment, other factors also play a role: the employer's litigation prospects, the age and employability of the employee as well as the economic situation of the company have a significant influence on the actual severance payment amount. In practice, severance payments of between 0.5 and 1.5 gross monthly salaries per year of employment are often agreed. In the case of senior employees or in cases where the employer has particularly poor grounds for dismissal, significantly higher amounts can also be achieved.

An example: A gross monthly salary of 4,000 euros and 10 years of service would result in a standard gross severance payment of 20,000 euros.

However, this rule of thumb is only a Starting point for negotiations. The actual amount of severance pay can vary considerably - both upwards and downwards. The following factors influence the negotiating position:

• Prospects of success of the action for unfair dismissal: The better the employee's chances, the higher the severance payment.
• Special protection against dismissal: Pregnant women, severely disabled employees and works council members have a much stronger negotiating position.
• Age and labour market opportunities: Older employees with poorer prospects on the labour market tend to receive higher severance payments.
• Economic situation of the employer: An economically strong company will be more willing to pay a higher severance payment.
• Urgency: If the employer wants to get rid of the employee quickly, the employee's negotiating position increases.

Specialist lawyer Reichelt analyses your individual case and advises you realistically on achievable severance pay.

Severance pay and taxes

A severance payment is generally taxable and must be taxed as extraordinary income. However No social security contributions to.

The tax treatment of the severance payment depends on § 34 EStG (one-fifth rule). This regulation can significantly reduce the tax burden, especially if the severance payment is made in a calendar year in which the remaining income is low. Social security contributions are generally not payable on the severance payment, as it does not constitute remuneration for social security purposes.

To alleviate the tax burden, there is the so-called Quintile regulation (§ 34 EStG). The severance payment is treated for tax purposes as if it had been spread over five years. In many cases, this leads to considerable tax savings, especially if the severance payment is high in relation to regular income.

Prerequisite for the one-fifth rule: The severance payment must be Aggregation of income i.e. the income in the year of the severance payment must be higher than the income that the employee would have earned if the employment relationship had continued.

Design tip: By deferring the severance payment to the following year (when less regular income will then be earned), the tax burden can often be further reduced. Specialist lawyer Reichelt already considers tax aspects during negotiations.

Severance pay and unemployment benefit

Another important aspect: What influence does the severance payment have on the Unemployment benefit (ALG I)?

Locking period

If the employment relationship is terminated by a Cancellation agreement or a Self-termination ends, the Federal Employment Agency usually imposes a Locking period of 12 weeks (§ 159 SGB III). During this period, no unemployment benefit is paid and the total period of entitlement is reduced by a quarter.

A blocking period can be avoided if a important reason for the termination, such as an imminent dismissal for operational reasons. The exact structure is crucial here - be sure to seek advice in advance.

Rest period

If the ordinary notice period is not observed by the cancellation agreement and a severance payment is made, an additional Rest period (§ 158 SGB III). Entitlement to unemployment benefit is suspended during the rest period. The duration of the rest period depends on the amount of the severance pay and the notice period not observed.

Important: A severance payment from a court settlement in dismissal protection proceedings usually results in not to a blocking period, as the employer has given notice and the employee has only defended himself against it.

Cancellation agreement with severance pay - note the risks

Many employers offer cancellation agreements with severance pay in order to avoid dismissal protection proceedings. This sounds tempting at first, but harbours considerable risks:

• Blocking period for ALG I: No unemployment benefit for up to 12 weeks
• No right of cancellation: In principle, a signed cancellation agreement cannot be revoked
• Severance pay often too low: Without legal advice, many employees accept the first severance payment offer - which is often well below what can be achieved
• Loss of entitlements: Compensation clauses in the termination agreement can lead to the loss of further claims (e.g. overtime pay, holiday pay)

Recommendation: Never sign a severance agreement without having it reviewed by a specialist lawyer for employment law. Specialist lawyer Reichelt analyses the draft contract, identifies risks and, if necessary, negotiates subsequent improvements.

Negotiation tactics for severance payments

The amount of a severance pay is always a matter of negotiation. Some principles that specialist lawyer Reichelt observes in severance pay negotiations:

• Avoid time pressure: Never allow yourself to be pressurised into signing immediately.
• Signal your willingness to sue: You have the strongest negotiating position if the employer knows that you are prepared to file an action for unfair dismissal.
• Consider the whole package: In addition to the severance payment, other negotiable items include leave of absence, references, outplacement counselling and company pension schemes.
• Tax optimisation: The timing and modalities of the payment can be optimised for tax purposes.
• Social law implications: The avoidance of blocking periods and rest periods must be included in the negotiations.

Frequently asked questions about severance pay

How much is a normal severance payment?

The rule of thumb is 0.5 gross monthly salaries per year of employment. With a salary of 4,000 euros and 10 years of service, this would be 20,000 euros. In practice, however, the severance payment can be significantly higher or lower depending on the negotiating position.

Do I have to pay tax on the severance payment?

Yes, a severance payment is subject to income tax. However, the tax burden can be considerably reduced by the one-fifth rule (§ 34 EStG). Social security contributions are not payable on the severance payment.

Is the severance payment offset against unemployment benefit?

The severance payment itself is not directly offset against unemployment benefit. However, a termination agreement may result in a blocking period of up to 12 weeks, and failure to comply with the notice period may result in a period of inactivity of the unemployment benefit entitlement.

Can I renegotiate the severance payment?

As long as you have not yet signed a cancellation agreement, you can renegotiate at any time. After signing, renegotiation is generally no longer possible. Therefore, always seek legal advice before signing.

Do I also get a severance payment in a small company?

Severance payments are also possible in small companies with ten or fewer employees, where the Dismissal Protection Act does not apply - for example as part of a cancellation agreement or if the dismissal is contestable on other grounds (discrimination, immorality, prohibition of measures).

This article is intended to provide general information and does not replace individual legal advice. For an assessment of your specific case, please arrange a consultation with lawyer Martin Reichelt.