Severance for termination & termination agreement

Severance pay upon termination or termination agreement: What you should know

Severance pay can be an important financial buffer when your job ends—whether due to termination or a termination agreement. Many employees have uneasy feelings about this: "Am I entitled to it?", "How much is realistic?" and "What should I sign, and what should I avoid signing?"

The most important thing to know up front: In most cases, there is no general entitlement to severance pay. Nevertheless, severe payments are common in practice because employers want to avoid disputes and control risks. Those who know the rules of the game are in a much better position to negotiate.

What is a severe payment?

A severe payment is a one-time payment made by the employer to the employees in connection with the termination of the employment relationship. It is intended to cushion the financial impact of losing one's job and is often agreed upon as part of a settlement.

When do you receive severance pay, and when do you not?

Principle: No automatic entitlement. In most cases, a serious payment does not arise automatically, but rather through:

• Social plan
• Collective bargaining agreement, employment contract or managing director regulations
• Termination or settlement agreement
• Court settlement (often after of action for unfair dismissal)

Legal entitlement: rare, but possible. Essentially, there are two scenarios to consider:

Termination for operational reasons with severe pay offer in accordance with Section 1a of the German Employment Protection Act (KSchG): The employer terminates the employment relationship for operational reasons and indicates in the termination notice that you will receive severance pay if you allow the deadline for filing a lawsuit to expire. The entitlement then arises – if you do not file a lawsuit.

Termination by the labor court pursuant to § 9 KSchG: Upon application, the court may terminate the employment relationship and set a severance payment – typically if continuation is unreasonable.

In practice, however, severe payments are very often paid without any legal entitlement – simply because a lawsuit can be expensive and risky for the employer.

Why do employers pay severance payments even though they often don't have to?

Because dismissals can be legally contestable, and because a lost lawsuit can be expensive. A key cost factor is the risk of default of acceptance: if the dismissal is invalid, wages may have to be paid retroactively for months – sometimes longer. Many employers prefer to "buy out" this risk with a serious payment.

When are the chances good?

Severance payments are particularly realistic if the termination is not watertight or the company wants to make a clean break, for example in the case of:

• Formal errors (e.g., works council consultation, formalities)
• Unclear social selection in the case of termination for operational reasons
• Unclear or changing reasons for termination
• Conflict situations in which both sides want "separation instead of dispute"
• Restructuring with a social plan

How high can a severe payment be?

Usual guideline: "Standard severance payment"

Often used as a basis for negotiation:

Severance payment ≈ 0.5 × gross monthly salary × years of employment

Example: 10 years with the company, $2,000 gross → 0.5 × 2,000 × 10 = $10,000

Important: This is not a law, but a guideline. Depending on the risk situation and negotiations, it can be significantly higher or lower – usually higher.

Alternative models: In some regions or internal company models, age is also taken into account to a greater extent (e.g., higher factors from certain age groups). This can happen, but it is not automatically "standard" and depends heavily on the context.

Special case: severe disability

As a rough guide, the standard severance payment is also often used in practice. However, additional factors often influence the actual amount: protective mechanisms, the specific negotiation situation, and social plan logic can influence the amount. Severance payment for termination for operational reasons (§ 1a KSchG)

Severance pay for termination for operational reasons (Section 1a KSchG)

If the employer terminates the employment relationship for operational reasons and expressly states in the termination notice that you can claim severance pay in accordance with § 1a KSchG if the deadline for filing a lawsuit expires, the following applies:

• The entitlement only arises if you do not take legal action (the 3-week period expires).
• The amount is 0.5 months' earnings per year of employment, with more than 6 months being rounded up to a full year.

This is effectively a "decision against legal action" – with immediately clear severance pay logic. Whether this makes sense depends on how vulnerable the termination is and how willing the employer would be to negotiate.

Severance pay in the termination agreement

A termination agreement does not automatically entitle you to severe pay. However, precisely because you have to agree to it, you often have leverage to negotiate severance pay. Typically, employers offer severance pay + a reference + time off work to avoid a wrongful dismissal lawsuit and

Typically, employers offer severance pay + a reference + time off work in order to avoid a wrongful dismissal lawsuit and to quickly obtain legal certainty.

Please note: Termination agreements can be tricky in terms of social security law (keyword: waiting period). Therefore, you should check not only the amount of the severe payment, but the entire package.

Severance settlement: pros and cons

What speaks in favor of it:

• Quick conclusion instead of lengthy proceedings
• Predictability (end date, payment, reference, leave of absence)
• Negotiating leverage: severance pay, reference, remaining vacation time, bonus, outplacement, etc.

Cons:

• Finality: Once signed, it's usually final – Renegotiation becomes difficult.
• Risk of waiting period/suspension: Depending on the terms, there may be disadvantages in terms of unemployment benefits.
• Signing too early = wasted potential: Those who sign under pressure often give up more than necessary.

Wages for delay in acceptance explained briefly

If you offer your labor but the employer does not accept it, there may be a delay in acceptance, entitling you to wage payment (Section 615 of the German Civil Code (BGB)). In cases of termination, this becomes relevant if it later turns out that the termination was invalid: In this case, Wages for the interim period may have to be paid retroactively.

Important: Employees have a duty to mitigate damages, for example, by seeking interim earnings. Whether and how this works always depends on the individual case.

Taxes, social security, and payment

Taxation: Severance payments are generally fully taxable. The actual tax depends, among other things, on whether and how the fifth rule can be applied and in which year the payment is made.

Social security: Severance payments that compensate for job loss are typically exempt from social security contributions. However, there are situations in which payments can be classified differently under social security law; the structure and delineation are crucial.

Unemployment benefits: A severe payment is not normally credited 1:1 to ALG I. However, there may be a waiting period—especially in the case of a termination agreement or if notice periods are "undermined." In this case, it is worth ensuring that the arrangement is clear.

Payment: Payment is often made with the next payroll – but it is also possible to agree on an individual date, for example for tax reasons. It is crucial to specify a clear due date in the contract text.

§ 1a KSchG: Accept or not?

Reasons that may speak in favor of this:

• The termination is likely to be effective – in which case the risk of a lawsuit is higher.
• You already have a new job lined up.
• You want to conclude the matter quickly and terminate the employment relationship in a predictable manner.

Reasons that may speak against it:

• There are many arguments in favor of the termination being invalid.
• The employer appears willing to negotiate – it may be possible to get more than § 1a level; this is usually the case.
• You need time and a strategy, for example for references, time off, bonuses, or outstanding claims.

If in doubt, it is worth obtaining an assessment from a specialist lawyer before the 3-week period expires. This will allow you to keep all your options open.