Termination agreement

Mutually agreed separation: but with far-reaching consequences

Employment relationships end for various reasons: restructuring, personal reorientation, or strategic decisions within the company. In such situations, a termination agreement is often offered.

At first glance, it seems straightforward. However, behind the supposedly "clean solution" there are often social security, tax, and labor law consequences that should be carefully considered.

What is a termination agreement?

A termination agreement—sometimes also referred to as a dissolution agreement—is a voluntary agreement between employer and employee that terminates the employment relationship.

Unlike termination, it is not one side that unilaterally declares the end of the contract, but rather both parties agree to it.

This means that

• No reason for termination is required.
• No notice periods must be observed.
• No dismissal protection proceedings take place.

Termination agreement or termination: the difference

While termination is more heavily regulated by law, a termination agreement offers more freedom of design – but also more risk.

• Termination: possible unilaterally, notice period must be observed, protection against dismissal applies, lower risk of a waiting period
• Termination agreement: only by mutual consent, no notice period required, no protection against dismissal, higher risk of a waiting period, but more co-determination

Advantages of a termination agreement

Flexible termination: The employment relationship can end on an individually determined date – regardless of statutory notice periods.

Severance pay negotiable: Even if there is no legal entitlement, severance pay is often offered in order to reach a mutually agreed solution.

No reason for termination necessary: The employer does not have to provide any operational, behavioral, or personal reasons.

Quick transition to a new job: Leaving early can be a good idea, especially if you already have a job offer.

Avoidance of legal proceedings: A possible unfair dismissal lawsuit is avoided.

Risks and disadvantages

Waiting period for unemployment benefits: Anyone who voluntarily terminates their employment relationship risks a waiting period of up to 12 weeks for ALG I unemployment benefits. The decisive factor is whether the employment agency accepts a "voluntary solution."

Loss of protection against dismissal: Special protection rights, for example in the case of severe disability, parental leave, or long service, do not apply.

Pressure situations: It is not uncommon for termination agreements to be presented at short notice. However, time pressure is not a legitimate form of coercion. You are entitled to a cooling-off period.

No automatic severance pay: If you sign too quickly, it is possible that no compensation payment has been agreed upon.

Do I have to sign?

No. A termination agreement is an offer – not an obligation.

If you refuse, your employment relationship remains unchanged. The employer would then have to terminate your employment in the normal way and comply with all legal requirements:

• Compliance with the notice period
• Social selection
• Consultation with the works council

This is precisely why companies often prefer a mutually agreed solution.

Can a termination agreement be revoked?

Reversal is only possible under strict conditions, such as:

• Deception
• Threat
• Error regarding essential content

The challenge must be made promptly and be well-founded. General remorse is not sufficient.

Contents of a termination agreement

A carefully worded agreement should regulate the following in particular:

• Termination date
• Severance pay (amount, payment date)
• Vacation regulations
• Leave of absence
• Reference commitment
• Return of work equipment
• Non-competition clauses or confidentiality

Unclear wording can lead to disadvantages later on.

Vacation and leave of absence

Vacation compensation: Any unused vacation days must be paid out if they can no longer be taken.

Leave of absence with credit: If vacation is credited to the leave of absence, the payment is waived.

Unpaid leave of absence: This can have an impact on social security and pension entitlements.

Precise contract drafting is crucial here.

Severance pay: what is realistic?

There is generally no legal entitlement.

In practice, the following rule of thumb is often applied:

0.5 gross monthly salaries per year of employment

Example: 6 years of service × $3,000 gross salary → approx. $9,000 severance pay

Higher amounts are often possible.

Avoiding suspension

A waiting period may be avoided under certain circumstances if:

• a new employment contract is already in place
• the job would have been lost anyway
• the employer has taken the initiative

The assessment by the Employment Agency is decisive.

Special cases

During the probationary period: A termination agreement may be advisable, for example, to avoid having a dismissal on your resume.

In the event of insolvency: Particular caution is required here. Payment claims may be at risk.

In the event of illness: A contract must not be concluded under pressure. There is also a risk of a waiting period.

Tax aspects

Severance payments are subject to income tax but are exempt from social security contributions. The so-called one-fifth rule can bring tax advantages.

Checklist before signing

• Am I aware that the decision is voluntary?
• Have I taken sufficient time to consider the matter?
• Has an appropriate severance payment been agreed?
• Are vacation and leave of absence clearly regulated?
• Has the waiting period been taken into account?
• Has the reference been arranged?
• Have I sought legal advice?

Conclusion: A termination agreement can be an elegant solution—but it doesn't have to be. It offers flexibility, but it takes away your protective rights. Whoever signs makes the final decision. Whoever checks makes an informed decision.