Termination Agreement or Dismissal: Which Is Better?

The quick decision guide

If you're reading this page, there's probably a termination agreement (Aufhebungsvertrag) on the table right now, or the sentence has come up in an HR meeting: "Otherwise we'll have to dismiss you." So here's the short answer first.

The question is usually framed wrong. You can't actually choose the dismissal, that's your employer's decision to make or not make. The question you actually need to decide is: do I sign what's in front of me now, or do I negotiate first?

And there's a clear starting answer to that: for you as an employee, a dismissal is almost always the better starting position. Not because it's more pleasant, but because it can be challenged: you can have it reviewed by the labour court within 3 weeks (§ 4 KSchG), and it's precisely this risk that's the reason employers pay severance payments at all. A termination agreement is the only variant where you negotiate that lever away yourself.

That doesn't mean a termination agreement is bad. It's a good tool with poor default content; it becomes worthwhile once the conditions and wording are right.

Which path wins when: the short version

• A dismissal is better if you don't have a follow-up job lined up, you depend on unemployment benefit, you've been with the company a long time, or the Dismissal Protection Act (Kündigungsschutzgesetz) applies. In short: in the vast majority of cases.
• A termination agreement is better if a new job with a fixed start date is waiting and you want out earlier, or if you enjoy special protection against dismissal and your employer practically can't get rid of you without your signature. In that case, the termination agreement is your lever, not theirs.
• It's never better if you're supposed to sign it on the spot under pressure, with no severance payment, a waiver of your right to sue, and well before your notice period would have expired.

Before you decide anything, you need a number: use the severance calculator to see in 2 minutes what severance payment is realistic as a guide in your case.

The central difference: a one-sided declaration versus a two-sided contract

Everything that follows on this page results from a single legal difference. If you take only one thing away, take this:

A dismissal is a one-sided declaration of intent. Your employer alone declares that the employment relationship should end, and it takes effect once you receive it. For that, it's bound to conditions: written form (§ 623 BGB), a notice period (§ 622 BGB), and if the Dismissal Protection Act applies, a reason that is socially justified (§ 1 KSchG). And above all: it's reviewable. Within 3 weeks of receiving it, you can file an unfair dismissal claim (§ 4 KSchG).

A termination agreement is a two-sided contract. It only comes into being if you sign it. It also needs written form under § 623 BGB, but that's already the only hurdle: no reason for dismissal, no notice period, no social selection, no works council hearing, no approval from any authority. And it takes effect once you sign it: there is no statutory right of withdrawal, not even if you sign it at the workplace.

Important: This is exactly where the asymmetry lies. Your signature is the one thing your employer can't produce on their own. As long as you haven't given it, you hold negotiating power. The moment you give it, that power is gone. Your employer offers you the termination agreement because it spares them all the hurdles mentioned above, plus the risk of losing a court case. That value is real, and part of it belongs in your severance payment.

The big comparison table: dismissal versus termination agreement

Read the table as a price list: every row where the right-hand column is worse is something you're giving up, and you should see a matching benefit for it in the contract.

Note: The table describes the standard case. Which way it tips in your case depends mainly on three questions: does the Dismissal Protection Act apply? Do you need unemployment benefit? How long have you been with the company? At a small business, the calculation looks different, more on that under Dismissal protection at small businesses.

The most expensive difference: the suspension period

With a dismissal by your employer, there's usually no risk of a suspension period, because you didn't bring about the unemployment yourself. With a termination agreement, it's different: from the employment agency's point of view, you played a part in ending the employment. That's the classic case of a suspension period due to giving up work under § 159 SGB III. The consequences come in two stages, and the second is almost always overlooked:

• Usually 12 weeks without unemployment benefit. Your claim is suspended. In special cases, the suspension period shortens to 3 or 6 weeks.
• Plus a permanent reduction. Under § 148 SGB III, a suspension period due to giving up work reduces the total duration of your claim by at least a quarter. 12 months of entitlement becomes 9. Those 3 months are gone for good.

When there's no risk of a suspension period with a termination agreement

A suspension period only occurs if you had no good cause. According to the Federal Employment Agency's technical guidance on § 159 SGB III, the agency usually doesn't dig further if these three points are met together:

1. A lawful operational dismissal was concretely threatened, for the same date on which the termination agreement ends the employment. Get this in writing or include it as a preamble in the contract, more under operational dismissal and severance payment.
2. The statutory notice period is observed. The agreement must not end earlier than a regular dismissal could have, see notice period.
3. The severance payment stays within the accepted range, meaning up to 0.5 gross monthly salaries per year of service.

Important: this is administrative practice, not a statutory guarantee. All the underlying rules, exceptions, and ways out are covered under suspension period for unemployment benefit, and the concrete wording level under termination agreement and unemployment benefit.

The notice period trap: why an earlier end costs you twice

"We'll end this quickly, so you'll have a free hand right away" sounds accommodating and is the most expensive sentence in the whole conversation. A termination agreement that ends before the statutory notice period expires costs you twice over.

First, you lose every month's salary you would still have received until the regular end date. Second, the suspension for severance compensation under § 158 SGB III also kicks in: if you receive a severance payment and your employment ends without observing the statutory notice period, you only get your unemployment benefit from the day the notice period would have expired. And this suspension can apply in addition to the suspension period.

Worked example: Tobias, 12 years with the company, €4,500 gross

Tobias has been with the company for 12 years and earns €4,500 gross per month. Under § 622 para. 2 no. 5 BGB, his notice period is 5 months to the end of a calendar month. His employer presents him with a termination agreement ending at the end of the current month, with a severance payment of €15,000:

So Tobias is meant to receive a "severance payment" that's smaller than the salary he's giving up in exchange, and on top of that push back his unemployment benefit. Economically, this isn't a severance payment, it's a partial payment of salary already owed.

Rule of thumb: a severance payment is only a genuine severance payment once it comes in addition to your salary up to the regular end of your notice period. Anything less is a discount you're granting your employer.

Work it out before you answer: the severance calculator shows you your guide figure in 2 minutes, which you can measure every offer against.

Severance payment: where it really comes from

A stubborn misconception goes: "with a termination agreement you get a severance payment, with a dismissal you don't." There's no general statutory right to a severance payment in either case. What does exist is negotiating power, and that arises from the fact that a dismissal can be challenged.

The only statutory severance payment is found in § 1a KSchG: if your employer explicitly offers a severance payment in an operational dismissal in case you let the deadline for filing a claim pass, it amounts to 0.5 months' pay per year of service. That's an offer, not an enforceable right, and in practice it's often the floor, not the ceiling, of the negotiation. More on the underlying system under severance payment in employment law and severance payment upon dismissal.

Worked example: the 0.5 rule of thumb

In practice, the rule of thumb of 0.5 gross monthly salaries per year of service serves as a guide figure. Let's stick with Tobias:

The initial offer of €15,000 is thus clearly below the usual guide figure, and that's before salary and unemployment benefit are even factored in. The rule of thumb isn't a right, but a negotiating anchor: it moves upward the weaker the dismissal would have been that your employer would otherwise have had to issue. You can read about the individual factors involved under severance payment: amount.

And here's the honest point: this negotiating position doesn't arise from the termination agreement. It arises from the fact that a dismissal can be challenged, that your employer bears the burden of proof in court proceedings, and that if they lose, they'd have to pay your salary retroactively for the entire duration of the proceedings. If you sign first and want to talk about the severance payment afterwards, you've already given up the lever. So the rule is: negotiate first, sign afterwards.

Tax: the same on both paths

Contrary to a widespread rumour, there is no difference in tax treatment between a severance payment from a termination agreement and one from a court settlement. Both are subject to:

• No social security contributions. A genuine severance payment, meaning compensation for the loss of your job, is not subject to health, long-term care, pension, or unemployment insurance contributions.
• Full income tax liability, but possibly reduced tax rate. The severance payment counts as extraordinary income under § 34 EStG and can be taxed at a reduced rate through the "fifths rule" (Fünftelregelung) if the requirements are met.

How the fifths rule works numerically is explained in the article the fifths rule. What actually ends up net in your account is covered under severance payment and tax.

Note: because the tax treatment is the same on both paths, it doesn't serve as an argument for a termination agreement. If it's sold to you in a conversation as an advantage, that's a signal to examine the whole offer more closely.

When a termination agreement really is better

There are situations where a termination agreement is clearly the right choice. They all have one thing in common: you want something a dismissal can't give you:

1) A new job is waiting with a fixed start date

If you've already signed and are supposed to start on the first of next month but one, the statutory notice period is your problem, not your protection. Only a termination agreement can end the employment relationship earlier, and the suspension period risk is here mostly of secondary economic importance, because you're not claiming unemployment benefit at all. But: make sure you're paid for the earlier exit; your employer saves salary if you leave earlier. The tool for this is called an accelerator clause (Turboklausel), colloquially also known as a "sprinter" bonus.

2) Special protection against dismissal makes a dismissal practically impossible

This is the strongest position there is, and it's the one most often given away. With special protection against dismissal, your employer can't dismiss you, or only with authority approval. The termination agreement is then the only path left to them, and thus your lever:

• Pregnancy and maternity protection: a dismissal is generally impermissible, see dismissal during pregnancy.
• Parental leave: special protection here too, see dismissal during parental leave.
• Severe disability: nothing works without approval from the integration office, more under dismissal with severe disability.
• Works council members: practically not subject to regular dismissal, the role of the committee is explained under works council (Betriebsrat).

Important: special protection against dismissal protects you from a dismissal, not from a contract you sign yourself. With your signature, it's gone. That's exactly why your negotiating position is exceptionally strong here, if you use it instead of giving it away.

3) You want to lock in certain conditions

Some things can be regulated contractually but are hard to win in court: a specific reference grade including the closing formula, an irrevocable release from work with continued pay, taking over a company car, or a waiver of a post-contractual non-compete clause. If these points are worth money or career progression to you, a termination agreement isn't a concession, it's a trade.

When it's almost always worse

These patterns keep appearing in practice, and they're warning signs, not coincidences:

• Pressure in an HR meeting. You're called into a meeting without warning, there are two people sitting on the other side, the contract is already drawn up and is supposed to be signed "ideally right away." According to the Federal Labour Court's case law, the requirement of fair negotiation applies when concluding a termination agreement. If a psychologically pressuring situation is created that significantly hampers a free decision, the contract can potentially be challenged. But don't rely on this: proving it is hard, and it's far easier simply not to sign on the spot.
• "This offer is only valid today." Artificial deadlines exist to prevent you from reviewing the offer.
• A weak or non-existent severance payment. Compare every offer first with the salary you'd receive until your notice period ends, then with the rule of thumb. If it's below both, you're paying extra.
• A waiver of your right to sue with no compensation. A waiver of the right to sue is the most valuable point in the whole contract, and it's valuable to your employer. It shouldn't come free.
• The settlement clause at the end. The unassuming sentence "all mutual claims arising from the employment relationship are settled by this agreement" quietly also clears away remaining leave, overtime, bonus, commission, and profit shares. Anything owed to you needs to be explicitly excluded, see remaining leave upon dismissal.
• Hidden repayment obligations. Training costs, relocation allowances, sign-on bonuses: clauses that wouldn't apply with an employer dismissal can suddenly become due because of your own involvement in ending the relationship.

Which clauses are problematic in detail and what a fair version looks like is shown in the articles termination agreement and termination agreement template. On the realistic severance payment amount specifically: severance payment in a termination agreement.

The third option almost nobody mentions

The choice "termination agreement or dismissal" blocks out the path that most often leads to the best result in practice: wait for the dismissal, file a claim against it, and settle during the proceedings. The process is less dramatic than it sounds:

1. You sign nothing and wait to see whether your employer actually issues a dismissal. Often they don't, precisely because of the hurdles the termination agreement was meant to bypass.
2. If the dismissal comes, you file an unfair dismissal claim within 3 weeks (§ 4 KSchG). How many days you have left is calculated by the deadline calculator for unfair dismissal claims. Your salary keeps running in the meantime until the notice period expires.
3. At the settlement hearing, which usually takes place a few weeks after the claim is filed, the court explores an amicable settlement. Very many proceedings end right here with a settlement, one that typically includes a severance payment, an end date that respects the notice period, a neutral wording of the reason for ending the employment, and a very good reference.

The decisive advantage lies in how it's treated under social security law: if you've received a dismissal from your employer and settle on a severance payment during the proceedings, you haven't brought about the unemployment yourself. A suspension period typically doesn't apply here, and if the notice period is respected, the suspension under § 158 SGB III doesn't apply either. In the end, you often get the same thing that was initially offered to you as a termination agreement, just without the disadvantages under social security law and usually with a higher severance payment.

Note: an settlement agreement (Abwicklungsvertrag), meaning an agreement about the consequences of a dismissal already issued, is by contrast no safe way out. It too can trigger a suspension period, because by waiving your right to sue, you're complicit in ending the employment.

Before you decide on a path, you need a number in your head: calculate your guide figure with the severance calculator, then you can actually evaluate the offer on the table.

Checklist: what belongs in every termination agreement

If you decide on a termination agreement after checking things over, make sure it's a complete one. These points belong in it, and every single one of them is regularly forgotten in practice:

• End date that respects the statutory notice period. The single most important point, it defuses the suspension period and the benefit suspension at once.
• Preamble on the threatened dismissal: a sentence stating that your employer would have issued an operational dismissal for the same date. Your basis with the employment agency.
• Severance payment amount, due date, and inheritability. The amount in euros, the payment date, and a clause stating that the claim also exists and is inherited if you should die before the end date.
• Release from work, explicitly revocable or irrevocable. This makes a difference for offsetting any interim earnings, so don't leave it open.
• Remaining leave explicitly named. Either it's granted during the release from work, or it's paid out under § 7 para. 4 BUrlG. A bare "leave is included" isn't enough.
• A reference with grade and closing formula, ideally the finished text attached as an annex. What makes a good reference is explained under qualified reference.
• Return of work equipment, date and scope. Laptop, phone, company car, keys, with a clear date.
• Repayment clauses explicitly excluded. Training costs, relocation allowances, sign-on bonuses, retention bonuses.
• No surprising settlement clause. If one is included, bonus, commission, overtime, remaining leave, and company pension must be explicitly excluded.

Important: you won't get every point pushed through. But every point you name shifts the negotiation. Someone who walks into the conversation with a complete list is treated differently than someone who only asks about the severance amount.

What you should do now

If the contract has been sitting on the table since today, the order of the next few hours matters more than any legal detail. What generally applies once you've received a dismissal is covered under received a dismissal, what now?

1. Sign nothing today. No termination agreement, no minutes, no receipt confirmation with an add-on. A friendly "I'll look at this carefully and get back to you" is enough, you owe no one an explanation.
2. Take the draft with you or have it sent to you. If that's refused, photograph every page.
3. Work out your notice period. Under § 622 BGB or your employment contract, whichever is more favourable to you. That's your benchmark for any offer, see notice period.
4. Calculate the rule of thumb and measure the offer against it. 0.5 x gross monthly salary x years of service. If the severance payment is below the salary you'd get until the regular end date, it's not an offer, it's a concession you're making.
5. If a dismissal has already been issued: note the date you received it. The 3-week deadline under § 4 KSchG starts running from that day, and it keeps running regardless of whether you're still negotiating.
6. Register as looking for work. This is compulsory regardless of which path you choose, and it doesn't harm your negotiating position.
7. Have it checked before you respond. Before you sign, almost everything can be corrected, afterwards, almost nothing can.

The fastest first step: calculate your guide figure with the severance calculator, then you'll know in 2 minutes whether the offer on the table is even worth discussing.

How can we help you?

You make the decision between signing and negotiating under time pressure and with incomplete information, while the other side has neither problem. This is exactly where we come in, checking your case together with lawyers specialising in employment law: would the dismissal even hold up? Which notice period applies to you? Is the end date suspension-proof? And what severance payment is realistic in your situation, instead of the figure on the table?

We carry the risk: purely success-based, at no upfront cost. Start with an initial assessment via the severance calculator, it takes 2 minutes. And until then, the one sentence on this page that's worth the most applies: sign nothing today.