Severance pay

Severance pay / Abfindung

October 08, 2020

Severance pay is the payment of a certain amount that the employee receives because the employment relationship is terminated. There is no general entitlement to severance pay under German labour law. If an employment relationship is terminated by the employer, an action for unfair dismissal is the best way for the employee to defend himself/herself against the dismissal. The subject of the action for protection against dismissal is the validity of the dismissal. If the court comes to the conclusion that the dismissal was invalid, the employer must actually continue to employ the dismissed employee. In most cases, the aim is to obtain the highest possible severance payment.

When is severance payment given?

There are two types of severance pay. The freely negotiated severance payment when a termination agreement is concluded, which is not regulated by law, and the legally regulated severance payment under section 1a of the Dismissal Protection Act (KSchG).

Voluntary payment of severance pay upon conclusion of a termination agreement

If the parties to an employment relationship mutually agree to terminate the cooperation, they conclude a termination agreement, in which a severance payment is then often agreed. A claim to payment of severance pay does not exist without such a contractual basis. The parties are free to determine the amount of severance pay.

Amount of severance pay

The amount of severance pay is not regulated by law. The parties must agree on the amount of severance pay. It therefore depends on what it is worth to the employer to terminate the employment contract and how the employee assesses his/her chances on the labor market. It also depends on the possibilities the employer has to terminate the employee's employment. Often, a factor of the average gross monthly salary that was achieved in the past year multiplied by the years that the employee has worked in the company is used. With the following severance pay calculator you can get a non-binding impression of which factor leads to which result.

In principle, termination of the employment relationship by notice of termination

In order to be able to understand the reason for a severance payment upon conclusion of a termination agreement, the legal framework of the termination of an employment relationship must first be examined in more detail.

Termination of the employment contract by the employee is in principle always possible, but for employers often only under certain conditions. These are particularly high if the protection against dismissal under the Dismissal Protection Act (KSchG) applies. If there is no reason for termination or if a required social selection was not carried out or was carried out incorrectly, the termination is invalid, so that the employment relationship was not terminated by the notice.

Possibility of a termination agreement

The employment relationship is terminated by a termination agreement without the existence of a reason for termination and a (correct) social selection being required. The parties to the employment contract agree on the date of termination of the employment relationship as well as on the other modalities (severance pay, reference, release from work, taking over company equipment, etc.). By concluding a termination agreement, the employer has the possibility to terminate the employment relationship even without a reason for termination. However, the employment relationship is not terminated unilaterally but by mutual agreement. The motive for the employee to conclude such a termination agreement is often the employer's offer of severance pay.

Severance pay as a goodie

However, the "pure" termination agreement is usually not advantageous for the employee. This is because the conclusion of a termination agreement ends an employment relationship that cannot actually be terminated effectively. First of all, there are only disadvantages for the employee and advantages for the employer - he/she can rid himself/herself of an employee where a dismissal would not be successful. So what reason is there to agree to a termination agreement if it means losing one's job? Employment litigation can be very time-consuming. At this stage there is legal uncertainty for both parties, namely whether or not the employment relationship will continue despite termination. This is a good reason to reach a mutual, time- and cost-sensitive agreement on the termination of the employment relationship including the payment of a severance package.

No entitlement to unemployment benefit 1 - blocking period

It is of enormous importance for employees that when a termination agreement is concluded, the employment agency usually imposes a so-called blocking period so that the employee does not receive unemployment benefit 1 (ALG 1) for a period of usually 12 weeks. The background to the blocking period is section 159 (1) No. 1 Social Security Code III (SGB III), according to which a blocking period for unemployment benefits can be imposed in the case of behaviour that is contrary to insurance. According to Section 159, (1) No. 1, SGB III, behaviour in violation of the insurance regulations is deemed to have occurred if the employee has terminated the employment relationship himself/herself - this is also the case if he/she has agreed to a termination agreement. Employees who agree to a termination agreement should therefore at least demand the statutory severance payment from the employer.

Special case of a termination agreement "to avoid dismissal”

In some cases, termination agreements are also concluded in cases where an effective termination would actually be possible. The reason for this is that the conclusion of a termination agreement can have advantages for both parties even if there are grounds for dismissal. The employee who is to be dismissed for personal reasons, for example, can have the opportunity to obtain a favourable reference by concluding a termination agreement and thus usually has better chances on the labour market. The conclusion of a termination agreement is also advantageous for the employer, as there is no danger that the employee will bring an action for unfair dismissal. The conclusion of a termination agreement can also have a more positive effect on the company climate than a dismissal.

In this case, too, the employee runs the risk of the employment agency imposing a blocking period under section 159 (1) SGB III. According to the employment agency's instructions, however, a blocking period is not to be imposed if the termination agreement was concluded under certain conditions or has a certain minimum content.

In order for a blocking period not to be imposed, it is therefore necessary that

the termination was announced by the employer with certainty,

the threatened dismissal by the employer was based on operational or personal reasons,

the employer's notice of termination would have taken effect at the same time as the employment relationship ended or earlier,

the employee is not ineligible for dismissal, and

the employer pays the employee severance pay of up to 0.5 months' salary for each year of employment.

The above conditions must be met cumulatively. If the preconditions are met, which is checked by the Employment Agency, the Employment Agency no longer controls whether the threatened employer's dismissal would have been lawful. However, it is easy to see that for the vast majority of cases of a termination agreement intended to preempt a dismissal, these preconditions are unlikely to be present.

Statutory severance payment - section 1a KSchG

If the employer terminates the employment relationship for operational reasons pursuant to section 1 (2) sentence 1 KSchG, the employee is entitled to severance pay under certain conditions pursuant to section 1a KSchG.

A claim for payment of severance pay exists under section 1a (1) KSchG if the employer terminates the employment relationship due to urgent operational requirements under section 1(2) sentence 1 KSchG and the employee has not brought an action for a declaration that the employment relationship has not been terminated by the notice of termination within the time limit under section 4 sentence 1 KSchG. In this case, the employee is entitled to payment of severance pay upon expiry of the period of section 4 sentence 1 KSchG. The claim requires the employer to state in the notice of termination that the termination is based on urgent operational requirements and that the employee can claim severance pay if the time limit for bringing an action has expired.

Pursuant to Section 1a (2) of the German Unfair Dismissals Act (KSchG), the amount of the severance payment shall be 0.5 months earnings for each year of the existence of the employment relationship, whereby a period of more than six months shall be rounded up to a full year for the purpose of determining the duration of the employment relationship.