Settlement Agreement

Settlement Agreement / Aufhebungsvertrag

October 25, 2019

Especially in labour law, termination agreements play a major practical role. A termination agreement is an agreement between employer and employee that regulates the termination of the employment relationship as well as under which conditions the termination will take place . Such an agreement is therefore voluntary, as both parties must cooperate.

Different obligations

Lawyers distinguish different obligation, which also includes employment contracts, according to whether a service has to be provided once, for example when buying an item, or whether services have to be provided on a permanent basis, for example in the case of an employment or rental contract. Such contracts or contractual obligations are therefore referred to as continuing obligations.

The major practical difference between the different types of obligations is how and when they can be terminated. If only one single performance is owed, the contract and the related obligation will end by so-called compliance, i.e. when the owed service is performed. A continuing obligation, on the other hand, does not end when the performance owed is made once. The employment relationship does not end with the one-time provision of labour - rather, the employee must offer their labour again and again.

Unilateral termination by notice

Such continuing obligations end by termination of the contract by one of the parties. A termination represents the unilateral termination of the contract, in an emergency also against the will, but in any case without the will of the other party. In contrast to the termination agreement, the parties do not have to agree on this.

However, certain continuing obligations can only be terminated under certain conditions. This can be justified by the consideration that certain contracting parties - for example employees - are particularly in need of protection, so that the unilateral termination of the contract would be particularly harsh for them.

Classically, in these special cases, the termination requires a special reason for termination to be effective. In the case of the employment contract, for example, this could be repeated to violations of obligations under the employment contract. If there is no such reason for termination, a unilateral termination of the contract is not possible.

Termination by mutual consent through settlement/termination agreement

However, the parties are always free to terminate the contract by mutual consent. The mutual termination of a contract is called a termination agreement.

Termination agreements often involve severance payment - but severance pay is not mandatory. Especially in labour law, termination agreements combined with severance payments are very common. However, the parties should consider the consequences in detail before concluding a termination agreement.

Risk of not receiving unemployment benefit

In the case of an employment termination agreement, the employment relationship ends on the agreed termination date. A reason for termination is not necessary. However, there is another special feature in labour law or social law: if the employment relationship has been terminated by agreement, the employment agency can impose a so-called "blocking period" for unemployment benefit. This is because, according to section 159 German Social Code III (SGB III), the entitlement to unemployment benefit can be "suspended" due to conduct contrary to insurance law. Behaviour contrary to insurance law is to be classified as behaviour which has led the employee(s) to unemployment upon their own will. Self-inflicted behaviour is, on the one hand, the termination of the employment relationship by the employee himself/herself, but also the termination by the employer because of the employee's behaviour. In the opinion of the Employment Agency, however, unemployment is also self-inflicted if the employee "without any need" agrees to a termination agreement. However, the conclusion of a termination agreement (and thus possible unemployment) is not self-inflicted if the parties to the employment contract agree to a termination agreement in order to avoid dismissal. Because for the employee it is of course easier to apply if he/she has not been dismissed, has been employed continuously and has received a good job reference. In cases where the termination agreement is intended to precede a notice of termination, the Employment Agency shall not impose a blocking period if 1. the employment relationship could also have been terminated by notice of termination, 2. the notice of termination has been announced with certainty, 3. the notice of termination would not be obviously unlawful. 4. the date of termination under the termination agreement is not earlier than a date of termination possible by notice of termination, and 5. a severance payment of up to 0.5 monthly salary for each year of the employment relationship is paid to the employee(s) (in accordance with section 1a of the KSchG). Whether these conditions are met must be examined in each individual case.

Employees should therefore always check before concluding the termination agreement whether the above 5 criteria are cumulative - if after the conclusion of the termination agreement it turns out that a blocking period is imposed after all, the employee(s) has/have no claim against the employer(s) for compensation for any "damage" in this respect.