Severance pay and termination agreement – two terms that belong closely together. As a rule, the severance payment is the biggest benefit that employees get from a termination agreement. We clarify the most important questions on this topic.
4 tips on severance pay in a termination agreement:
- There is no entitlement to severance pay in a termination agreement. You must negotiate.
- Only agree to the termination agreement if the severance pay is high enough from your point of view.
- You must make it clear to your employer why he cannot terminate your employment unilaterally and is therefore dependent on your consent to the termination agreement.
- The severance pay should usually be above 0.5 gross monthly salary per year of employment.
- Is there always a severance payment in the termination agreement??
- How much severance pay is included in the termination agreement?
- How to achieve the maximum severance pay in a termination agreement
- Does the severance pay reduce the unemployment benefit?
- Are social security contributions payable on the severance payment??
- This is how severance pay is taxed
1. Is there always a severance payment in the termination agreement??
No. It is not required by law that a termination agreement includes severance pay. Nevertheless, as a rule you should only sign if the employer offers a severance payment. This has the following background:
If your employer wants to part with you, there are two possible options. Either he gives notice or you voluntarily give up your job by means of a termination agreement. A termination depends on high preconditions and entails the risk of a lengthy and expensive termination process in court.
Employers try to avoid this by presenting you with a termination agreement. In it you voluntarily give up your job. This step is usually final. No protection against dismissal applies. No one can force you to agree – so why should you sign?? The answer lies in the severance pay. To make the termination agreement palatable to you, the employer offers you a one-time payment.
So when negotiating a termination agreement, you should withhold your consent until the employer is willing to pay a reasonable severance package. Which demands you can realistically make depends very much on the individual case. An experienced lawyer for termination agreements can help you here.
However, there are also cases where the employer does not offer severance pay. This is to be expected in these constellations:
- You yourself have proposed the termination agreement, z.B., Because you have found a new job. Since the employer has no interest in parting with you, he usually does not offer any severance pay.
- The employer could terminate your employment unilaterally without any problems. If he can be sure he would win a dismissal case, he will not pay severance pay. However, these cases are rare.
You can read more about the termination agreement without severance pay in the linked article.
2. How much is the severance pay in a termination agreement??
There is no blanket answer to this question. In practice, however, the following rule of thumb has become accepted for the amount of severance pay:
0.5 gross monthly salary x number of years of employment with the company
However, please note: This formula gives at best a first rough orientation. Experience shows that employers are willing to pay much higher amounts in many cases. This shows the following case from practice.
The client represented by us had been employed by his employer as head of sales for only one year. The average gross monthly salary was approx. 20.000,00 €. The employer had terminated the employment relationship with due notice without a real, viable reason for termination according to the German Protection Against Dismissal Act (Kundigungsschutzgesetz).
The out-of-court negotiations, in which the employer would have had to pay a settlement in the amount of the o.g. Rule of thumb offered, led to no result.
After filing a lawsuit with the labor court, we were able to negotiate a settlement with the employer in the conciliation hearing, according to which the employer was obligated to pay a severance payment of 70.000,00 € was obligated.
This amount is exorbitantly higher than the average of comparable cases. If the "rule of thumb" mentioned above had been applied, the severance payment would have amounted to 10.000,00 € amount. However, since the employer had a very high interest in the termination of the employment relationship and our client had an excellent "best alternative", namely the continuation of the employment relationship, the employer was finally forced to accept the settlement. Loss of the legal dispute and the associated obligation to continue employment would not only have been associated with an enormous loss of image for the employer, but would also have been significantly more disadvantageous economically.
3. How to obtain the maximum severance pay in the event of a termination agreement
As already indicated, the settlement amount depends crucially on negotiating skills. As a rule, the employer will present a termination agreement and threaten you with termination if you do not sign it.
Now you have to convince the employer that a dismissal would not stand up in court. It must become clear to the employer that the termination agreement is the only safe option to part with you. Few employers want to engage in a lengthy termination process with an uncertain outcome. If you are proven right in court, the employer must not only pay you all of the back pay, but also reinstate you on top of that.
As a layman, you will hardly be able to convince your employer that a dismissal would be unlawful. In order to achieve the maximum severance payment in your termination agreement, you should therefore consult a lawyer experienced in severance payments. Mr. Gradl is a specialist attorney for labor law and has already enforced numerous attractive settlements.
Classic reasons for an unlawful termination and thus a high severance payment are:
- In the case of a dismissal for operational reasons, the employer must first give notice to the employees who are socially least worthy of protection. With this sog. Employers repeatedly make mistakes in social selection.
- If the employer wants to part with you because of an allegation of conduct, he must generally issue warnings before terminating the employment contract.
- A dismissal due to illness also depends on high requirements. This is why an attractive severance package is often available in a severance agreement for health reasons.
- The protection against dismissal of severely disabled persons, works councils, parents on parental leave, pregnant women and some other groups of persons is particularly good. In this case, it is even more difficult for the employer to terminate the contract. Accordingly, the severance pay should be z.B. In the termination agreement with a severely disabled employee fails.
In some cases, the severance pay can be increased further by agreeing a so-called. sprinter clause. You will receive a higher amount if you leave the job before the agreed date. This is an option if you have already found a new job at this time. The employer thus saves social contributions and salary payments. Part of this saving goes to you in the form of increased severance pay.
We advise you.
Attorney Georg Gradl is an expert in termination agreements and an experienced specialist in labor law. Feel free to send us your questions by e-mail or give us a call.
We offer you a competent initial consultation, which also includes a review of your documents, for a flat fee of €250.00 plus. VAT. at.
If you would like us to take on your case after an initial consultation, we will of course discuss the expected further costs and the possibilities of having the costs covered by legal expenses insurance or by the employer with you before we take on the case.
4. If the severance pay reduces the unemployment benefit?
As a rule, this is not the case. Whether you receive a severance payment is usually irrelevant for unemployment benefits. However, note the following important exception:
If you agree on an exit date in your termination agreement that is earlier than the expiration of the notice period, you must expect a so-called. Calculate rest period.
Example: Assuming your notice period is three months to the end of the month (your actual notice period can be found in § 622 BGB or in the collective bargaining agreement/employment contract). Am 4.5. sign a termination agreement. If your employer had given you notice on that day, you would not have left the company until the end of August. In the termination agreement, agree on an exit date before the 31st month.8., the employment agency generally imposes a sog. Rest period.
This suspension period means that you will not receive unemployment benefits until later. In principle, you are entitled to the benefit only from the time when your notice period expires (in the example of the 1.9.). However, you must waive a maximum of 60% of your severance payment amount. The rest period can therefore also be shorter.
Please also note that after a termination agreement with a high severance payment, there is a greater risk of developing a so-called "back pain". Have to accept a blocking period.
You can find out more about the blocking period and suspension period in our article on unemployment benefits after a termination agreement .
5. Are social security contributions payable on the severance payment?
No, as a rule, severance pay is exempt from social security contributions.
However, this does not apply to severance pay. "fake settlements". These are one-time payments that are not to be understood as redundancy compensation, but rather as compensation for outstanding claims arising from the employment relationship. Classic cases are:
- Payment of outstanding wages
- Compensation for remaining leave
- Overtime compensation
Social contributions must be paid on these payments.
In addition, you have the option of voluntarily paying your severance pay into the pension insurance scheme. This may reduce pension reductions if you wish to retire before the actual retirement age. You may also benefit from tax advantages.
6. This is how severance pay is taxed
You must pay taxes on the severance pay. Unless you are already subject to the highest tax rate, the high one-time payment often leads to an increase in your tax rate. You will have to pay significantly more taxes on the settlement than on the rest of your wages.
You can smooth out this effect as far as possible by taking advantage of the so-called "suspension period". Apply for the one-fifth rule in your tax return. After that, your severance pay will be taxed as if it had been paid out over five years.
- The tax burden for the regular wage is calculated.
- The tax burden for the regular salary + 1/5 of the severance pay is calculated.
- Now you have to make up the difference between these two tax charges.
- This amount is multiplied by five. This is how the tax burden for severance pay is calculated.
The prerequisite for the applicability of the one-fifth rule is that the severance payment is paid within one calendar year.
- The severance pay in the termination agreement is a matter of negotiation. The more difficult it is for the employer to give notice, the higher the amount should be.
- In order to maximize your settlement amount, you should make it clear to the employer why termination is not an option and why they are relying on your approval. Leave this to an experienced attorney for labor law.
- The severance pay only reduces your entitlement to unemployment benefits if your employment contract ends before this would be possible in the course of a dismissal. However, after a termination agreement, there is often the threat of a so-called overtime payment. Blocking period.
- The severance pay is exempt from social insurance. However, it is taxable. The quintuple rule reduces your tax burden.
We advise you.
Attorney Georg Gradl is an expert in termination agreements and an experienced specialist in labor law. Feel free to write us your questions by e-mail or call us.
We offer a competent initial consultation, which also includes the examination of your documents, for a flat fee of 250,00 € plus. VAT. to.
If you wish to instruct us to take on your case after an initial consultation, we will of course discuss the further costs to be expected and the possibilities of costs being covered by legal expenses insurance or by the employer with you prior to the mandate.