Severance Pay in Employment Law – Definition, Entitlement, and Amount

What is Severance Pay?

Severance pay is a one-time financial compensation paid by an employer to an employee upon termination of employment. It serves to compensate for the loss of a job and is often negotiated in the context of dismissals or termination agreements.

Attorneys Dimitrov and Filippatos can help you in your severence payment case in Germany.

Additionally, individuals who are not classified as direct employees but are subject to social security contributions may also be entitled to severance pay. This often applies to external managing directors of a GmbH. Severance pay should be distinguished from compensation claims of commercial agents under § 89b of the Commercial Code (HGB), which constitute a separate financial arrangement.

Do Employees Have a Right to Severance Pay Upon Dismissal?

In principle, there is no statutory right to severance pay, even in the case of employer-initiated dismissals. It is often mistakenly assumed that employees automatically have a right to severance pay when they are dismissed, but this is not the case. Similarly, it is incorrect to assume that employers are always obliged to pay severance pay with every dismissal.

Under What Conditions Does an Entitlement to Severance Pay Exist?

There are several exceptions where employees can claim severance pay. Such provisions can be found in:

  • Social plans,
  • Collective bargaining agreements,
  • Managing director contracts,
  • Individual employment contracts.

Additionally, severance pay can be agreed upon voluntarily between employer and employee, for example through:

  • A termination agreement with severance pay provisions,
  • A settlement agreement with severance pay provisions.

Another special case is severance pay under § 1a of the Protection Against Dismissal Act (KSchG). If an employer offers severance pay in connection with a dismissal for operational reasons and the employee waives a lawsuit for protection against dismissal, an entitlement to the agreed severance pay arises.

Does a Lawsuit for Protection Against Dismissal Lead to Severance Pay?

Employees have the right to contest their dismissal. However, a lawsuit for protection against dismissal does not automatically result in the payment of severance pay. The purpose of such a lawsuit is to establish the invalidity of the dismissal so that the employment relationship continues to exist.

In practice, however, employers often offer severance pay to avoid lengthy legal disputes, especially when the chances of success of the lawsuit are high. Theoretically, an employer may also be ordered by a court to pay severance pay under §§ 9, 10 KSchG if continuing the employment relationship is unreasonable for the employee – but this is rare.

When Are Claims for Severance Pay Promising?

The amount of severance pay largely depends on the legal security of the employment relationship. The stronger the protection against dismissal, the higher the severance payment can be.

Example: An employee with special protection against dismissal as a member of the works council is dismissed for operational reasons. Due to the high legal hurdles for such a dismissal, they have very good prospects of success in a lawsuit for protection against dismissal. In this case, the employer may offer substantial severance pay (e.g., one to two years‘ salary) to achieve a mutually agreeable solution.

How Can a Law Firm Help with Severance Pay?

A law firm specializing in employment law can advise and support both employees and employers, particularly in:

  • Assessing the protection against dismissal,
  • Negotiating an appropriate severance package,
  • Drafting and reviewing termination agreements,
  • Litigating or defending severance pay claims.

An experienced lawyer will help in making economically sensible decisions, minimizing legal risks, and realistically assessing the potential amount of severance pay.

What is the Typical Amount of Severance Pay?

As a general rule, severance pay is usually between half and a full gross monthly salary per year of employment. However, this can vary significantly depending on the industry, the reason for dismissal, and the negotiation situation.

Example: An employee with ten years of service and a gross monthly salary of €3,000 could expect severance pay between €15,000 and €30,000.

Social Security and Tax Implications of Severance Pay

Severance payments are not considered wages under § 14 of the Social Security Code (SGB IV) but rather compensation for the loss of a job. Therefore, no social security contributions such as pension, health, unemployment, or long-term care insurance are deducted. As a rule, employees retain their full entitlement to unemployment benefits.

An exception applies when an employee leaves before the expiration of the notice period. In such cases, the Employment Agency may impose a waiting period on unemployment benefits, as it assumes that the employee voluntarily ended the employment relationship in exchange for severance pay.

Furthermore, if severance pay significantly increases the employee’s annual gross income, they may fall into a higher tax bracket. To reduce the tax burden, the „fifth rule“ (Fünftelregelung) may apply, which spreads the tax burden over five years, provided the severance pay is paid as a lump sum.

Conclusion

Negotiating severance pay requires a strategic approach and in-depth legal knowledge. Professional legal consultation can help achieve the best possible results, whether through negotiation or litigation.

For an individual assessment and expert assistance, the employment lawers at LAWMUC are available. Contact us for a free initial consultation!