Severance pay in labor law

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Severance pay in the event of termination and termination agreement

Law firm for labor law in Kerpen, Cologne and Witten

Lawyer for - Labor Law | Criminal Law | IT Law | Data Protection

In principle, termination of employment is not necessarily a reason for the employee to despair. Especially not if the amount of compensation they receive is high enough. But what exactly does the term severance pay actually mean in employment law? And how much severance pay is an employee entitled to in the event of dismissal? We explain the terminology in detail and what the employee has to do in the event of dismissal.

What exactly is severance pay?

Definition according to German labor law

A so-called severance payment is permitted under the German Labor law defined as a one-time cash payment by the employer to the employee and is usually made in connection with the termination of employment by the employer or the conclusion of a termination agreement. The statutory severance payment, to which, however, there is an actual legal claim only in extremely rare cases, is the so-called standard severance payment.

How to get severance pay as an employee?

Conditions for severance pay

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In principle, according to German Labor lawthat there is no legal entitlement to receive severance pay. Unless these are separately regulated and agreed in the form of contracts, e.g. collective agreements, social plans, individual employment contracts or management contracts. However, some companies / employers may also make so-called voluntary payments of severance pay as a result of negotiations in relation to settlement or termination agreements.

A legal regulation on this subject can only be found in § 1a of the KSchG (Dismissal Protection Act). According to the legal wording, an employee is only entitled to payment of a severance payment if the employer has given notice of termination for operational reasons to the employee and the employee is entitled to a severance payment if the employer fails to give notice of termination for operational reasons. Preclusion-, lawsuit period offers a compensation payment.

The exception to this, however, is § 1a of the KSchG (Dismissal Protection Act), since the purpose of this is that no lawsuit is filed. In principle, however, it should be noted that even if the special Protection against dismissal does not apply to the employee, the chances of the employer being willing to pay recompensation are not extinguished. However, this presupposes that the employee has experienced legal support in negotiating this with the employer. One on Labor law specialized lawyer.

For each Legal action against dismissal also causes costs on the employer's side, which are often higher for the employer than the settlement sum demanded by the employee and thus offers a high chance for the employee that a settlement will be paid to him after all. In addition, there is the risk of default of acceptance for every employer, which means that the employer is obligated to pay all outstanding salaries in the event of losing the lawsuit.

Under what conditions am I entitled to severance pay?

The 2 cases of the legal claim

1st case:

If the employer has given the employee notice of termination for operational reasons and has informed the employee that if the notice period is not observed, the employee is entitled to receive severance pay (§ 1a of the KSchGDismissal Protection Act).

2nd case:

If, upon the employee's request or the employer's request by the labor court, the employment relationship between the parties is terminated after § 9 KSchG was dissolved. In all other scenarios, amounts and claims will be negotiated individually between the employee and employer. Termination and settlement agreements are an effective and commonly used means of doing this. In court proceedings, an agreement is reached by means of a settlement. 

At this point, it should also be mentioned that the employee's chances of receiving recompensation are particularly high if the employer cannot easily dismiss the employee.

Cases in which the employee is not entitled to severance pay

The following scenarios completely exclude the entitlement to a severance payment or the assertion of this entitlement, or make it considerably more difficult to reach an agreement on this:

  • Extraordinary termination
  • Termination during the probationary period
  • Behavioral termination
  • Termination for personal reasons

How high is a standard settlement?

Calculation of the standard settlement

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In principle, it should be noted here that according to German Labor law there is a legal entitlement to severance pay for the employee in the event of termination, but the question of whether severance pay is paid to the employee and how much is clearly a matter of negotiation. In most cases, we negotiate the highest possible severance payment for our clients. Therefore, it is also indispensable to engage a specialist for this activity.

The so-called standard compensation is determined or calculated by a simple formula. Which is as follows:

Number of years of employment x 0.5 x the employee's gross monthly salary. In order to achieve a higher amount, your lawyer must negotiate hard with the employer.

One example:
An employee has been employed by his employer for 20 years. The employer terminates this, the employee files a Legal action against dismissal to the labor court through his lawyer and demands the following amount for a gross monthly salary of 3,000 euros:

30,000 euros (20 years of service x 0.5 x 3,000 euros gross monthly salary)

However, the factor of 0.5 can be negotiated upwards depending on the age, the content of the employee's activity and many other factors. However, this requires a profound knowledge of the German Labor Lawwhich is why you should definitely put such a process in the hands of a specialist.

How high is the severance payment entitlement in the event of termination for operational reasons?

Termination for operational reasons

In the event of termination for operational reasons, the employer is not obliged to pay the employee any severance pay at all. According to § Section 1a of the KSchG (Dismissal Protection Act) the right to payment of severance pay is subject to very specific conditions, which must be fulfilled in order to claim it. The text of the law provides the following:

"If the employer terminates the employment contract due to urgent operational requirements after § 1 Para. 2 Sentence 1 and if the employee raises a claim by the expiry of the deadline of the § 4 sentence 1 no action for a declaration that the employment relationship has not been terminated by the notice of termination, the employee shall be entitled to severance pay upon expiration of the notice period."

If the employer terminates the employee for operational reasons and makes reference to severance pay in the notice of termination, it is generally possible for the employee to receive severance pay. However, this claim for recompensation presupposes that the employee has met the deadline for submitting a Legal action against dismissal has elapsed. In the case of termination for operational reasons, the calculation formula of the standard severance payment is also used to calculate the severance payment amount, as in the examples already mentioned. Here, too, the calculation factor can be further increased by various details and contents of the employment relationship, if necessary.

Why are severance payments agreed even though the employee has no legal right to them?

Legal entitlement to recompensation

Despite the fact that, except in absolutely exceptional cases, there is no legal right to receive a severance payment after an employee has been dismissed by the employer, many employers are nevertheless prepared to pay such a payment to the employee. This is because in the vast majority of cases, the receipt of a severance payment is the result of extensive and complex negotiations between the employee and the employer. However, there are also special cases in which the employee is actually entitled to receive a severance payment. These are, for example, "compensation for disadvantages", "social plan severance payments", severance payments from severance agreements or even severance payments in accordance with § Section 1a of the KSchG (Dismissal Protection Act). It should be noted, however, that contractually agreed severance and compensation claims mainly occur in the case of contracts with senior executives.

But why pay employers compensation when they are not obliged to pay it? The explanation is quite simple.

In the event of an employee's termination by the employer, the employer shall always have the option of a Legal action against dismissal at the competent labor court, as long as the preclusion period is observed. In the context of this legal dispute, the employer also incurs costs, as it is usually represented by a lawyer, as well as court costs, and the competent court also examines and decides whether the termination of the employee was lawful or not. The employer also runs the risk of losing the case, because if the employer loses the case, the employment relationship between the employer and the employee is deemed never to have ended, and the employer must therefore also pay wages/salaries for this period.

Since such Litigation against dismissal can drag on for months or even years in some cases, this is an economic risk for employers/entrepreneurs that should not be underestimated. For this reason, both sides, employee and employer, are best advised to reach a settlement as quickly as possible, ideally out of court, but at the latest in court. This also saves time for the courts.

So, as already mentioned, the economic risk associated with a Dismissal protection proceedings for the employer by paying the dismissed employee a severance payment as quickly as possible or reaching an agreement on this.

Excerpt from termination for operational reasons in connection with severance pay § Section 1a of the KSchG (Dismissal Protection Act):

"(1) If the employer terminates the employment relationship due to urgent operational requirements in accordance with Section 1 (2) sentence 1 and the employee does not bring an action for a declaration that the employment relationship has not been terminated as a result of the termination by the expiry of the period of notice in accordance with Section 4 sentence 1, the employee shall be entitled to severance pay upon expiry of the period of notice. The claim requires the employer's indication in the notice of termination that the termination is based on urgent operational requirements and that the employee can claim severance pay if the period for bringing an action expires.

(2) The amount of the severance payment shall be 0.5 months' earnings for each year of the existence of the employment relationship. § Section 10 (3) shall apply mutatis mutandis. In determining the duration of the employment relationship, a period of more than six months shall be rounded up to a full year."

Advantages and disadvantages of the settlement agreement

Severance pay through a termination agreement

A termination agreement is an agreement between the employer and employee that terminates the employment relationship by mutual consent. In contrast to a notice of termination, a termination agreement offers the opportunity to negotiate the terms of termination individually. These include the amount of severance pay, release from work duties and other aspects such as the issuing of a favorable reference. The flexibility of a termination agreement can be advantageous for both parties, but it also harbors risks that are difficult to understand without legal advice.

Legal aspects

The legal basis for termination agreements is anchored in employment law. A key point is the right of revocation, which enables the employee to revoke the contract within a certain period of time. There is also the possibility of rescission in the event of demonstrable error or deception. A lawyer can check whether all legal requirements have been met and whether the contract is advantageous for the employee.

Right of withdrawal and rescission

The termination agreement is a mutually agreed termination of the employment relationship and is therefore subject to the general rules of civil law. This means that the employee can revoke or contest the contract under certain conditions. Revocation is possible if the contract was concluded under pressure or in a surprising situation. Rescission is also possible if the employee can prove that they were tricked or misled into signing the contract.

Severance pay and unemployment benefit

A key component of many severance agreements is the severance payment. The amount of severance pay can be freely negotiated, but there is no legal obligation on the part of the employer to make a severance payment. It is important to consider the tax aspects of the severance payment. An incorrectly negotiated severance payment can also have an impact on unemployment benefit. Unemployment benefit may be suspended if the termination agreement was concluded on disadvantageous terms for the employee.

Pitfalls regarding the conclusion of termination agreements

There are several critical points that should be taken into account in a termination agreement. The amount of severance pay is only one aspect. More important are often the conditions associated with the unemployment benefit, such as blocking periods, which can be triggered by a poorly negotiated contract. The clauses in the contract should also be checked carefully to ensure that no obligations are entered into that later prove to be disadvantageous.

Blocking periods for unemployment benefit

One aspect of termination agreements that is often overlooked is the possible suspension of unemployment benefit. If the employee agrees to the termination agreement without good cause, the employment agency can impose a suspension period of up to twelve weeks. This blocking period can lead to financial bottlenecks and should therefore be taken into account during negotiations. A lawyer can help to draft the contract in such a way that the risks of a blocking period are minimized.

Favorable reference

Another important point is the reference letter. The termination agreement should contain a clause that guarantees the employee a favorable and qualified reference. Such a reference is of great importance for future job applications and can have a significant impact on the employee's chances on the job market. The lawyer can ensure that the wording of the reference is included in the contract and is in the interests of the employee.

Leave of absence and remaining vacation

The issue of time off and remaining vacation is also a critical point. Employees often want to be released from work after signing a termination agreement so that they can concentrate on their job search. The contract should therefore clearly regulate whether the employee has to work until the end of the notice period or is released from work and to what extent the remaining vacation is compensated.

Special clauses in the termination agreement

Termination agreements can contain a large number of clauses that appear insignificant at first glance, but can have significant consequences. These include non-competition clauses, repayment clauses and confidentiality provisions.

Non-compete clauses

A non-competition clause can prevent the employee from working in a similar industry or for a competing company for a certain period of time after the end of the employment relationship. This clause can significantly restrict the job search and should therefore be carefully examined. A lawyer can help to negotiate or, if necessary, mitigate non-compete clauses.

Repayment clauses

Some termination agreements contain clauses that oblige the employee to repay severance pay if they do not meet certain conditions. This may be the case, for example, if the employee starts a new job before a certain period of time has elapsed. Such clauses can be disadvantageous for the employee and should be checked carefully in advance.

Non-disclosure agreements

Non-disclosure agreements are often part of termination agreements. They oblige the employee not to disclose any confidential information about the company. While such agreements are often standard, the employee should ensure that they do not contain any unreasonable restrictions.

The termination agreement for special groups of people

Certain groups of people, such as severely disabled persons, pregnant women or works council members, enjoy special protection and special regulations apply to termination agreements.

Severely disabled employees

Special regulations apply to severely disabled employees when concluding a termination agreement. Employees should inform themselves about their rights and, if necessary, involve the integration office in the negotiations in order to avoid disadvantages.

Pregnant employees

Pregnant employees have special protection against dismissal. However, a termination agreement can still be concluded if the employee is fully informed and agrees to the agreement voluntarily. Here too, legal advice is recommended to ensure that all rights are safeguarded.

Works Council members

Works council members also enjoy special protection against dismissal. The conclusion of a termination agreement is possible, but should be carefully examined to ensure that no unlawful means of pressure have been used.

The termination agreement offers both employers and employees the opportunity to terminate the employment relationship in a flexible manner. It is important to carefully examine both the legal and tax aspects in order to avoid disadvantages. An experienced lawyer can provide valuable support and ensure that the contract contains the best possible conditions for the employee. Whether severance pay, unemployment benefits or special clauses - a thorough examination and negotiation of the termination agreement are crucial for a successful conclusion.

Advantages and disadvantages of the settlement agreement

Pros and cons

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Compensation for dismissal or severance pay is the most common form of severance pay. In such a case, the employer agrees to pay compensation to the employee leaving the employment relationship by giving notice or concluding a termination agreement. Of course, only in the case of the employee's declaration of consent to the termination of the employment relationship.

To what extent should the employee actually agree to the settlement?

Per Settlement:

  • Most cost-effective settlement option for the employee to obtain the highest possible amount. There are no lawyer's fees or court fees. Especially as the legal dispute can also be nerve-wracking and time-consuming for the employee.
  • High amounts are possible. The economic risk is very high in the event of losing a dismissal protection case due to a possibly invalid dismissal or similar and benefits the dismissed employee.
  • As a rule, the issuance of a favorable job reference is also part of these negotiations.

Contra Settlement:

  • The conclusion of a settlement should be well-considered and checked, ideally by a specialized lawyer, as the content cannot be corrected after the conclusion of this agreement.
  • There is a risk that the payment of a severance package will lead to a 3-month blocking period at the responsible employment office, whereby the employee loses his entitlement to unemployment benefits for this period. In some cases, the blocking period can be even longer.

What is a default of acceptance and the associated default of acceptance wages?

Definition of Default of Acceptance / Default of Acceptance Wage

The definition of default of acceptance and the related default of acceptance wage is as follows. The default in acceptance according to § 615 BGB arises when the employee offers his labor to the employer, but the employer does not call upon it.

Example:
An employee is no longer employed in the company by his employer after notice of termination has been given. The employee files an action for protection against dismissal and, after the end of the action for protection against dismissal, the court finds that the employer's dismissal is invalid. Accordingly, the employment relationship between the employee and the employer continues to exist retroactively, including the period of the legal proceedings. Thus, the employee has a claim against the employer for the so-called acceptance delay wage, the wage for the entire period between the termination and the end of the legal proceedings. Since in particularly serious cases such negotiations or legal proceedings can last for years, the employee is entitled to a great deal of money in the event of a claim for default of acceptance wages.

A severance payment must also be taxed

Taxation

Employees whose employment relationship ends due to termination or the conclusion of a termination agreement and who receive a severance payment as a result must always pay tax on this in full. However, it is possible to apply for a tax reduction via the so-called fifths rule, provided that the full severance payment was paid out in one calendar year. However, severance payments are always exempt from social security contributions. However, solidarity surcharge and church tax still apply.

Definition quintuple rule

Under German tax law, extraordinary income such as severance pay received as a result of a termination of employment or the conclusion of a termination agreement is favored with the so-called fifth rule (Section 34 EStG). A one-off, high amount of income, such as severance pay, is treated for tax purposes as if the recipient had received it evenly over the next five years. This avoids a one-off tax burden that is too high for the employee, as the tax rate would be significantly higher than if it had been spread over five years due to tax progression. For this purpose, one fifth of the one-off income is added to the taxable income when calculating the tax. The difference between this amount and the (normal) tax amount without one-off income is multiplied by five to give the tax amount for the entire one-off income.

In which case is the severance pay not exempt from social security?

First of all, all severance payments that arise in connection with the termination of an employment relationship, e.g. due to a dismissal or the conclusion of a termination agreement, are exempt from social security contributions, as the overriding purpose of a severance payment is to compensate the employee monetarily for the loss of a job and thus the associated income. However, there are also special cases here, scenarios in which this is fully subject to social security contributions. The same applies to the payment of health insurance contributions.

These are as follows:

  • In the event of termination by the employer due to a change in circumstances
  • In the event of the expiry of a fixed-term employment contract
  • In the event of a transfer of operations
  • In the event of retirement
  • In the case of payment of leave compensation for leave not taken but to which the employee is entitled

Have you been terminated or received a severance agreement from your employer?

Then contact us

+49 (0) 2273 - 40 68 504

info@kanzlei-baumfalk.de

Law firm for labor law in Kerpen, Cologne and Witten

Lawyer for - Labor Law | Criminal Law | IT Law | Data Protection

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