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

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In principle, a termination of employment is not necessarily a reason for the employee to despair. Especially not if the amount of severance pay received is high enough. But what exactly does the term severance pay mean? And what is the amount of severance pay to which an employee is entitled in the event of termination? We explain the terms in detail and what the employee has to do in the event of termination.

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 for the employee, the chances of the employer's willingness to pay a severance payment 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 has been dissolved. In all other scenarios, severance amounts and severance claims will be negotiated individually between the parties employee and employer. Termination and settlement agreements are a proven and commonly used means of achieving this. In court proceedings, the agreement is reached by means of a settlement. 

At this point, it is also worth mentioning that an employee's chance of receiving severance pay is particularly high if the employer cannot easily terminate 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 much is a severance payment as a rule?

Calculation of the potential settlement amount

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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 settlement 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 before the labor court through his lawyer and demands the following severance payment on 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."

Thus, if the employer terminates the employee for operational / business reasons and indicates in this termination a reference to severance pay, it is in principle possible for the employee to receive severance pay. However, this entitlement to severance pay presupposes that the employee has met the deadline for filing 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?

Why severance payments without legal entitlement?

Despite the fact that, except in very exceptional cases, there is no legal right to receive severance pay after an employee's termination by the employer, many employers are nevertheless willing to pay it to the employee. This is because in the vast majority of cases, the receipt of a severance payment is the result of complex and time-consuming 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, "disadvantage compensation settlements", "social plan settlements", settlements from severance agreements or even settlements pursuant to § 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."

Severance pay through a termination agreement

With regard to the conclusion of a termination agreement, the employee generally has no claim at all to the payment of a severance package, unless such a package has been negotiated between the employee, through his lawyer, and the employer. Granularly broken down, this means that a termination agreement represents a contractual agreement between the parties employee and employer, which declares the employment relationship terminated, but in contrast to the termination with the particularity that both negotiating parties must agree to this agreement. Since the employee must agree to this termination agreement, in such a case there is a particularly high chance for the employee to negotiate a particularly high severance payment with the employer.

Advantages and disadvantages of the settlement agreement

Pros / cons settlement

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Compensation for dismissal or severance settlement is the most common case of severance pay. In such a case, the employer agrees to pay a severance payment 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 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 receive severance pay. No lawyer's fees or court costs are incurred. Especially since the legal dispute can also be very nerve-racking and time-consuming for the employee.
  • High severance payments are possible. The economic risk is very high in the event of losing the dismissal protection proceedings due to a possibly invalid termination 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 of a severance payment

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

Definition quintuple rule

With the so-called quintuple rule, extraordinary income such as severance pay received as a result of a termination or the conclusion of a cancellation agreement is given preferential treatment under German tax law (Section 34 EStG). A one-time, high income, such as severance pay, is treated for tax purposes as if the recipient had received it evenly distributed over the next five years. This avoids a one-time excessive tax burden for the employee, because due to the tax progression, the tax rate would be significantly higher than if it had been spread over five years. To this end, a fifth of the one-time income is added to the taxable income when calculating the tax. The difference between this amount and the (normal) tax amount without one-time income is multiplied by five and results in the tax amount for the entire one-time 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. through a termination or the conclusion of a cancellation agreement, are exempt from social security contributions, since the overriding purpose of a severance payment is to compensate the employee monetarily for the loss of a job and thus of the associated income. However, there are also special cases, 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