We go into more detail below about how much severance pay is usually paid and whether social security contributions or income tax are due. We also tell you what you need to know about your entitlement to unemployment benefits, because you may be blocked from receiving them.
What is severance pay?
In employment law in Germany, the term severance pay is used to describe a one-time payment by the employer to his workers. The reason is mostly a Termination of employment and the severance pay is considered as compensation for your lost wages. It is mainly paid when an employment relationship is terminated prematurely rather than on notice, or when the employer wishes to avoid a dismissal protection lawsuit.
Whether you are entitled to severance pay depends on the individual case. The entitlement to severance pay in Germany is regulated by law. This means that in the event of dismissal, you may be entitled to and at least receive severance pay as compensation for the loss of your job.
Compensations are paid in the following cases:
- on the basis of a court or out-of-court settlement due to the effectiveness of a termination of the employment relationship
- on the basis of a termination agreement
- on the basis of a termination judgment by a labor court, because the continuation of the employment relationship is not reasonable
- due to legal regulations of § 1a KSchG
- for example, in the case of mass redundancies due to a social plan or a collective agreement
- due to a court decision because of the employee’s legal entitlement to compensation for disadvantages
When am I entitled to severance pay?
Employer forgives only in exceptional cases voluntarily Severance pay. Because you do not automatically receive a severance payment or a severance payment in an appropriate amount with every termination by the employer. For this reason, you should first of all Employment contract look. Sometimes there are regulations here about due severance payments.
In the case of termination agreements, severance pay is much more common. Should an employer terminate without cause, very often he offers you the payment of a severance package so that you agree to the termination of the employment contract. However, you should keep in mind that this may require the Suspension of unemployment benefits may result in.
If a termination takes place on the basis of a operational change or a Social plan, you are also entitled to a severance payment as compensation for the disadvantages you have suffered in this way. Nevertheless, you can of course Dismissal protection action Submit and sue for reinstatement or alternatively sue for a higher severance payment. In the case of a reinstatement procedure however, you are not entitled to severance pay.
Is the reinstatement for an employee by virtue of a court ruling not reasonable, the employer will usually also a severance pay must pay, the amount of which will be determined in the judgment. In the event of termination for operational reasons, some employers offer to pay a severance package if you do not file a lawsuit in return. In this case, the severance payment is already due after the expiry of the period for an action for protection against dismissal, which is usually three weeks.
Severance pay in the event of your own dismissal
If you quit yourself, for whatever reason, there are not entitled to severance pay. This also applies if the employer was the reason for the termination. Severance pay is only paid if the employer terminates the employment relationship. In a few special cases, severance pay is paid, for example, if the employer does not actually have a reason for termination and hopes that you will accept the termination with the severance pay.
You yourself can of course Termination agreement for example because you have new job in prospect have. Very often, this is the case if you have not met the statutory or contractually agreed severance payment you do not wish to observe the notice period. However, severance pay is not common in such cases, since the termination is on your own initiative and the employer accommodates you by shortening or waiving the notice period.
How much is severance pay?
How much severance pay you are entitled to may depend on your own Negotiating skills dependent. Because the amount depends on different factors from, for example:
- reason for the dismissal (are there sufficient reasons for dismissal?)
- Consequences of the loss of the job for the employee
- duration of employment
- Negotiation skills of the employee or his lawyer
If you have a good chance of winning an employment protection lawsuit that may take place, the severance pay larger off. This means that if there are doubts about the validity of the termination, you can expect a higher severance payment than if you can assume that a judge will also declare the termination legally valid.
There is a rule of thumb with which the Calculating the amount of severance pay lets. However, it only serves as a rough guide and reads:
Half of the last gross monthly salary x number of years of employment with the company
How exactly is severance pay calculated?
However, this is a completely rough guide, because the amount of the settlement is also depends on the age of the employee. This is to compensate for the chance of finding a new job. For example, the Hessian Labor Court has used the following formulas in the past:
- Age of employee up to 39 years: Gross monthly salary x 0.5 per year
- age of employee between 40 and 49 years: gross monthly salary x 0.75 per year
- age employee from 50 years: gross monthly salary x 1.0 per year
severance pay: Case studies with different starting situations
Severance pay can be due due to different situations and reasons. This is the case in the following examples:
1. Severance pay in the termination agreement
A termination agreement is legally to be treated like an employment contract. Because this is only valid if both parties (employer and employee) him signed have. Whereas in the case of an employment contract, the work is started, in the case of a termination agreement, the employment relationship is terminated, and in contrast to termination amicable and not unilaterally. In such a case, the severance pay is offered for the fact that the employee loses his job.
The severance pay is thus a Compensation payment for the financial disadvantages suffered by the employee due to the loss of the job. Severance pay is also offered by the employer in exchange for the employee’s does not go to the labor court and file an action for protection against dismissal.
If, for example, the employer terminates the employment without a termination agreement and the employee takes legal action against the termination, the labor court can determine in the legal proceedings that the termination by the employer is invalid. In most cases, the employer does not have to continue employing the employee, but a severance payment is still due. In addition, he must pay the salary in arrears up to the notice period decided by the court.
Even if the employee has no longer fulfilled his or her duties, the subsequent payment of wages is due. Thus, for the employer, a termination agreement is a safe option, which may even be financially advantageous for him, depending on how long the labor protection lawsuit lasts.
2. Severance pay in the event of termination for operational reasons
One of the most common reasons for termination is termination for operational reasons. This means that you are terminated because your losing his job. In order for the employer to be allowed to terminate your employment, for example, according to the Dismissal Protection Act, the following conditions must be met no further employment at another job is possible its. In addition, the employer must make a social selection and determine which of his employees must go first.
The employer can declare in the notice of termination that he will pay you a severance package in exchange for No action for protection against dismissal raise. The statutory protection against dismissal applies in the following cases not:
- There are fewer than ten employees in the company
- your employment contract has not yet existed for six months
In these cases, the employer can terminate your employment and there is no chance that you will be offered further employment or severance pay, even in the event of an action for protection against dismissal. However, if there is protection against dismissal, then very often the severance pay is voluntary paid by the employer. As a rule, you will receive half gross monthly salary per year of service with the company offered, whereby in the calculation a period of more than six months is rounded up and less than six months is rounded down.
3. Severance pay in dismissal protection proceedings
In the event of a dismissal protection lawsuit, there is also the possibility in certain situations that the judge will award you a severance payment in the event of dismissal. The maximum amount of the claim to the severance pay as well as to the salary is determined in the severance agreement determined by the judge.
By law, a maximum of twelve months’ earnings as severance pay to be determined. If the employment relationship has existed for at least 15 years and the employee is at least 50 years old, you are entitled to a maximum of 15 months’ earnings. For employees who are at least 55 years old and have been employed by the company for at least 20 years, the maximum severance payment is 18 months’ earnings.
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Which social security contributions are due on the severance pay?
Severance payments are, according to § 14 Abs.1 sentence 1 fourth social security code no earnings subject to social security contributions. Current and non-recurring income from employment is subject to social insurance contributions. No consideration is given to whether there is a legal entitlement to the payment and whether the payment was earned from the context or directly from employment.
A severance payment cannot be attributed to the period of employment, since it is paid when future earnings cease to exist. For this reason no social security contributions or. contributions to pension insurance, health insurance, nursing care insurance and unemployment benefits deducted.
If income tax is due on severance payments?
Until 2005, there were tax allowances for severance payments. However, since 2006, this tax advantage has been eliminated and severance pay are subject to full income tax liability. However, since this is a Exception income severance pay is better off in comparison to regular employment income.
Therefore, in the case of a severance payment, the so-called quintuple rule according to § 34 of the Income Tax Act is applied. It is also paid Five-fifths rule or five-fifths method called. The tax progression is intercepted a little with this regulation with a strongly rising tax burden. Due to the fact that the regular employment income is only increased by one fifth of the amount of the severance payment, the monthly tax due increases only a part.
This additional amount is quintupled and thus the tax is calculated as if it had been accrued in five months and not all at once. This results in a lower income tax payment burden, since the progression level is significantly lower. A rule of thumb says that the larger the severance payment and the higher the income, the lower the tax saving.
This Calculation can only then be applied, if it is a compensation in case of severance pay according to § 24 no. 1 a EStG is concerned. This refers to payments that a Compensation represent for lost income or for income that would still be received.
Does severance pay reduce the right to unemployment benefits?
Normally has a severance pay (except, however, unemployment benefit II) regardless of its amount no influence on your unemployment benefit. If, however, you agree to a settlement, for example, within the scope of a early termination of the employment relationship, so that the employer does not have to observe the statutory notice period, your severance pay is credited against your unemployment benefit is.
Even a severance payment in the context of a severance agreement or in the case of a Termination agreement can be adverse consequences have for you. This is because the employment office checks whether the severance payment has been paid as compensation for the fact that the employer has prematurely terminated its obligation to continue paying wages with the severance payment. However, if you have been given notice within the statutory period of notice, this will not have any negative consequences for you with regard to your entitlement to unemployment benefits.
When is severance pay due?
As a rule, a severance payment is agreed upon before the employment relationship is terminated. The reason lies in the notice periods that the employer has to comply with. If there are no special agreements regarding the maturity of the severance pay, the severance pay is only when the employee leaves the company and therefore with the last pay slip due.
However, this also means that if the due date is not brought forward, the severance payment will lapse if the employee dies in the meantime. Because this invalidates the claim to the severance pay. Therefore, the due date of the severance payment should be specified in the termination agreement, whereas in the case of a severance payment due to a dismissal protection lawsuit, the due date is immediate.
If there are no corresponding provisions in the termination agreement, the severance payment is thus due at the time of the end of the employment relationship. Only from this point in time is there also a claim to interest.
What do I have to consider as an employee?
If you agree on a severance payment with your employer, you should also consider your unemployment benefit entitlement. If you receive your severance pay or other compensation for not having terminated your employment within the notice period, you may have problems later on with unemployment benefits.
In this case, unemployment benefits will only be paid from the time when the employment relationship would have been terminated if the notice period had been observed. In this phase you are besides also not over the employment agency health insurance. In addition for you also the further social security contributions not continued to pay.
You are threatened with Blocking of unemployment benefits up to a period of twelve weeks, because the employment agency assumes that you have brought about your unemployment yourself. This results from your consent in the termination agreement, in which you agree to the shortening of the notice periods. By corresponding Formulations in the termination agreement you can avoid these problems.
When is a lawyer worthwhile?
A lawyer who specializes in labor law knows from his wealth of experience, what are the advantages and disadvantages and how you can reduce the disadvantages in case of a severance pay. In addition, the lawyer can, for example Negotiating the amount of severance pay and inform yourself about your rights and obligations.
What are the alternatives?
If you prefer to keep your keep your job the only alternative to a settlement is a legal Dismissal protection process. This you must within three weeks after receipt of the termination notice file a claim with the labor court. The process is also appropriate if you are the Amount of severance pay too low appears. Especially employees who do not have legal protection insurance very often shy away from the process because of the costs. In most cases, however, this is unjustified, because under certain circumstances you may also be entitled to a legal aid to.
Theoretically, you can file the action for protection against dismissal yourself, but this is not recommended. There is a Legal application, help you fill out the forms. In the event of a formal error, however, you cannot correct this later retroactively. Therefore it makes sense here Lawyer to assign.
In the context of the dismissal protection process, the judge can, for example, determine that the dismissal was unjustified and ensure that you get your job back.
A severance payment can be paid for various reasons. A Legal claim exists only if the severance pay is paid as compensation for the loss of a job. If you terminate the employment contract yourself or if the termination is not for operational reasons but because you have committed misconduct that justifies extraordinary termination, for example, you have no claim to.
The severance pay is free of social security contributions, but falls income tax to. Make absolutely sure that in the case of certain clauses in the termination agreement your unemployment benefit can be cancelled. Therefore, if in doubt, it is better to seek professional help from a Attorney.