Severance pay in the event of dismissal: this is how entitlement is regulated

It’s to compensate for the job loss and the temporary financial limitations that come with it. Nevertheless, it is not true, as many employees still believe, that severance pay in the event of termination is always customary.

On the contrary, the payment of severance pay is still not a must for the employer. It is not a legally defined rule, but rather an exceptional case. Generally, the employee is not entitled to a severance payment, even if many employees believe this again and again.

Severance pay in the event of termination: In the cases there’s a severance pay

In principle, however, there is nevertheless a regulation that governs the payment of severance pay on termination for the individual case: Among other things, severance pay can be paid if the employer is legally obligated to do so.

In addition, a legally binding claim to severance pay in the event of termination can arise from social compensation plans, collective agreements or even the employment contract. If this is not the case, there is still the case of severance pay with reference to § 1a of the Dismissal Protection Act (Kundigungsschutzgesetz) in the event of termination for operational reasons.

In the case of ordinary termination, the employee has a good chance of receiving severance pay. (#01)

Entitlement to severance pay in the event of termination

According to a study by the Bertelsmann Foundation, two thirds of Germans still believe that the right to severance pay in the event of termination is governed by the Severance Pay Act.

Such a regulation does not exist however up to now at all . Rather, a severance package is a voluntary benefit to which there is no legal entitlement.

From this theoretical situation, two questions then arise in practice that are frequently asked in the case of a severance payment:

  • How is it that companies often pay a severance payment upon termination of employment?
  • Why does it happen in the course of a dismissal protection process that the parties agree on the payment of severance pay?

The answers are obvious: If the employee who has been dismissed files a lawsuit against the dismissal, which is called an action for protection against dismissal, his employer runs the risk of losing the corresponding action for protection against dismissal.

In practice, there are then also numerous reasons why the employer can lose the lawsuit:

  • The vast majority of terminations by an employer are legally contestable.
  • Employee protection laws and judicial rulings determine the termination of employment.
  • If the employer were to lose the dismissal protection lawsuit, his attempt to separate from the employee would have failed as well.
  • After the failed termination, he would have to continue to employ the employee.
  • With this result, the company reaches a solution that is hardly desirable.

Infographic: Severance pay – How much money is there in the event of dismissal? (Average amount of severance pay, by number of employees)

Severance pay with dismissal protection proceedings

In most cases, therefore, a settlement is reached between the employer and the employee in the course of an action for protection against unfair dismissal: the opposing parties agree in this settlement that the employment relationship will end as a result of the termination. In return, the company pays the employee a severance payment. This also means that the employer buys his freedom by paying the severance pay in the notice of termination.

Special cases of severance pay in the event of termination

Social compensation plans, which are valid, for example, under Section 112 of the Works Constitution Act, are negotiated agreements between the employer and the works council "on the compensation or settlement of the redundancies". The mitigation of economic disadvantages for employees caused by a planned change in operations".

The regulation defines a change of operation as a reorganization or a restriction of the operation, which can even be a closure of the operation or, in individual cases, of one or another department.

In addition, severance pay in the event of termination may still be regulated in the collective bargaining agreement or employment contract, which gives the employee the right to receive it.

The way to a severance pay in case of termination

Even if the individual has no legal entitlement to a severance payment in principle, there are reasons that are considered to be conditions for paying a company severance payment:

  • An action for protection against dismissal must be brought against the employer. This is because if there is a notice of termination against which an action for protection against dismissal is not filed within a period of three weeks, it becomes legally effective after the expiration of this period. Practically, the three-week period according to. § Section 4 of the KSchG takes effect on the date of receipt of the notice of termination.
  • If no action is taken against the dismissal and the three-week period is missed without any action, the dismissal becomes legally binding. It can no longer be challenged.
  • The employment relationship thus ends irretrievably. Why should the employer then still pay his former employee a severance payment?
  • For the company, there must be a risk of losing the lawsuit. This can still be so small.

Video: Severance pay in the event of termination? Tips from attorney Kinder Wurzen

Willingness to pay a severance package

Apart from the loss of image for the enterprise such a compensation costs finally much money. On the other hand, the employer must fear that he will have to continue to employ and pay his employee. In addition, there is the additional risk of having to pay the compensation up to the time when the judgment is issued in the dismissal protection proceedings.

Thus, if the employer adds up the consequential costs that arise for him in the event of a negative outcome of the dismissal protection proceedings, he will probably quickly realize that the payment of a severance package is the more favorable alternative for him! So more and more companies are prepared to pay severance pay.

Tips in the event of termination for operational reasons

What chance does the individual have of obtaining the highest possible severance payment? When can it be worthwhile to appeal against a dismissal for operational reasons?? Before answering these questions, it is first necessary to explain what a termination for operational reasons is.

The following applies to this: for operational reasons, this means that it is no longer possible for the company to continue employing the employee due to urgent operational requirements. Here, too, the following applies in principle: The employee has no general claim to severance pay.

With reference to § 1a of the Dismissal Protection Act, however, the employer can promise the employee severance pay in the notice of termination on condition that the employee does not bring an action for protection against dismissal. Then the employee and his employer wait for the three weeks and subsequently receive a severance payment in the legally prescribed amount.

Infographic: Severance pay – How much money is there in which industry?? If the severance payment amount depends on the industry?

This is how severance pay is calculated

If the employer agrees to a severance pay in case of termination, it is calculated as follows: For each year of service with the company, half a gross monthly salary is generally applied.

Years that have begun but not been completed are rounded up to whole years, provided that more than six months have passed. Paragraph 1a of the KSchG even stipulates the following for termination for operational reasons! With a little negotiating skill, however, significantly more can be negotiated!

Explanatory example:

The employment relationship ended on 1. July 2007 and is due to expire on 31. January 2018 be terminated due to "urgent operational requirements". This means that the employee was in the company for a total of nine years and seven months.

For the calculation seven months are rounded up to the full year. With a monthly gross amount of 2500 euros, the severance payment makes 12.500 euros from.

So there is a voluntary severance pay

In principle, most companies are not prepared to pay money to a departing employee voluntarily. However, there are situations in practice where the employer uses the money as a kind of lure.

For what reason? The answer is usually the following: Either the company wants to use it to terminate or. Obtain consent to a termination agreement. Or there is misconduct on the part of the employee as well as the closure or outsourcing of departments or a decline in sales that has existed for a long time. In all cases, the employer will use a severance payment to try to dissuade his employee from taking legal action against dismissal.

Influence of severance pay on unemployment benefits

In most cases, such as termination for operational reasons, the severance payment has no effect on unemployment benefits. What applies differently, however, if the employee has signed a termination or settlement agreement.

Then the Federal Employment Agency is of the opinion that the termination is a self-induced unemployment and a twelve-week blocking period is to be ordered, during which no unemployment benefits may be drawn. Under certain circumstances, the severance payment may even be credited against unemployment benefits.

From therefore it is again stressed that it is very important to keep the so-called three-week period for the complaint against dismissal to raise. If this is missed, the chance of a severance payment is considerably reduced.

Severance pay in the event of termination can be calculated using the length of service with the company. (#02)

This is how severance pay is taxed

In the case of the notice of a work relationship employees concerned often ask themselves one and the same question: What remains from a severance pay, if the tax return is to be delivered and the treasury helped itself?

To this end, the following points should be noted:

  • The times when there was a tax allowance for severance pay are unfortunately over.
  • Until the end of 2005, employees could claim severance pay allowances based on age and length of service with the company, which ranged from 7.200.00 € and 11.000.00 € were. As of 01.01.2006 is § 3 no. 9 EStG, which provided for a tax allowance for severance payments, expired.
  • Since then, severance payments are fully taxable – the severance payment is therefore fully taxed.
  • Under social security law, severance pay is a one-time payment in cash or in kind that is used to replace legal claims. If the severance payment is made as compensation for the loss of the job, no social security contributions are due.
  • In the case of "normal" employment income, one pays taxes as well as social security contributions (employee’s share of social security contributions). Only taxes are levied on severance pay.
  • So the bottom line is that you have more left over from a severance pay than the work earnings.

New job and then a severance payment

One more comment:

If an employee already has a new job in prospect, or has even signed an employment contract with the future employer? Anyone who then sets his sights on being terminated by his employer and then also collecting a severance payment may not, under any circumstances, let his employer know that he or she intends to leave shortly anyway.

If the employer knows that his employee has concrete prospects of finding a new job, he has little reason to pay a severance payment. He just has to wait until he leaves by himself.

Infographics: ©
Photo credits: © Shutterstock cover photo: fizkes – #01: Dmytro Zinkevych, – #02: fizkes

About the author

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Sabrina Muller, born in Berlin in 1982, is now the mother of three children. Actually, she didn’t want so many children. However, after their first daughter was really low-maintenance, Sabrina and her husband decided to have more children. No one could have known that easy-care would not always be followed by easy-care again. The first daughter was followed by another girl and a boy. Your rascals currently fill Sabrina’s life. In addition to caring for the children, Sabrina is also involved in kindergarten and enjoys sewing and handicrafts.

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