Must the German employer pay severance at the end of an employment relationship?
In general there is no entitlement to severance payments in Germany. If the contract is terminated by the employer (Kündigung), the employee can only claim reinstatement. This must be done by filing a law suit under the under the Dismissal Protection Act (Kündigungsschutzklage) within three weeks. Find more information under: termination/dismissal of employment (Kündigung) in Germany – Rechtsanwaltskanzlei von Preuschen, Bonn (kanzlei-vonpreuschen.de)
If the court finds that a termination was not valid, the employment must continue as before. There is generally no compensation is to be paid in the case of a valid dismissal.
In Court Settlement
Most of the law suits are however settled against payment of a severance. Obviously a majority of the employees want to obtain a severance pay as lucrative as possible. The employer is motivated by minmizing the risk of losing the court case Also the prospect of reinstating an unhappy employee is often a major factor in negotiating severance pays and ending the relationship.
There are no legal regulations for the calculation of the severance. A usual severance payment is calculated by multiplying the years of employment by half to a full month’s salary. However the final severance sum can be much higher than this and is completely a matter of negotiation. Important factors of leverage include amongst others: tenure, wage, firm size and whether the employee already has a new job at a different company. Often the employer already has got the replacement and therefore wants the matter to be resolved fast.
As an incentive for employers Severance is free of social security contributions. Although the payment is still taxable, there is still a substantial tax benefit for employees.
It usually takes the experience of an expert employment lawyer to determine which strategy is appropriate to successfully settle an individual case.
Severance Agreement (Aufhebungsvertrag mit Abfindung)
Often the employment is terminated out of court by a so called separation/severance agreement. A severance agreement is a joint declaration by employers and employees that the employment relationship should be terminated. The severance payment is an incentive for the employee to accept the termination by out of court agreement. Together with the severance payment often the wording of final job report (Arbeitszeugnis) is agreed upon. In this context the employer is far more open for discussion if a comprehensive out of court agreement can be reached.
However for the employee such an agreement can turn out very costly. If not done professionally the employee faces the possibility of shortening the unemployment benefits. Such an agreement should never be entered into before having it thoroughly checked by an expert employment/labour law lawyer/attorney (Fachanwalt für Arbeitsrecht).
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In Germany the lawyer is usually paid according to the Lawyers’ Fee Statute (RVG=Rechtsanwaltsvergütungsgesetz).
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Christopher von Preuschen is a english speaking certified specialist lawyer, attorney, solicitor (Fachanwalt) for labour and employment law in Bonn and Cologne.