Termination Agreement and Severance Pay

The termination agreement is the agreement by which the employer and the employee agree on the termination of the employment relationship without giving notice. The termination agreement is normally disadvantageous for the employee. The main area of application for the termination agreement is the termination of employment relationships between companies and their executives, often board members and managing directors or senior employees and managers. In this area, the focus is on financial aspects and the will of both sides to part in such a way that they can still shake hands in the future.

The advantage of the termination agreement is that both parties agree on the difficult issue of terminating the employment contract. The uncertainties involved can be optimally resolved for both sides. The respective planning for the further professional or private future can be taken into account in the best possible way. In the best case, both sides part on good terms. That way employees and employers can achieve legal certainty very quickly.

All disadvantages of the termination agreement are on the employee’s behalf. The best-known disadvantage is that the employment agency usually imposes a blocking period. This means that unemployment benefits are not granted for a period of 12 weeks as a result of a termination agreement. There are exceptions to this rule, which are regulated in the instructions of the Federal Employment Agency (Bundesagentur für Arbeit). DOWNLOAD: Service instruction of the Federal Employment Agency /german only (Dienstanweisung der Bundesagentur für Arbeit.pdf 342 KB).

The second disadvantage is the possibility of suspension of unemployment benefits. If, for example, the notice period is not observed, the entitlement to unemployment benefits is suspended, i.e. the severance payment is partially offset against the entitlement to unemployment benefits. This is ultimately the worst case, and cannot be adequately compensated even with a very high severance.

The termination agreement may be associated with further disadvantages under social security law. Some of these disadvantages cannot be solved by the so called termination agreement. This combines the contents of a termination agreement with a termination. However, it leads to the same consequences under social security law.

Another disadvantage for the employee is that in the case of termination by mutual consent, the legal expenses insurance refuses to provide cover. In this case, other forms of arrangement can be chosen.

The decisive disadvantage, however, is that in very few cases does the employer or employee correctly assess the various options for terminating the employment relationship by mutual consent. The results based on this misjudgement are rarely optimal.

It is important to avoid these mistakes in advance by seeking legal advice.

The termination agreement is really just a written agreement. This can be formally recorded on the employer’s letterhead or handwritten on a piece of paper. It is important that the contents are clearly and unambiguously stipulated and that both employer and employee have signed.

The essential contents of a termination agreement can be found in our sample (german only).

The most important contents are the date of termination of the employment relationship and any release of the employee. In addition, the possibility of early termination of the employment contract in the event that a new job is found must be regulated. In this context, a turbo bonus is often agreed. And then, of course, there is the severance pay: This must not only be fixed in amount, but of course the due date, inheritability and any payment modalities must be agreed.

For further important contents, please see our detailed sample termination agreement (german only).

In the practice of labour law, the term “standard severance pay” has developed. In this regard, both employers and employees assume that there is a right to severance pay. This assumption is wrong. There is no statutory right to severance pay in Germany. An exception is the case where a severance payment results from a social plan or sometimes even from an employment contract.

Despite this lack of entitlement, there is the so-called standard severance pay. This is paid in order to avoid the risks that arise for the employer in the event of termination of the employment relationship. The prerequisite is therefore that there is a risk for the employer. Such uncertainty only exists if the Dismissal Protection Act applies. In small businesses or employment relationships of a duration of less than 6 months, severance pay is usually not paid upon termination of the employment relationship. In all other cases, however, severance pay is the rule.

The so-called standard compensation is based on the formula 0.5 gross monthly salaries per year of employment. However, there are regional differences here and above all this formula reflects balanced litigation risks. In this respect, there is quite a lot of leeway here. Moreover, the determination of the gross monthly salary is not entirely simple. Here the question always arises of how to deal with Christmas bonuses, holiday pay or variable remuneration components. And last but not least, it is not even easy to determine the year of employment. As a rule, an employment contract does not begin on 1 January and end on 31 December of a year. In this respect, everything ultimately depends on the negotiating skills of the parties involved. And one thing has always proven true in practice so far – don’t negotiate for yourself! Let a lawyer represent your interests.

MAYR Kanzlei für Arbeitsrecht provides this topic article as a guide. For individual advice, advice should always be sought from a specialist lawyer for labour law. We draw your attention to the fact that we can therefore accept no liability for the accuracy and completeness of this contribution.