You have received notice of termination from your employer and are perhaps even already before the competent labor court with an action for protection against dismissal? Many affected employees then very quickly ask themselves whether they are entitled to severance pay and, if so, how much. But what exactly does this mean? When and in what amount is it paid and is there any entitlement to it at all?
The following article explains the essential basics around the topic of severance pay. In case of doubt, however, it may be worthwhile to consult a specialist attorney for employment law.
1. What is severance pay?
A severance payment is a one-time payment made by the employer to the employee. It represents a kind of compensation for the employee, as he loses his job and therefore does not receive any further salary.
2. When must the employer pay severance pay?
Basically there is no legal entitlement to payment of severance pay. In certain cases, however, terminated employees are nevertheless entitled to severance pay, for example:
- The employment or collective bargaining agreement provides for severance pay
- A social plan severance payment is provided
- A dismissal for operational reasons was pronounced
- The employee resigns because of the employer's conduct in breach of the contract
- Contractual agreement to which the employee and employer have voluntarily agreed upon termination of the employment relationship (e.g. termination agreement).
3. Do I receive severance pay in the event of termination for operational reasons?
If the employer terminates the employment contract for operational reasons, the employee is entitled to a severance payment under the following conditions (Section 1a KschG):
a. Applicability of the Dismissal Protection Act (KSchG)
The employment relationship must have already existed for six months and the company must have more than ten employees working full-time (Section 23 (1) KSchG). For smaller companies, therefore, this variant of severance pay does not exist.
b. Termination for operational reasons
The termination must have an operational reason. This may be due to economic difficulties, necessary restructuring or other operational reasons.
If the employer dismisses the employee because of his behaviorfor example, because of a gross insult of his boss, there is no no severance pay provided for by law.
c. Offer of money against waiver of action
In the letter of termination, the employer can offer to pay a severance package if the employee does not file an action for protection against dismissal with the labor court (§ 1a KSchG).
If the employee wishes to accept the severance payment offered, he or she may not file an action for protection against dismissal in this case.
4. Do I receive severance pay in the dismissal protection process?
For employers, a dismissal (regardless of the reason for the dismissal) entails the risk that the employee will not accept it and will take legal action against it. The labor court then examines whether the employer was allowed to terminate the employment at all. If the court declares the termination invalid, the employment relationship is not terminated and the employee can return to work. In this case, of course, no severance payment is made.
An action for unfair dismissal is therefore no guarantee for the entitlement to a severance payment.
If the employer loses the case, the financial risk for the employer is great, especially if the proceedings before the labor court drag on. This is because the employer must then pay the wage in arrears, even though the employee did not work from the end of the notice period until the decision of the labor court.
To reduce the risk of defeat in court and the associated high costs, employers offer a settlement in the legal proceedings. Such a settlement creates legal and planning security for the employer.
5. Do I receive severance pay in the event of a termination agreement?
Some employers wish to exclude the risk of a lawsuit by concluding a termination agreement with the employee instead of giving notice. In addition to various other regulations, the amount of the severance payment is linked to the waiver of legal action. However, if the employee and employer agree on a termination agreement, the employment office can block unemployment benefits for three months. A termination agreement should not be signed without prior consultation with a lawyer specializing in labor law.
6. How much is my severance pay?
In principle, the amount of severance pay is purely a matter of negotiation. There are no legal requirements for this - although certain calculation aids and standards have become established. The usual amount is half a month to a whole month's gross salary per year of employment. How much you ultimately receive, however, always depends on the individual case. The chances of success in court are very important: If it is highly probable that the dismissal is invalid, the severance payment will generally be higher. Conversely, the severance payment is usually low if the employer has a very good chance of prevailing in court with the termination.
The basis of the calculation is the earnings in the last month of employment. Regular allowances such as bonuses, vacation pay or the company car are included in the calculation. The following aspects must also be taken into account when calculating the amount of severance pay: Length of employment, industry, negotiating skills of the employee or the lawyer, position of the employee in the company (how easy is it to fill the position?), possible misconduct of the employee, chances of the employee finding a job again, general conditions of the new job, etc.
7. special case: dissolution request
If a court determines that the termination is not permissible and that continued employment is unreasonable, the court must, according to Section 9 KSchG, at the request of the employee (so-called dissolution request), dissolve the employment relationship and order the employer to pay an appropriate severance payment.
According to Section 10 of the German Unfair Dismissals Act (KSchG ), the amount of severance pay depends on the age of the employee and the length of service:
From 50 years & at least 15 years of service: up to 15 months' salary
From 55 years of age & at least 20 years of service: up to 18 months' salary
8. Does severance pay have to be taxed?
Yes, severance payments are treated and taxed by the tax authorities as a normal salary payment. However, employees can take advantage of the one-fifth rule and thereby reduce their tax burden. However, details should always be clarified with a tax advisor before concluding an agreement.
9. Does severance pay in the event of termination have consequences for unemployment benefits?
Employees are fully entitled to unemployment benefits (ALG I) despite severance pay. As a rule, the severance payment is not offset against the social benefit. The only exception is if the employee leaves the company prematurely. This is the case if the relevant ordinary notice period was not observed at the time of termination. In this case, the entitlement to unemployment benefits is suspended until the end of the notice period.
10. what social security contributions are due?
Severance payments are exempt from contributions if, upon termination of an employment relationship, they are considered compensation for the fact that the employee will no longer have any earnings in the future because he or she has lost his or her job. Accordingly, the employee does not have to pay contributions to pension, health, long-term care and unemployment insurance.