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Severance Pay in Germany

How much is the severance payment after termination of employment contract?

In general, most employees are not legally entitled to severance pay . In practice, however, severance pay is usually paid in the event of dismissal by the employer. Many employees refrain from asserting their rights because they mistakenly believe that this would entail years of litigation.

However, this is not the case in German labor law . Statistically speaking, the vast majority of cases are settled out of court within a few weeks or within a few weeks of filing a claim. Hardly any other area of law offers such rapid legal protection as employment law.

As specialist lawyers for employment law , we are experts when it comes to severance payments . With many years of experience, sound legal knowledge and a well-thought-out strategy, we negotiate the highest possible severance payment for you in the shortest possible time. Please note that severance payments are usually negotiated in connection with an action for unfair dismissal . After receiving a dismissal notice, the action must be filed within three weeks. Otherwise, the dismissal becomes legally binding and the employer has no reason to agree to a severance payment.

When do you receive severance pay in Germany?

In general, severance payments are made in the following cases:

  • the employment contract provides a contractual severance payment after dismissal;
  • the parties negotiate a severance payment (in or out of court) to settle a dismissal dispute – this is the most common case;
  • a social plan agreed with the works council in connection with collective redundancies provides for severance pay.

How much is a severance payment in Germany?

There is no statutory entitlement to severance pay, nor is the amount of severance pay regulated by law. However, there are some "rules of thumb" for estimating the amount of severance pay:

One widely used calculation is based on half a month's salary per year of employment . For example, an employee who worked for his last employer for 10 years and most recently earned a gross (pre-tax) income of EUR 4,000 per month would receive a severance payment of EUR 20,000 (0.5 * EUR 4,000 * 10 years). The three key variables are the 0.5 factor , the amount of the last gross monthly salary paid and the length of service .

In practice, the multiplier depends not only on the individual circumstances of the employee, but also on many other factors. Depending on the labor court district and the size of the employer's company, some courts apply a factor of 1.0 (not 0.5). And depending on the circumstances of the individual case, the factor may be 1.2 or higher in some cases. For example, if the dismissal was obviously invalid and unlawful.

How is severance pay calculated in detail?

Three factors determine the amount of severance pay: salary, length of service and the amount of the multiplier:

Last gross salary (before tax)

The last gross salary (before tax) at the time of termination of employment is particularly important for calculating the severance payment. It is based on the gross monthly salary at the time of termination. If there are differences in monthly income due to special payments such as overtime, other bonuses or gratuities, the average monthly income is generally used. The annual salary is therefore divided by 12.

Length of service

The duration of the employment relationship is decisive for calculating length of service. In addition to the actual hours worked, this also includes maternity leave, part-time work and periods of training. Other periods, e.g. when an employee has only worked as a temporary worker/freelancer, are not taken into account. The duration of the employment relationship is not interrupted by changes in the employment contract, including transfers of undertakings.

Individual multiplier

The length of employment and the amount of income are multiplied by a certain multiplier to calculate the amount of severance pay. The amount of the multiplier depends not only on age, but also on the effectiveness of the dismissal and the level of protection against dismissal. The question of the effectiveness of the dismissal is of course of great importance for the value of the multiplier. In order to answer this question and put pressure on the employer, it is essential to file an action for unfair dismissal. If the dismissal is obviously invalid, an employee will generally only agree to a (consensual) dismissal in court if the employer offers a significantly higher severance payment. The multiplier is then usually 1.0 or higher. However, even if the dismissal is effective and there is no actual entitlement to compensation, many employers will "voluntarily" offer severance pay. However, these are usually lower. A multiplier of 0.5 is usually applied.

Can other payments be claimed in addition to the severance payment?

When an employment relationship is terminated and the employee files an action for unfair dismissal, it is not only the severance payment that is paid at the end. The employee is entitled to additional payments:

  • Lost wages: If the dismissed employee files an action for unfair dismissal and the court finds that the dismissal was invalid, the employer must pay the wages retroactively. The entitlement to wages exists even if the employee has not worked for the employer since receiving notice of dismissal. This basically means: no work, but still money.
  • Bonuses, commissions and other variable or one-off payments: Employees often forget that there are bonuses, commissions and other one-off payments that have not yet been paid out. These should always be claimed in addition to the actual severance payment. They should not be "settled" by the severance payment.
  • Other emoluments: The employee is also entitled to payment of other salary components, e.g. unpaid overtime, pro rata vacation pay, Christmas bonus.

Important note on the taxation of severance payments:

The severance payment is taxable but exempt from social security contributions.

Be sure to check your tax situation before signing a termination agreement . It is often possible to make arrangements that reduce the tax burden, e.g. by applying the so-called one-fifth rule. This depends, for example, on the date of payment and also on the countries in which you worked for the employer and where you now live. Remember: the wording of the termination agreement also determines the amount of your tax burden on the severance payment.

Our specialist tax lawyers will of course be happy to assist you with tax matters.

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