When layoffs occur in a company, the question of an appropriate amount of severance pay often arises. In some cases, severance payments are offered at the time of termination, but as a rule, an amount of severance pay is reached through negotiations with the employer.
The employment lawyers at Marten & Graner explain here whether and when an amount of severance pay is even an option.
In our short explanatory video, we cover everything you need to know about severance pay.
Severance Pay Upon Termination—What You Need to Know
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In the following article, we explain the basics of severance pay and the role of legal counsel in negotiations.
What Is Severance Pay Under Employment Law?
Severance pay is a one-time payment made by the employer. It is paid to the employee in the event of termination to provide him or her with financial security.
This is intended to partially compensate for the loss of income.
In addition, employees who are not permanently employed may also receive severance pay. The only requirement is that the employment relationship be subject to social security contributions. This applies, for example, to external managing directors working for a GmbH.
Severance payments are subject to income tax but are not subject to social security contributions. This means that the net amount received is higher than it would be for a comparable salary or wage payment.
The so-called compensation claim of commercial agents is treated differently under the law. They receive a financial compensation payment upon termination of their employment.
Is there a right to severance pay?
Many employees assume that they are automatically entitled to this financial payment if their employer terminates their employment unilaterally. However, as a general rule, there is no legal entitlement to such a payment.
Are you entitled to an amount of severance pay?
How do I get an amount of severance pay?
Since there is generally no legal entitlement to severance pay, you can only receive such a payment through negotiation in two cases:
- if the employer presents you with atermination agreementand seeks to persuade you to mutually terminate the contract.
- if you receive a notice of termination and file a lawsuit for protection against wrongful termination, and the employer negotiates an amount of severance pay with you—among other important points—to settle the legal dispute.
In both cases, legal counsel can help you assess the legal and financial aspects of the negotiations.
What benefits do I gain if a certified specialist lawyer in employment law negotiates a severance package on my behalf?
We’ll support you in dismissal protection proceedings and in negotiations regarding a termination agreement. In doing so, we’ll assess your situation and discuss with you the goals and possibilities for reaching a settlement.
Keep in mind that most companies—even when negotiations are conducted directly by your supervisor or the HR department—are advised behind the scenes by an employment lawyer.
A certified specialist lawyer in employment law can assist you in preparing for and conducting severance negotiations.
However, experience shows that this is only successful if you have employment law specialists on your side who, like us, have mastered negotiation tactics based on decades of experience in labor courts and in negotiations for termination agreements.
We know the risks your employer faces—namely, that their termination could be invalid under the Unfair Dismissal Protection Act—and we’ll press the company on these very points, which will then prompt them to offer a higher amount of severance pay.
Furthermore, you benefit from the fact that we will structure and negotiate a settlement—whether in or out of court—in such a way that you can make a fresh start with a new employer flexibly, optimally, and without worry.
Conversely, this also means that, in the event of layoffs, the employer is not obligated to pay severance to the terminated employees. However, there are a few exceptions in which the employee is entitled to severance.
This is particularly the case under social plans or, less commonly, in collective bargaining agreements. Executive employment contracts also often contain explicit provisions regarding whether severance pay is paid upon termination and the amount thereof.
Furthermore, in the event of termination for operational reasons, the employer may offer an amount of severance pay in accordance with Section 1a of the German Unfair Dismissal Protection Act (KSchG). This creates a legally enforceable claim for the dismissed employee if he or she waives the right to file a lawsuit.
The requirements for this special provision should also be carefully reviewed. Therefore, if you receive a notice of termination in which an amount of severance pay is already offered to you on the condition that you do not file a lawsuit for protection against dismissal, have this offer reviewed by an employment lawyer, as there may be a significant risk of default hidden here as well.
Should you accept severance pay?
If the employer offers financial compensation as part of the termination, you should not sign anything at first.
As a rule, this involves “selling” certain claims against the employer. And in very rare cases, a signature can only be corrected by challenging the agreement. In the vast majority of cases, this is not possible.
In any case, you should first consult a certified specialist lawyer in employment law and seek their advice. Often, the amount of the settlement offered can be significantly increased through negotiations.
In some circumstances, it may also make sense to file a lawsuit challenging the termination.
Can you force an amount of severance pay through a claim challenging a dismissal?
From a legal standpoint, a lawsuit for protection against termination does not create a claim to an amount of severance pay. Rather, its purpose is to have the court determine that the termination was unlawful and that the employment relationship therefore continues.
If such a proceeding results in a judgment, the court generally does not order an amount of severance pay but rather decides whether the termination is valid or not.
However, the overwhelming majority of cases follow this scenario:
After a wrongful termination lawsuit is filed, negotiations almost always begin between both parties, focusing in particular on whether and how an amount of severance pay will be made, along with other issues to be resolved; once an agreement is reached, it is recorded and confirmed by the court.
Be aware of the filing deadline: If you receive a notice of termination, the 3-week filing deadline begins upon receipt of the notice. If you miss this deadline, the termination is deemed valid by law.
After receiving a notice of termination, keep an eye on the filing deadline even while negotiations are ongoing.
It is best to involve us—as certified specialist lawyers in employment law—as early as possible after receiving the notice of termination, or even when a termination is merely anticipated, to protect your interests.
Simply filing a wrongful termination lawsuit significantly increases the pressure on the employer or the company, and during the ongoing proceedings, we—as specialized certified specialist lawyers in employment law—will conduct negotiations on your behalf.
These negotiations can begin immediately after the lawsuit is filed, and if an agreement is reached, it can be formalized in writing shortly thereafter without the parties ever having to appear in labor court.
If the case proceeds to trial, the pressure on the employer to settle increases over time.
This is because if the plaintiff wins at the end of what may be a protracted proceeding, the financial consequences for the company are substantial. In that case, the terminated employee is retroactively entitled to all wages for the duration of the lawsuit, minus any wage replacement benefits already paid, without the employer having received any work in return.
This risk prompts many companies to agree to a settlement favorable to them upon the conclusion of the unfair dismissal lawsuit, provided the negotiations are skillfully conducted.
An Exception
Under very rare circumstances, however, both the employer and the employee may also file a motion to terminate the employment relationship in exchange for an amount of severance pay to be determined by the court.
This is possible under Sections 9 and 10 of the Unfair Dismissal Protection Act (KSchG). To do so, two essential conditions must be met.
First, the court must deem the termination invalid and consequently declare it invalid. Furthermore, it must be demonstrated that continuing the employment relationship would no longer be reasonable for either the employee or the employer.
This may be the case, for example, if the employer makes derogatory remarks about the employee or if the employment relationship between the parties has deteriorated to such an extent that fruitful cooperation can no longer be expected in the future.
In contrast to voluntary severance payments, however, this specific scenario occurs only extremely rarely in practice.
How much is severance pay typically? Are there standard rates?
You will often read or hear that half a gross monthly salary is paid for each year of employment.
This rule of thumb is intended as a guide; it does not establish a legal entitlement.
Consulting with a lawyer helps assess the negotiation options in each individual case.
The standard rate is often proposed by labor courts at the first court hearing (conciliation hearing) when the court is still completely undecided as to whether the termination is valid or invalid—that is, when the litigation risks are evenly balanced.
If the litigation risk is higher for the employer, these calculation rules generally should not be applied, and we will negotiate a much higher amount of severance pay.
Early preparation helps you assess your own negotiating position. Legal advice can help you develop realistic goals and determine the next steps.
