Termination Agreement for Layoffs

To preempt a termination for operational reasons, employers and employees can also initiate a termination agreement themselves under employment law. Such a mutually agreed-upon solution can be sensible in certain situations, such as to avoid protracted conflicts or legal uncertainties.

In this article, we’ll explain what you should keep in mind when entering into a termination agreement due to a layoff and why a termination agreement can generally be a good idea.

1. What are operational reasons?

If employees have been employed by the company for at least 6 months and the company has more than 10 full-time employees, the Unfair Dismissal Protection Act applies. Under this law, an employer may only terminate an employee’s employment for personal, conduct-related, or business-related reasons.

Termination is considered for operational reasons, for example, if an employee’s job is at risk of being eliminated due to a decline in revenue or restructuring. If such a situation exists, the employer may issue a termination for operational reasons. Whether such a termination is lawful and whether the operational reasons actually justify the termination can only be determined by the labor court in a potential unfair dismissal lawsuit.

2. A Mutual Termination Agreement Instead of Termination for Operational Reasons?

If the employee’s position must be eliminated for operational reasons, a termination agreement can be negotiated instead of a termination notice. The termination agreement offers the employer the advantage that no statutory, collective bargaining agreement, or employment contract notice periods need to be observed. Thus, the employment relationship can be terminated immediately or in the near future through the termination agreement.

However, the termination agreement does not necessarily shorten the notice period for the employee. Instead, the notice period can be maintained, and the employee can be placed on leave for that duration. If the employee no longer has work to perform, they can use the time off to look for a new job.

In most cases, the employer will offer a termination agreement when they wish to end the employment relationship with the employee by mutual consent. On the other hand, a termination agreement may also be offered if the employer believes that a termination for operational reasons might not hold up in labor court.

Employees can file a lawsuit for protection against dismissal within the 3-week period following notice of termination. Once a termination agreement has been signed, it is very difficult to challenge it in court. For this reason, termination agreements are generally the safer option for the employer. Employees should therefore carefully consider whether they should sign the termination agreement. If in doubt, it is helpful to seek advice from a knowledgeable and competent certified specialist lawyer in employment law.

3. Am I entitled to severance pay under a termination agreement?

There are very few legal requirements governing the content of a termination agreement. The termination agreement can be freely negotiated between the employer and the employee. This includes the question of an amount of severance pay and its amount.

For more information on severance pay, see our article on entitlements, negotiations, and amounts.

Neither termination nor a termination agreement entitles you to severance pay. In the case of termination for operational reasons, however, the employer may voluntarily offer severance pay as the sole exception to the statutory requirement—provided the employee waives the right to file a lawsuit for unfair dismissal, § 1a KSchG.

Even with a termination agreement, there is still no obligation to agree on an amount of severance pay. However, as compensation for the loss of employment, an amount of severance pay increases employees’ willingness to sign the termination agreement in the first place.

When considering the amount of the severance pay, employees should keep in mind that termination agreements often result in waiting periods for unemployment benefits. These waiting periods typically last up to 12 weeks, during which employees must provide for their own financial needs and do not receive unemployment benefits. However, this is not a problem if employees are able to find a new job quickly.

You can find the most important information on this topic in this video:

4. What are the benefits of a termination agreement for employees?

In any case, from the employee’s perspective, the contractual notice period owed by the employer must be observed between the signing of the agreement and the termination of the employment relationship; otherwise, problems may arise with the Federal Employment Agency regarding the crediting of an amount of severance pay or the suspension of ALG I benefits. In addition

To the termination period, a possible leave of absence, and the amount of an amount of severance pay, a termination agreement—unlike a termination for operational reasons—can also address other outstanding issues.

• Remaining Vacation andOvertime :Unlike in the case of a termination for operational reasons, a termination agreement can address how any remaining vacation time and overtime are handled. As an employee, you should pay close attention to the wording here: Employers sometimes attempt to settle claims for remaining vacation time and overtime hours in full upon the conclusion of the termination agreement. In that case, any claims to remaining vacation time and overtime would lapse. Such settlement clauses should be avoided.
• Employment Reference: The termination agreement may include provisions regarding the employment reference. While employees have a right to a favorable and qualified reference, a termination agreement can also specify the overall rating the reference should contain. Additionally, a closing statement expressing best wishes for the future, regret over the employee’s departure, and gratitude for the collaboration can be agreed upon. There is no legal right to such a closing statement, which is why one cannot sue for it in the event of termination. However, if such a closing statement is missing from the employment reference, many HR managers view this as a negative sign.

5. When should employees not agree to a termination agreement?

The termination agreement only becomes effective once it has been signed by both the employer and the employee. Thus, the employee’s consent is essential for the agreement to be valid. A strict written form requirement applies, pursuant to Section 623 of the German Civil Code (BGB). Verbal termination agreements or termination agreements via email are not sufficient, nor is a signature via Docusign. However, there may be situations in which it is not advisable to sign the termination agreement. This may be the case, for example, in the following situations:

• As an employee, you are determined to keep your job and believe that a potential termination for operational reasons is unlawful. If you were to receive a notice of termination, you could file a claim for continued employment under the Unfair Dismissal Protection Act. Whether such a claim can succeed in the case of a termination for operational reasons that is not socially justified depends on the individual case and is difficult to assess without specialized knowledge. In such cases, employees should seek advice from and be represented by one. In any case, a strict three-week filing deadline applies from the date the notice of termination is received.
• Even if certain clauses are unacceptable to the employee despite negotiations with the employer, one should not agree to the termination agreement. Particularly if, for example, the termination period falls short of the statutory notice periods specified in § 622 of the German Civil Code (BGB), there is often a risk of a waiting period for unemployment benefits. Furthermore, in such a case, the severance pay may be offset against unemployment benefits.

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