Termination Agreement and Voluntary Resignation or Dismissal with Severance Pay

Many employees suddenly find themselves under pressure when, following restructuring or difficult discussions, they are unexpectedly presented with a termination agreement. In employment law in particular, such offers often seem like a quick and low-conflict solution, but they can have significant consequences for protection against dismissal, unemployment benefits, and severance pay. The question also arises as to what happens if no agreement is reached and the employer terminates the employment instead. Now, more than ever, it is important to objectively assess your options, properly evaluate the risks under employment law, and avoid common mistakes.

In this article, we provide information on the opportunities and risks of a termination agreement, when filing a lawsuit for protection against dismissal may be advisable, how an amount of severance pay can realistically be secured following a termination, which deadlines and waiting period risks must be considered, and whether, in individual cases, a termination agreement or a termination followed by negotiations is the better choice.

1. When Is a Termination Agreement Better Than a Dismissal?

Sometimes, in the course of your daily work, you may notice that the atmosphere at the company is changing, that restructuring is on the horizon, or that your employer has invited you to a “discussion about the future.” At the end of such a discussion, a termination agreement is often placed on the table. Employers typically present the termination agreement as a mutually agreed-upon solution and ask the employee to “sign it promptly.” Often, there is also a more or less explicit threat of termination should the

Offer of a termination agreement is rejected.
At that moment, many affected employees ask themselves the same question: Should I accept the termination agreement, or is it better to wait and see if a termination notice follows? The decision is anything but easy, because while both options lead to the termination of the employment relationship, they have very different legal and financial consequences. Anyone who acts rashly here risks suffering disadvantages.

1.1 When the employer offers a termination agreement

A termination agreement is intended to provide a quick and conflict-free solution that primarily benefits employers. Employers thereby avoid the uncertainties of an unfair dismissal proceeding, while employees may, at first glance, benefit from an amount of severance pay or a short transition period. But appearances are often deceptive: Anyone who signs too hastily risks a waiting period for unemployment benefits and forfeits important rights under unfair dismissal protection.

A termination agreement is a mutual agreement between an employer and an employee to end the employment relationship at a specific date. The major advantage lies in the flexibility it offers: the termination date, severance pay, remaining vacation time, employment reference, or leave of absence can all be arranged on an individual basis.

1.2 Termination as an Alternative

If you cannot reach an agreement with your employer on a termination agreement, or if you, as an employee, do not wish to end the employment relationship at all, this does not necessarily mean that your employer will or can terminate your employment. If your employer does terminate your employment, statutory protection against dismissal still applies. This allows for a review of whether the termination is legally valid and socially justified.

Employees can defend themselves by filing a lawsuit for protection against termination and often have the opportunity to secure an amount of severance pay as part of a court-mediated settlement. As a rule, there is no statutory entitlement to severance pay. In practice, the entitlement usually arises through negotiation: The employee files an action for protection against dismissal within three weeks ( Section 4 of the German Employment Protection Act (KSchG)) and challenges the validity of the termination. In many cases, the parties reach a court-mediated settlement during the proceedings, in which the termination of the employment relationship is agreed upon in exchange for an amount of severance pay.

Although such a process is more time-consuming, it offers greater legal certainty and better opportunities for negotiation.

1.3 Why Legal Advice Is Crucial Here

Whether you sign a termination agreement or respond to a termination notice from your employer can have significant legal and financial consequences. Whether a termination agreement makes sense in a specific case depends on many factors, such as the grounds for termination, the amount of the severance pay, or your personal situation.

Employees should therefore never rush to sign a proposed termination agreement but should first have it reviewed to determine whether the agreement entails any disadvantages or risks, whether the employer is even authorized to terminate the employment if the agreement is not accepted, and whether a lawsuit challenging the termination has a reasonable chance of success.

Seeking legal advice from a certified specialist lawyer in employment law helps you accurately assess the opportunities, benefits, risks, and consequences and develop a course of action tailored to your situation.

2. What is the difference between a termination agreement and a termination with severance pay?

Many employees first hear about a termination agreement when their employer brings up the idea of ending the employment relationship through such an agreement instead of terminating it immediately. While both approaches lead to the same result—the end of the employment relationship—the legal paths to that outcome are very different. Understanding the differences and consequences allows you to better assess which option is more advantageous in your specific case.

2.1 Termination Agreement: Mutual Termination of the Employment Relationship

A termination agreement is a mutual agreement between the employer and the employee. Both parties agree in writing that the employment relationship will end on a specific date.

This agreement often addresses all key points: the termination date, an amount of severance pay, time off from work, compensation for unused vacation time, and the right to a reference letter. Bonus payments, non- compete clauses, or deadlines for returning work equipment may also be part of the agreement.

A termination agreement offers flexibility, as all terms can be freely negotiated. This also applies to the notice period. However, it also carries risks: Anyone who signs it loses the protection of the Unfair Dismissal Protection Act and may risk a waiting period for unemployment benefits. Therefore, a termination agreement should never be accepted without legal review.

2.2 Termination: Unilateral Termination of the Employment Relationship

Termination occurs when the employer unilaterally terminates the employment relationship and the employee subsequently receives an amount of severance pay as part of negotiations or court proceedings. However, this severance pay must be negotiated within the framework of the labor court proceedings regarding protection against dismissal. As a rule, there is no statutory entitlement to severance pay.

In practice, the entitlement arises almost exclusively through negotiation: The employee files a claim for protection against dismissal within three weeks ( Section 4 of the German Employment Protection Act (KSchG)) and challenges the validity of the termination. In many cases, the parties reach a court- mediated settlement during the proceedings, in which the termination of the employment relationship is agreed upon in exchange for payment of an amount of severance pay.

The severance pay is intended to compensate for the loss of the job and eliminate the risk that the court might declare the termination invalid during the course of the proceedings. Since the termination is initiated by the employer, the employee does not face a waiting period for unemployment benefits. Under certain circumstances, this can result in a significantly higher amount of severance pay than would be offered in a termination-by-mutual-agreement, if there are good reasons to believe that the grounds for termination did not exist or that the termination might be invalid.

2.3 Why the Distinction Matters

Whether one signs a termination agreement or responds to a termination by the employer can have significant legal and financial consequences. A termination agreement offers a quick solution, while a termination followed by severance negotiations preserves protection against unfair dismissal and often opens up better opportunities for negotiation.

Employees should therefore never rush to sign a termination agreement that has been presented to them, but should first have a lawyer review whether a claim for protection against wrongful termination has a chance of success. Legal advice in employment law helps employees choose the best strategy for their individual situation and assess the possibilities for negotiating a severance package.

3. When is a termination agreement worthwhile, and what are the risks involved?

A termination agreement can be an attractive way to end an employment relationship by mutual consent. In practice, it is often offered when employers wish to implement operational changes or seek a separation without conflict. For employees, such an offer can certainly have advantages. At the same time, the termination agreement, with its legal implications, often entails further consequences and is generally more complex than it appears at first glance.

3.1 Advantages for Employees

A termination agreement allows for a flexible and predictable end to the employment relationship. Unlike in the case of a termination by the employer, both parties can individually determine the termination date and other terms before the relationship between the parties to the employment contract has broken down. This can be particularly appealing if a new job is already in the works or a seamless transition to retirement is planned.

Often, an amount of severance pay is also agreed upon as part of a termination agreement, and the amount is freely negotiable. However, this also means that the severance pay must first be negotiated. If the employer is not willing to do so, there will be no severance pay. That said, most employers will be willing to pay an amount of severance pay if you are the one to initiate the termination agreement.

In addition, other terms can be tailored to your specific interests, such as a leave of absence with continued pay, compensation for unused vacation time, or the wording of your employment reference. This allows for an orderly conclusion that avoids conflicts and does not jeopardize your professional future.

3.2 Disadvantages and Risks of a Termination Agreement

As attractive as the flexibility of a termination agreement may seem, it comes at a price. Anyone who signs a termination agreement waives their general protection against dismissal (if applicable) and thereby loses the ability to file a lawsuit for unfair dismissal. Even employees who are entitled to special protection against dismissal waive this protection. This can result in employees forfeiting entitlements they might have been entitled to in the event of termination but which were not included in the termination agreement.

Another key point is the risk of a waiting period for unemployment benefits. The Employment Agency may impose a waiting period of up to twelve weeks if it determines that the unemployment was voluntary and thus contrary to the terms of the insurance. To avoid this, the agreement must be drafted in such a way that it is clear whether the initiative came from the employer or whether termination was unavoidable.

Furthermore, there is a risk that employees may sign the agreement too hastily under time pressure or emotional stress. In such cases, challenging the agreement is theoretically possible. In reality, however, challenges are usually unenforceable unless the employee can prove that the employer put them under immense pressure or violated the principles of fair negotiation. Clauses regarding non- compete agreements, repayment obligations, or confidentiality agreements should also always be reviewed by a lawyer, as they can have significant financial consequences.

3.3 Legal advice is particularly important

A termination agreement should never be signed without prior legal review. A certified specialist lawyer in employment law can review the agreement for legal risks, tax implications, and potential consequences regarding the waiting period. Legal assistance is particularly advisable if an amount of severance pay is agreed upon, if there are unclear deadlines, or if the agreement contains specific clauses that could affect future employment. Employees should therefore never sign a termination agreement that has been presented to them under pressure or without due consideration. If the employer does not allow time for consideration or does not provide the employee with the draft of the termination agreement, this should be given special consideration during the legal review.

Timely legal advice and review provide clarity, prevent costly mistakes, and can often lead to a higher amount of severance pay or contract terms that are more favorable to the employee.

4. How can an amount of severance pay be secured after a termination?

If employees do not accept a termination agreement offered by the employer, it is unclear whether the employer will instead terminate the employment relationship by giving notice. If the employer has issued a notice of termination, employees can and should challenge the termination by filing a wrongful termination lawsuit.

However, many employees mistakenly assume that they are automatically entitled to an amount of severance pay. In fact, there is no legal entitlement to an amount of severance pay in the event of termination by the employer, unless the employer offers it voluntarily. In practice, however, a great many employees do receive severance pay. This is only the case, however, if they take legal action after the termination and negotiate a severance package through a settlement or in court.

4.1 Termination by the Employer: The First Step in Negotiations

Employees who do not wish to accept a termination by their employer or who have doubts about its legality can defend themselves by filing an action for protection against wrongful termination. This must be filed with the competent labor court within three weeks of receiving the notice of termination ( Section 4 of the German Employment Protection Act (KSchG)).

The goal of the lawsuit is to return to the workplace; however, in most cases, it leads to a mutually agreed-upon termination of the employment relationship in exchange for an amount of severance pay. In judicial practice, most dismissal protection proceedings therefore end with a settlement in which both parties agree to the termination of the employment relationship and a specific amount of severance pay.

4.2 Determining the Severance Pay in Practice

The amount of an amount of severance pay does not depend on a fixed legal entitlement, but rather on the employee’s negotiating position. This is determined primarily by the strength of the claim challenging a dismissal or the weakness of the termination or the grounds for termination. If the lawsuit has a high likelihood of success—for example, because there is no sufficient grounds for termination or because formal errors were made—the pressure on the employer increases. In such cases, it is significantly easier for an experienced certified specialist lawyer in employment law to negotiate an appropriate amount of severance pay.

The following rule of thumb often serves as a rough guideline: half a month’s gross salary per year of employment. In many cases, however, a significantly higher amount can be achieved through skillful negotiation and legal representation. Employers are often willing to pay more to avoid the risk of losing in court or facing a protracted dispute. Here, too, it is important to analyze the grounds for termination and confront the employer with them.

4.3 Advantages of an amount of severance pay Following Termination

A major advantage of this approach is that the termination is initiated by the employer. As a result, there is generally no waiting period for unemployment benefits, since the termination of the employment relationship is not based on a voluntary decision by the employee. In addition, the protections under the Unfair Dismissal Protection Act remain in effect, which significantly strengthens the employee’s negotiating position. This applies especially to female employees who are subject to special protection against dismissal.

Furthermore, additional terms can be individually negotiated as part of a court-mediated settlement. These may include, for example, the effective date of termination, a leave of absence, or the rating in the employment reference. In this way, employees retain more control over the terms of their departure without prematurely waiving their rights.

4.4 Legal Representation Makes All the Difference

Negotiating a severance package following a termination requires legal expertise, experience, and tactical skill. A certified specialist lawyer in employment law can realistically assess the prospects of success for a claim challenging a dismissal, analyze the grounds for termination, conduct the negotiations, and ensure that the agreed-upon severance package takes all tax and social security law considerations into account.

Since employment law typically involves tight deadlines and substantial financial sums, seeking advice early on is crucial. Those who seek legal counsel promptly after a termination can assess the legal and financial possibilities of reaching a settlement at an early stage.

5. Conclusion: Which option is the right one? A termination agreement or a termination with an amount of severance pay?

Every termination of an employment relationship is different. Whether a termination agreement or a dismissal followed by an amount of severance pay is the better solution depends on your personal goals, the negotiation situation, and the legal framework. Both approaches can make sense. The key is to choose one with a clear understanding of the opportunities and risks involved.

Five key points to keep in mind:

• Only sign a termination agreement after reviewing it: A termination agreement offers flexibility, but it can result in waiting periods for unemployment benefits and the loss of protection against wrongful termination. Therefore, always have it reviewed by a lawyer before signing.
• Take advantage of protection against wrongful termination: If your employer terminates your employment, filing a wrongful termination lawsuit may be the best way to negotiate a fair severance package. The stronger your legal position, the higher or more favorable the outcome of negotiations will generally be.
• Assess the severance amount realistically: The amount of the severance package depends on your negotiating skills, the length of your employment, and the litigation risk. An experienced lawyer specializing in employment law can assess which outcome is realistic and tax-advantageous.
• Be aware of the waiting period and deadlines: Once you receive a notice of termination, you have three weeks to file a lawsuit. If you miss this deadline, you lose important rights. The terms of the termination agreement also affect your unemployment benefits.
• Secure legal support in a timely manner: Seeking legal advice early on provides clarity and strengthens your negotiating position. This applies whether you’re dealing with discussions with your employer, court proceedings, or settlement negotiations.

6. FAQ: Termination Agreement or Dismissal with Severance Pay: Your Most Important Questions