Severance pay after dismissal

What is severance pay?

If an employee loses their job, severance pay offsets that loss: a one-off payment from the employer to end the employment relationship. For tax purposes it counts as compensation for lost income (§ 24 No. 1 letter a EStG), which distinguishes it from wages for work actually performed.

It is owed by law only in exceptional cases, for example under the Dismissal Protection Act or from a social plan (§ 112 para. 1 BetrVG); in most cases it is the result of a negotiation. Company law and inheritance law also know severance payments; this page deals with the employment-law variety. More on this in the guide Severance pay: definition and special cases (currently available in German only).

When you are entitled to severance pay

In practice, four routes lead to severance pay: the court settlement in an unfair dismissal claim, the offer under § 1a KSchG for a redundancy dismissal, a termination agreement with a severance clause, and a social plan under § 112 para. 1 BetrVG.

A social plan offsets the economic disadvantages of a change to the business and can provide for severance payments. What applies when the business is sold is set out in the guide Severance pay when a company is sold (currently available in German only).

For the offer under § 1a KSchG a fixed rate of 0.5 months’ salary per year of service applies; the requirements and the rounding rule follow below in the section on the Dismissal Protection Act.

Beyond that there is no general statutory entitlement. When the employer does not have to pay severance (currently available in German only) explains the guide on entitlement; what applies to severance pay after resigning yourself (currently available in German only) is covered in a separate article.

The unfair dismissal claim must reach the labour court within three weeks of receipt of the written dismissal (§ 4 sentence 1 KSchG). If the deadline expires, the dismissal is deemed valid from the outset (§ 7 KSchG). At that point no one negotiates a severance payment any more. How to determine receipt and the end of the contract is shown in the guide on notice periods and dismissal to the end of the month (currently available in German only).

If the Dismissal Protection Act applies to you, that is, your employment has lasted more than six months without interruption and the business regularly employs more than ten employees (§ 1 para. 1, § 23 para. 1 KSchG), your negotiating position is better than the dismissal suggests. Of the 165,851 dismissal proceedings concluded nationwide by the labour courts in 2021, 134,679 ended in a court settlement (Federal Statistical Office, Fachserie 10, Reihe 2.8).

How much the employer offers depends on how vulnerable the dismissal is. For a redundancy dismissal it is socially unjustified if length of service, age, maintenance obligations and severe disability were not sufficiently taken into account in the social selection (§ 1 para. 3 KSchG).

For a conduct-related dismissal, a missing prior warning (Abmahnung) increases the amount (BAG, judgment of 10 June 2010, case 2 AZR 541/09). Without a prior hearing of the works council, any dismissal is invalid (§ 102 para. 1 sentence 3 BetrVG). And both dismissal and termination agreement require the written form (§ 623 BGB).

Amount of severance pay and how it is calculated

The rule of thumb in practice corresponds to the statutory factor in § 1a para. 2 KSchG: 0.5 months’ salary per year of service, including benefits in kind (§ 10 para. 3 KSchG). A period of more than six months is rounded up to a full year. At €4,000 gross and ten years of service that gives €20,000. No statutory factor applies to the court settlement. There, the amount is freely negotiable and may be above or below this figure. What is negotiated is the factor, not your salary.

How the years of service are counted is explained in the guide Severance pay by length of service: from how many years (currently available in German only). The range achievable in an individual case is covered by the article on how much severance pay you are entitled to.

Factors that increase severance pay

An employer goes beyond the rule of thumb where the outcome of proceedings is open for them. Thinly reasoned grounds for dismissal, a defective social selection, long service, older age and a position that needs to be filled again quickly shift the negotiation in your favour.

Special dismissal protection weighs more heavily: pregnancy and the four months after the birth (§ 17 para. 1 MuSchG), severe disability where the integration office has not consented (§ 168 SGB IX), and membership of the works council (§ 15 para. 1 KSchG).

Factors that reduce severance pay

Severance pay is lower for short service, a cleanly reasoned and formally flawless dismissal, provable misconduct, or an economically strained position of the business. A missed filing deadline is not a factor that lowers the amount. It ends the negotiation. Once the three weeks have passed, the employer no longer bears any litigation risk, and with that any reason to pay disappears.

What does the Dismissal Protection Act say about severance pay?

The Dismissal Protection Act does not provide for a general entitlement to severance pay. It addresses severance mainly in two places: § 1a and §§ 9, 10 KSchG. Both require that the employment relationship has existed without interruption for more than six months (§ 1 para. 1 KSchG) and that the business regularly employs more than ten employees (§ 23 para. 1 KSchG). If either is missing, a termination agreement and a social plan remain open as routes, but the claims under the Dismissal Protection Act do not.

§ 1a KSchG concerns redundancy dismissal: the employer offers the severance payment in the dismissal letter and makes it conditional on you letting the filing deadline pass. The amount is fixed: 0.5 months’ salary per year; a period of more than six months is rounded up (§ 1a para. 2 KSchG). Anyone who files a claim loses this entitlement, even if they later withdraw the claim (BAG, judgment of 13 December 2007, case 2 AZR 971/06). The offer is only worthwhile if the dismissal is hardly open to legal challenge. You can accept or decline it, but you cannot negotiate it.

Under § 9 para. 1 KSchG, the labour court dissolves the employment relationship on application and sets a severance payment if the dismissal was invalid but continuation cannot reasonably be expected. The cap is twelve months’ salary, fifteen from age 50 with 15 years of service, and eighteen from age 55 with 20 years of service (§ 10 paras. 1, 2 KSchG). These caps apply only to the dissolution judgment, not to a settlement. The increased caps do not apply from the standard retirement age. What counts is your age at the time of dissolution (§ 10 para. 2 sentence 2 KSchG). More on this in the guide The Dismissal Protection Act and severance pay in detail (currently available in German only).

Severance pay, tax and unemployment benefit

Severance pay is subject to income tax. It counts as compensation for lost income (§ 24 No. 1 letter a EStG). Social security contributions are not payable as long as it offsets the loss of the job and does not settle outstanding wages (§ 14 para. 1 SGB IV). Since January 2025 the employer no longer applies the one-fifth rule when withholding wage tax.

The one-fifth rule since 2025

§ 34 para. 1 in conjunction with para. 2 no. 2 EStG continues to apply unchanged, but now only takes effect in the assessment procedure. You claim the reduced tax rate through your income tax return.

On payment, the employer initially withholds the full wage tax; the tax office refunds the difference after assessment.

Suspension period and dormancy of the claim

Severance pay is not offset against the amount of unemployment benefit. But it can postpone the start of payment: if the employment relationship ends without the employer’s ordinary notice period being observed, the claim is dormant until the day on which it would have ended had that period been observed, for a maximum of one year (§ 158 paras. 1, 2 SGB III).

This is separate from the suspension period. Anyone who ends the employment relationship themselves without good cause, for example through a termination agreement, receives a twelve-week suspension period. It is reduced to three weeks if the employment relationship would have ended within six weeks anyway, and to six weeks in cases of particular hardship (§ 159 para. 3 SGB III).

Simply accepting a dismissal by the employer does not trigger a suspension period, even if you accept a severance payment. The same applies, under the Federal Employment Agency’s operational guidance on § 159 SGB III, to a court settlement without prior conduct contrary to the insurance scheme. The route via a claim and a settlement is therefore the only one in which neither a suspension period nor dormancy of the claim is a risk.

The details on § 159 SGB III are explained in the guide Suspension period for unemployment benefit.

Further information on employment law

These topics may also be of interest:

• Unfair dismissal claim
• Received a dismissal
• Reviewing a termination agreement
• Entitlement to severance pay (currently available in German only)
• Dismissal to the end of the month (currently available in German only)
• Severance pay by length of service (currently available in German only)
• What is severance pay? (currently available in German only)
• The Dismissal Protection Act and severance pay (currently available in German only)
• When the company is sold (currently available in German only)
• Severance pay after resigning yourself (currently available in German only)