That is exactly why signing too quickly is risky. Anyone who looks only at the sum on offer can easily overlook which rights they give up with their signature, and what consequences the agreement can have for unemployment benefit, tax and other claims.
The essentials at a glance
- A severance payment is in most cases not a compulsory payment by the employer.
- It often arises through negotiation, a court settlement, a social plan or a termination agreement.
- The rule of thumb of 0.5 gross monthly salaries per year of employment is a rough guide value, not a fixed rule for every case.
- After a dismissal, time matters: in employment disputes short deadlines are often decisive.
Am I entitled to a severance payment?
In most cases there is no automatic entitlement to a severance payment. In everyday life it often seems as if severance is paid as a matter of course after every dismissal. Legally, that is the exception.
Employers often pay because they want to avoid a dispute, need planning certainty quickly or shy away from the risk of litigation. As a rule, severance therefore has to be negotiated.
There are certainly individual situations in which an entitlement can be expressly regulated. In practice, however, what matters far more often is how strong your legal position is and how much pressure the employer is under to reach an agreement.
How is a severance payment calculated?
The best-known rule of thumb is: severance = 0.5 x gross monthly salary x years of employment.
An example: with 4,000 euros gross a month and 8 years of service, the rule of thumb produces a severance payment of 16,000 euros gross.
That looks clear-cut, but it is only a rough starting point. In reality the sum can turn out considerably higher or lower.
Why the rule of thumb is only a starting value
The formula is not a fixed rule that employers or courts have to follow. The actual amount depends above all on how vulnerable the dismissal is to challenge. The higher the risk for the employer, the better the chances of a higher severance payment usually are.
The following points are relevant, among others:
- whether protection against dismissal applies
- formal errors in the dismissal
- whether the social selection can be challenged
- special protection against dismissal
- the length of the employment relationship
- the level of the salary
- the employer’s interest in a quick and quiet separation
The amount of severance is therefore less calculated than negotiated. In the end, what counts is the starting position of both sides.
Which factors influence the amount of severance?
Length of service
The longer you were with the company, the stronger your position in the negotiation usually is. Long service often also increases the economic risk for the employer.
Level of salary
The higher your salary, the higher the starting value of the rule of thumb already is, purely arithmetically.
Prospects of success in a dispute
If much suggests that the dismissal is vulnerable, the employer’s willingness to negotiate usually increases. A carefully prepared dismissal, by contrast, noticeably reduces the room for manoeuvre.
Type of termination
Whether a dismissal, a termination agreement or a court settlement is on the table makes a big difference in practice. Each variant brings its own negotiating dynamic.
The negotiating situation
Some employers above all want peace and quiet quickly. Others calculate more harshly. This starting position, too, influences the severance payment.
Severance after dismissal: what amount is realistic?
There is no blanket answer to the question of what sum is realistic. In some cases the result lies roughly in the range of the well-known rule of thumb; in others, considerably more is possible. There are also situations in which a low severance payment, or none at all, is realistic.
A stronger negotiating position often exists when:
- the dismissal appears legally vulnerable
- the employer has made mistakes
- special protection against dismissal applies
- the case could become uncomfortable or expensive for the employer in court
The position is often weaker when:
- the employment relationship has not lasted long
- protection against dismissal does not apply
- the dismissal was well prepared
- the employer is under little pressure
Negotiating severance: what matters
The biggest mistake is accepting the first offer as final. Many employees sign too early because they are relieved to receive an offer at all. That is exactly what the employer side often exploits.
Anyone who signs before their own position has been properly reviewed often gives money away. Besides the sum itself, other points in the agreement matter too:
- paid release from work
- remaining holiday
- overtime
- bonus or commission
- the wording of the reference
- the termination date
- return of work equipment
- settlement clauses in the agreement
An agreement with a somewhat lower severance payment can end up being the better solution if these points are properly regulated.
Checkpoints before signing
Termination date
The exact end of the employment relationship is more important than many people think. It should be fixed before signing and fit your own planning.
Unemployment benefit
A termination agreement or an unwise wording can have a negative effect on unemployment benefit. This point should be clarified before signing.
Outstanding claims
Before the agreement is finalised, it should be clear whether holiday entitlements, overtime, bonuses, commissions or other components of pay are still outstanding. Such items can be brought into the negotiation.
Settlement clause
Many agreements contain a clause under which the payment settles all mutual claims. Anyone who signs such a provision may be giving up more than they realise.
Reference
The agreement should specify which employment reference you will receive. Without a clear provision, this point remains open after the employment ends.
Do I have to pay tax on severance?
Yes, severance is in principle subject to tax. Social security contributions, on the other hand, are usually not payable on it. Income tax therefore remains the main burden.
The one-fifth rule (Fünftelregelung) can often reduce the tax burden. Since 2025, however, it is no longer applied automatically in the wage tax deduction; the benefit has to be claimed through the income tax return.
How much of the severance is left net?
For your own planning, the net amount is often the more important figure. A severance payment of 20,000 or 30,000 euros sounds good at first glance. What matters is what actually remains after tax, and whether additional disadvantages arise, for instance for unemployment benefit or through the loss of other claims.
A severance payment should therefore never be assessed in isolation. What matters is the overall package of sum, contract terms and knock-on effects.
Termination agreement and severance: why particular caution is needed
A termination agreement often looks orderly and clean. That very impression is what makes it risky. It often serves above all to remove legal risks for the employer quickly.
A termination agreement with severance is therefore not automatically a good outcome. Anyone who signs too early may lose the chance to negotiate better terms or to enforce other claims.
With termination agreements in particular, several points should be checked before signing:
- whether the severance payment offered is appropriate
- whether the termination date makes sense
- the consequences for unemployment benefit
- the scope of the settlement clause
- possible alternatives to the termination agreement
When is a higher severance payment possible?
A higher severance payment is usually realistic when the employer has something to lose. Typical situations are:
- a legally shaky dismissal
- deadlines or formalities that were not observed
- a problematic social selection
- existing special protection against dismissal
- a high litigation risk for the employer
The better your negotiating position, the more room there usually is on the sum as well.
Conclusion: the whole agreement determines the value of the severance payment
The amount of an appropriate severance payment can rarely be answered with a single figure. It is usually the result of pressure, negotiation and the legal starting position. The well-known rule of thumb only provides a rough starting point for this.
What really matters is how strong your position is and what you accept overall with your signature. Anyone who looks only at the sum on offer is thinking too narrowly. Only the whole agreement, with all its secondary points, shows how good a settlement really is.
