Severance pay: How much am I entitled to?

Anyone who receives a notice of termination or is presented with a termination agreement almost always asks themselves the same question: Will I receive a severance payment, and if so, how much?

The honest answer is: in Germany, there is usually no automatic entitlement to a severance payment. In many cases, it is a matter of negotiation. That is precisely why it is risky to sign anything too hastily.

Many employees initially focus solely on the sum offered. That is a mistake. What matters is not just how much the severance pay is, but also which rights you are waiving by signing and what consequences this may have for unemployment benefits, taxes and other entitlements.

The most important points in brief

A severance payment is usually not a mandatory payment by the employer.

It often arises from negotiations, a court settlement, a redundancy plan or a termination agreement.

The well-known rule of thumb of 0.5 gross monthly salaries per year of service is only a rough guide and not a fixed rule for every case.

Anyone who has received a notice of termination should not wait too long. In labour law disputes, short deadlines are often crucial.

Am I even entitled to a severance payment?

In most cases, there is no automatic entitlement.

This surprises many people. In everyday life, it often seems as though severance pay is automatically paid following every dismissal. In reality, however, this is not the case. Employers often pay severance pay because they wish to avoid a dispute, need planning certainty quickly, or wish to avoid the risk of litigation.

This means that severance pay is often not simply a given, but must be negotiated.

There are, of course, individual exceptions where a claim may be expressly regulated. In practice, however, what is far more decisive is how strong your legal position is and how much pressure there is on the employer to reach an agreement.

How is a severance payment calculated?

The best-known rule of thumb is:

Severance pay = 0.5 x gross monthly salary x years of service

A simple example:

If you earn €4,000 gross per month and have been employed by the company for 8 years, this rule of thumb results in a severance payment of €16,000 gross.

That sounds straightforward, but it is only a rough starting point. In reality, the amount can be significantly higher or lower.

Why the rule of thumb is often just a starting point

Many employees regard the formula as a fixed rule. It is not.

The actual amount often depends on how valid or invalid the dismissal is. The higher the risk for the employer, the better the chances of a higher severance payment are usually.

The following questions are important, for example:

• Does the protection against unfair dismissal apply?
• Are there any formal errors in the dismissal?
• Is the selection of employees for redundancy open to challenge?
• Is there special protection against dismissal?
• How long has the employment relationship lasted?
• What is the salary?
• Does the employer have an interest in a quick and quiet settlement?

The severance payment is therefore often less a matter of calculation than a matter of negotiation.

Factors influencing the amount of the severance payment

1. Length of service

The longer you have been with the company, the stronger your negotiating position is likely to be. Long service often also increases the financial risk for the employer.

2. Salary level

The higher your salary, the higher the starting figure usually is, purely from a mathematical point of view.

3. Prospects of success in the event of a dispute

If there are strong grounds to suggest that the dismissal is open to challenge, the employer is often more willing to negotiate.

4. Type of termination

Whether it involves a dismissal, a termination agreement or a court settlement makes a significant difference in practice.

5. Negotiation situation

Some employers simply want things settled quickly. Others take a tougher stance. This also influences the severance pay.

Severance pay following dismissal: What is realistic?

Many employees want to know what amount is realistic.

There is no one-size-fits-all answer to this. In some cases, the outcome falls roughly within the range of the well-known rule of thumb. In other cases, significantly more is possible. However, there are also situations in which a small severance payment or no severance payment at all is realistic.

A stronger negotiating position often arises when:

• the dismissal appears legally contestable
• the employer has made mistakes
• there is special protection against dismissal
• the case could become awkward or costly for the employer in court

The position is often weaker when:

• the employment relationship has not been in place for long
• protection against dismissal does not apply
• the dismissal has been well prepared
• the employer is under little pressure

Negotiating a severance package: What really matters

The biggest mistake is to accept the first offer as a done deal.

Many employees sign too soon because they are relieved to have received an offer at all. This is precisely what employers often exploit. Anyone who signs before their own position has been properly assessed is often giving away money.

It is also important to remember: it is not just about the sum itself.

You should also pay attention to, amongst other things:

• paid leave
• remaining holiday entitlement
• overtime
• bonuses or commission
• Wording of the reference
• Termination date
• Return of work equipment
• Compensation clauses in the contract

A contract with a slightly lower severance payment may ultimately be better if other points are clearly settled.

Before you sign: You should check these points

Termination date

When exactly does the employment relationship end? This question is more important than many people realise.

Unemployment benefit

A termination agreement or an ill-advised clause can have a negative impact on your unemployment benefits.

Outstanding entitlements

Are there any outstanding holiday entitlements, overtime, bonuses, commissions or other elements of remuneration?

Settlement clause

Does the contract state that all mutual claims are settled upon payment? If so, you may be giving up more than you realise.

Reference

Has it been agreed what kind of reference you will receive?

Do I have to pay tax on a severance payment?

Yes, in principle, a severance payment is taxable.

Many people confuse this with social security contributions. Taxable does not automatically mean that the same deductions apply to the severance pay as to a normal salary.

In practice, it depends very much on how the payment is structured and which tax rules apply in each individual case. That is why you should never look solely at the gross amount.

How much of the severance pay remains after tax?

That is often the much more important question.

A severance payment of €20,000 or €30,000 sounds good at first glance. However, what really matters is what is actually left after tax and whether there are any additional disadvantages, such as with unemployment benefit or through the loss of other entitlements.

That is why a severance payment should never be assessed in isolation. You must always consider the deal as a whole.

Termination agreement and severance pay: why particular caution is needed

A termination agreement often sounds neat and tidy. That is precisely what makes it dangerous.

Many employees believe that a termination agreement with a severance payment is automatically a good deal. That is not true. Often, its main purpose is to quickly eliminate legal risks for the employer.

Anyone who signs too soon may lose the chance to negotiate a better deal or enforce other claims.

This is why termination agreements in particular should be scrutinised carefully:

• Is the severance payment really fair?
• Is the termination date reasonable?
• What are the implications for unemployment benefit?
• Which claims are settled by this?
• Are there better alternatives?

When is a higher severance payment possible?

A higher severance payment is usually more realistic if the employer has something to lose.

This may be the case, for example, if:

• the dismissal is legally questionable
• deadlines or formalities have not been met
• the social selection process is problematic
• special protection against dismissal applies
• the litigation risk for the employer is high

The stronger your negotiating position, the more room for manoeuvre there usually is when it comes to the severance pay.

Conclusion: It’s not the first figure that counts, but the contract as a whole

The question “How much am I entitled to?” can rarely be answered with a single figure.

A severance payment is often not a fixed entitlement, but the result of pressure, negotiation and the legal situation. The well-known rule of thumb is only a rough starting point. What really matters is how strong your position is and what you are accepting overall by signing.

Anyone who looks only at the sum offered is thinking too short-term.

Those who look more closely often realise: it is not the first figure that matters, but the deal as a whole.

Frequently asked questions about severance pay

Am I automatically entitled to a severance payment?

No. In many cases, there is no automatic entitlement. Severance pay is often a matter of negotiation.

Is 0.5 months’ salary per year always the correct calculation?

No. This is merely a well-known rule of thumb and not a fixed standard for every case.

Is a higher severance payment possible?

Yes. Especially if your legal position is strong and the employer wants to avoid a high risk.

Do I have to pay tax on the severance pay?

Yes, in principle. The extent of the tax implications depends on the individual case.

Should I sign a termination agreement straight away?

Generally speaking, no. You should first check what the consequences of the agreement are and whether the proposed solution really makes sense.