Severance payments in Germany: how to assess an offer

A severance payment is not an automatic consequence of every dismissal in Germany. It is commonly negotiated as part of a court settlement, a termination agreement, a restructuring process or another agreed separation.

No general automatic entitlement

German employment law does not provide a universal rule under which every employee receives severance after a dismissal.

A payment may nevertheless become relevant where the parties wish to resolve uncertainty concerning dismissal protection, continued employment, litigation risk or the economic consequences of ending the employment relationship.

Formulas are only a starting point

A frequently used calculation approach refers to monthly remuneration and length of service. Such formulas may provide a rough orientation, but they do not determine the legally or economically appropriate result in every case.

The negotiating position depends on the circumstances of the individual employment relationship and the risks faced by both parties.

Factors that may affect the amount

Relevant considerations may include:

• the applicability and strength of dismissal protection
• formal or procedural weaknesses in the dismissal
• length of service
• fixed and variable remuneration
• the prospects of continued employment
• evidence and litigation risk
• the employee’s and employer’s negotiating objectives
• the expected duration and cost of proceedings
• special protection or approval requirements
• restructuring circumstances and selection issues

Assess the complete separation package

The severance amount should not be reviewed in isolation. The overall value may also depend on:

• the agreed termination date
• continued remuneration during the notice period
• garden leave and holiday treatment
• bonus, commission and other variable remuneration
• company car and other benefits
• employment reference wording
• return of company property
• post-contractual restrictions
• tax timing and payment structure
• unemployment-benefit consequences
• settlement and waiver clauses

A higher headline payment may be less favourable if valuable contractual or financial claims are surrendered elsewhere in the agreement.

Coordinate negotiations with court deadlines

Settlement discussions do not automatically suspend a deadline for bringing an unfair-dismissal claim. Where a dismissal has been received, the possible three-week court deadline should therefore be checked independently of any ongoing negotiations.

Review broad settlement clauses carefully

Termination and settlement agreements often contain wording intended to resolve all mutual claims. Such clauses may affect remuneration, bonuses, holiday compensation, expenses, pension rights or other claims that are not specifically listed.

The scope of the settlement wording should therefore be understood before the agreement is signed.