EVERYTHING YOU NEED TO KNOW ABOUT SEVERANCE PAY

Dismissal, mutual termination agreement, negotiations and unemployment benefit – an overview of the key points regarding severance pay.

What is a severance payment?

A severance payment is a sum of money paid or agreed upon in connection with the termination of an employment relationship. It is often intended to provide financial compensation for the separation or to facilitate an agreement between the employer and the employee. 

Many employees assume that a severance payment is automatically included in the event of dismissal or a termination agreement. This is precisely one of the most common misconceptions. In practice, a severance payment is often only paid if it is expressly offered, agreed or negotiated. 

In concrete terms, this means for you: not every termination of employment automatically results in a financial payment. The decisive factors are, above all, the strength of your position and whether the employer has an interest in reaching a swift or secure settlement. The most important question is therefore not only whether a severance payment is on the table, but also whether the offer is appropriate for your situation. Our lawyers, who specialise in severance payments, will support you in achieving the best possible outcome in your case. 

When are you entitled to a severance payment?

A severance payment is particularly relevant when the employment relationship is to be terminated and the employer wishes to reach an agreement or avoid a dispute. Typical situations include:

• dismissal by the employer
• a mutual termination agreement
• an agreement between employer and employee
• a situation in which the employer wishes to terminate the employment relationship as quickly and predictably as possible 

It is important to note that a severance payment does not arise automatically simply because the employment relationship ends. In many cases, the more difficult it is for the employer to terminate the employment relationship without an agreement, the greater the scope for a severance payment. 

This is precisely why it is often worthwhile to seek legal advice at an early stage. Those who misjudge their own position often go into negotiations with too little leverage.

What determines the amount of a severance payment?

Many people look for a set formula. In practice, however, the matter is considerably more complex. Whilst half a month’s salary per year of service is often cited as a rough guide, this figure may be helpful for an initial assessment, it is by no means a fixed rule that applies in every case. The actual amount depends, amongst other things, on:

• how long you have been employed by the company
• how much you earn
• how strong your negotiating position is
• how keen the employer is to reach an agreement
• whether the employer could otherwise dismiss you without major problems
• what other issues remain unresolved, such as leave of absence, a reference, bonuses or holiday entitlement 

This means: a severance payment is often not simply calculated, but negotiated. Those who rely solely on a rough rule of thumb often assess their own situation too superficially. If you’d like to assess this more accurately, the article “How much is my severance pay? How to realistically estimate your severance pay” is particularly relevant.

Severance pay upon dismissal vs. severance pay under a mutual termination agreement

Whether you have been dismissed or are about to sign a mutual termination agreement makes a significant difference to your situation. 

Severance pay in the event of dismissal 

When the employer terminates the contract, the question often arises as to whether the termination would actually be valid without further ado. This is precisely where room for negotiation can arise. If the termination appears open to challenge or the employer wishes to avoid a dispute, they are often more willing to pay a severance payment. 

Severance pay in a termination agreement 

In a termination agreement, you yourself agree to the termination of the employment relationship. A severance payment can also be agreed here. At the same time, however, there is a risk that employees will sign too hastily and thereby give away money, rights or room for negotiation. 

In practice, this means: the question “How much will I get?” can never be answered properly without first clarifying the situation you are in.

Why severance pay and unemployment benefit must always be considered together

A common mistake is to focus solely on the amount of the severance pay. That is not enough. Even a substantial severance payment can work out significantly worse financially if it results in a reduction in your unemployment benefits. This is particularly critical in the case of a termination agreement. If you play a part in the termination of your employment, you may face a waiting period for unemployment benefits. In concrete terms, this means for you:

• The severance pay looks attractive at first glance
• At the same time, you may not receive unemployment benefit for several weeks
• In the end, you are left with significantly less than expected 

A severance payment can therefore only be realistically assessed if the implications for your unemployment benefits are also taken into account. If this issue is relevant to your situation, be sure to read the article “Severance pay and unemployment benefits: What you absolutely must bear in mind”.

Common mistakes regarding severance pay

In practice, the same mistakes crop up time and again:

• It is assumed that there is an automatic entitlement
• The first offer is accepted too hastily
• One’s own negotiating position is underestimated
• Unemployment benefit and the waiting period are not taken into account
• The focus is solely on the amount of money and not on the overall package
• Important points such as leave of absence, a reference, holiday entitlement or a bonus are left unresolved 

The last point in particular is often underestimated. A slightly higher severance payment is of little use if money or entitlements are lost elsewhere. A good solution therefore consists not just of a figure, but of a coherent overall package.

Why individual classification is so important

There is no one-size-fits-all answer to whether a severance payment is realistic in your situation and how much it might amount to. The specific circumstances of each case are always decisive. Important questions include, for example:

• Is the dismissal contestable?
• Should a termination agreement be signed?
• Are there any potential disadvantages regarding unemployment benefit
• Are there any further claims outstanding
• How much pressure is there on both sides
• How strong is your overall position 

Only when these points are considered together can it be assessed whether an offer is viable or whether more could be achieved. A severance payment is not merely a matter of arithmetic. It is almost always also a question of the legal and tactical starting position. Many people lose out financially not because of the figure in the contract, but because they misjudge their situation. Our employment lawyers will examine what options are available in your situation and what course of action makes sense.

Advantages and disadvantages of a severance payment

A severance payment is not inherently good or bad. What matters is how it comes about and what consequences it entails.