No automatic entitlement, but often negotiable: learn when you are entitled to severance pay, how to calculate the amount and what tax planning options are available.
Severance Pay: Myth and Reality
Many employees assume that they are automatically entitled to severance pay upon dismissal. This widespread misconception regularly leads to disappointment. The reality is more nuanced: there is no general statutory right to severance pay in Germany. Nevertheless, in practice, severance payments are made in a significant proportion of all dismissals — whether due to specific statutory provisions, collective bargaining agreements or individual negotiations.
This article explains comprehensively when a severance entitlement actually exists, how to realistically estimate the amount, which negotiation strategies are promising and how to optimise the tax burden.
When Does a Right to Severance Pay Exist?
Statutory Severance Entitlement Under § 1a KSchG
Since 2004, the Protection Against Dismissal Act has contained an express severance provision in § 1a. Under this provision, an employee is entitled to severance pay where:
- The employer issues a redundancy-based dismissal
- The employer states in the dismissal letter that the dismissal is based on operational reasons
- The employer offers the employee severance pay on condition that the employee does not file an unfair dismissal claim
- The employee allows the three-week filing deadline to lapse
In this case, the amount is 0.5 gross monthly salaries per year of service by operation of law (§ 1a Abs. 2 KSchG). In practice, however, this provision is rarely used, as most employers do not offer the severance payment in the dismissal letter itself.
Severance Through Court Settlement
The most common route to severance pay is through an unfair dismissal claim. At the conciliation hearing before the labour court, the parties frequently agree on a severance payment:
- Approximately 50% of all unfair dismissal proceedings end in a settlement
- The courts actively encourage settlements to spare both sides litigation risks
- The amount is freely negotiable and depends on the prospects of the claim
Severance Through Dissolution Judgment (§§ 9, 10 KSchG)
If the labour court finds that a dismissal was socially unjustified, it may, upon application by either party, nevertheless dissolve the employment relationship and award severance pay where:
- Continuation of the employment relationship is unreasonable for the employee, or
- Productive cooperation is no longer feasible for the employer
Severance pay amounts to up to 12 monthly salaries, or up to 18 monthly salaries for older employees with long service.
Severance Through a Social Plan
In the case of operational changes (e.g. mass redundancies, plant closures), the works council and employer may agree a social plan containing severance provisions. These entitlements arise under §§ 111 ff. BetrVG and are binding on all affected employees.
Severance Through a Termination Agreement
Employers frequently offer severance pay in the context of a termination agreement. This is a voluntary arrangement — the amount is a matter of negotiation.
Calculating the Severance Amount
The Rule of Thumb
The following rule of thumb has become established in practice:
Severance = 0.5 x gross monthly salary x years of service
Example: With a gross monthly salary of EUR 5,000 and 10 years of service, the standard severance amounts to EUR 25,000 gross.
Factors Influencing the Amount
The actual severance amount may deviate considerably from the rule of thumb. Relevant factors include:
- Prospects of an unfair dismissal claim: The weaker the dismissal, the higher the severance
- Age of the employee: Older employees often have poorer labour market prospects, which strengthens their negotiating position
- Length of service: Long service strengthens the position
- Reason for dismissal: In cases of conduct-related dismissal, the prospects are lower than for redundancy-based dismissal
- Financial situation of the employer: Companies in financial difficulty tend to pay less
- Special dismissal protection: Severely disabled persons, pregnant employees or works council members have a stronger negotiating position
- Industry and region: In certain industries (e.g. financial services, pharmaceuticals), above-average severance payments are common
Severance Factors in Practice
In practice, the factors typically range as follows:
- Standard cases: 0.5 to 1.0 monthly salaries per year of service
- Strong employee position: 1.0 to 1.5 monthly salaries
- Exceptional cases (e.g. executives, discrimination): 1.5 to 3.0 monthly salaries or more
Negotiation Strategies
Before the Negotiation
- File the unfair dismissal claim on time: The three-week filing deadline under § 4 KSchG is mandatory. Without a claim, you lose your negotiating position almost entirely.
- Analyse the legal position: Carefully review the validity of the dismissal — formal errors, failure to consult the works council or inadequate social selection are common points of attack.
- Define your target: Set a realistic severance expectation, but also a minimum acceptable amount.
During the Negotiation
- Remain objective: Emotional conflicts damage the negotiating climate
- Highlight alternatives: In addition to the severance amount, other elements can be negotiated (garden leave, reference, outplacement support)
- Use the time factor: Employers often have an interest in reaching a swift agreement to end uncertainty
- Professional representation: An experienced specialist employment lawyer can significantly strengthen your negotiating position
Tax Treatment of Severance Pay
Principle: Severance Pay Is Taxable
Severance payments are subject to income tax as extraordinary income pursuant to § 34 EStG. However, they are exempt from social security contributions — no health insurance, pension, unemployment or long-term care insurance contributions are payable.
The One-Fifth Rule (§ 34 Abs. 1 EStG)
The one-fifth rule mitigates tax progression for lump-sum payments:
- The severance payment is notionally spread over five years
- One fifth is added to the regular income
- The resulting additional tax burden is multiplied by five
- The result is the tax attributable to the severance payment
Requirement: The severance payment must constitute compensation for lost or forgone income and must be received in a single tax year (concentration of income).
Important: Since 2025, the one-fifth rule is no longer applied by the employer in the payroll tax deduction but only in the income tax return. You must therefore actively claim the relief in your tax return.
Planning Options
- Timing of payment: Shift the severance payment to a year with lower income (e.g. the following year, if you do not start working again immediately)
- Lump-sum payment: The one-fifth rule requires that the severance is paid in a single amount — instalment payments are detrimental
- Combination with garden leave: Paid garden leave until the termination date followed by a severance payment can be more tax-efficient
Termination Agreement vs. Settlement Agreement
Termination Agreement
In a termination agreement, employer and employee agree by mutual consent to end the employment relationship. Advantages and risks:
- Advantage: Freely negotiable terms (severance, garden leave, reference)
- Risk: Generally a waiting period for unemployment benefit of up to 12 weeks, as you actively participate in the termination
- Risk: No right of withdrawal — once signed, the agreement is binding
Settlement Agreement
A settlement agreement is concluded after a dismissal has been issued and governs the terms of termination:
- Requires a validly issued dismissal
- Waiting period risk is lower but not excluded
- Frequently combined with a waiver of the right to bring a claim by the employee
Waiting Period for Unemployment Benefit
General Rule
The Federal Employment Agency imposes a waiting period of 12 weeks pursuant to § 159 SGB III where the employee has caused the unemployment themselves. This is particularly the case where:
- The employee resigns without good cause
- A termination agreement is concluded
- A conduct-related dismissal is provoked
Avoidance Strategies
- Demonstrate good cause: Where the employer has threatened a redundancy-based dismissal and the severance is in the range of 0.25 to 0.5 monthly salaries per year of service, the Employment Agency often accepts this as good cause
- Observe the notice period: The termination should not take effect before the date on which the employer could have given ordinary notice
- Settlement agreement instead of termination agreement: Following an employer-initiated dismissal, the waiting period risk is lower
Conclusion: Professional Advice Makes the Difference
Negotiating a severance payment is one of those moments where professional employment law advice makes the greatest difference. Knowledge of your own legal position, a realistic assessment of the negotiating scope and consideration of tax and social security implications can result in a difference of several tens of thousands of euros.
Do not allow yourself to be placed under time pressure and do not sign any agreement without having it reviewed by a lawyer first. The investment in qualified advice almost invariably pays for itself many times over.
compleneo supports you competently throughout the entire process — from the initial assessment through negotiation to the tax-optimised structuring of your severance payment.
