Severance payment

Severance pay is a one-off payment made by the employer to the employee. It is paid out when the employee loses their job, as a form of compensation.

Requirements for a severance payment

Such a payment follows legal rules and is individual. For this reason, there are some requirements that must be observed.

A settlement is payable in the following cases:

• severance payment rules are laid down in a social plan, collective agreement, management contract or individual employment contract.
• contractual agreement in the termination agreement.
• employee can rely on customary law because colleagues who have previously left the company also received severance pay.
• the employer offers a severance payment under the Dismissal Protection Act.
• the employer has acted in breach of contract or has given notice of termination without notice.

Workers who are not employees but are subject to social security contributions can also receive severance pay. It is generally intended as compensation, as the employee suffers losses as a result of the dismissal.

Legal requirements

Some employees who have been made redundant will certainly have the following thought: “If I’m made redundant, at least I want money for it.”

But this is not the rule. It is only a matter for negotiation between the employer and the employee.

There are also a number of legal requirements that must be observed in the event of dismissal for operational reasons:

• A “partial” year of employment is rounded up to a full year.
• The starting point is the salary that the employee receives in the month in which the notice of termination is given.
• The amount of severance pay that the employee can demand is half a gross monthly salary

How to calculate severance pay

Executives and some respected managers in large companies receive enormously high severance payments. However, this is not a benchmark.

Important: If you have fundamental doubts that a dismissal is not legal, then the chance of a high severance payment increases. The final amount must be calculated individually, taking various factors into account.

The following factors are included in the calculation:

• Duration of employment
• Industry
• Employee position in the company
• Negotiating skills of the employee or their lawyer
• Employee’s chances of finding a new job
• General conditions of the new workplace
• potential misconduct by the employee

Age also plays a decisive role.

An employee who is older than 50 and has also worked for the company for at least 15 years is entitled to up to 15 months’ earnings.

If the employee is older than 55 and has worked for the company for at least 20 years, they are entitled to up to 18 months’ earnings.

Are social security contributions due?

Particularly good: severance payments are non-contributory as long as they are paid as compensation when an employment relationship is terminated. It must be clear that the employee will no longer have any future earnings due to the loss of their job.

Accordingly, the employee does not have to pay any contributions to pension, health, long-term care or unemployment insurance.

Unemployment benefit & severance pay

Despite the severance payment, the employee is entitled to the full amount of unemployment benefit.

If the employee leaves the company by mutual agreement with the employer before the end of the notice period, he or she is only entitled to unemployment benefit after the notice period has expired.

If there is a termination agreement between employer and employee, the employment office has the option of blocking unemployment benefit for 3 months. The exception here: There is a contractual clause which states that the contract was only concluded in order to avoid dismissal for operational reasons. In the case of a so-called settlement contract, this block also does not apply.