Severance Pay in Germany [2024 Expats Guide]

Key takeaways

• You usually get severance pay of between half and one gross monthly salary per year of employment.
• You are entitled to severance pay if you worked for the employer for at least 6 months and the company has more than 10 full-time employees. 
• You are also entitled to severance pay if you are terminated for operational reasons.
• Companies offer severance pay to avoid wrongful termination lawsuits.

This is how you do it

• Start looking for a new job if you expect a dismissal soon.
• Get employment legal insurance to cover the legal costs. Legal insurance has waiting periods of 3 to 6 months. So, the sooner you take it, the better.
• Never accept or sign a termination agreement immediately.
• Seek legal advice if you believe it’s a wrongful termination or the severance pay is too low. 

Table of Contents

How much severance payment do you get in Germany?

You can expect the severance payment between half and one gross monthly salary per year of employment. You, as an employee, receive a severance payment if the employment relationship ends with a termination agreement. 

The employers pay the severance pay as an incentive to end the employment relationship by mutual agreement without going to the labor court (Arbeitsgericht). 

NOTE: You must file for the wrongful termination suit within three weeks after receiving the termination letter. If you don’t file the suit, it automatically means you accepted the termination agreement.

When are you entitled to severance pay in Germany?

You are entitled to severance pay in the following cases ( Section 1a of the KSchG ):

• The Dismissal Protection Act (Kün­di­gungs­schutz­ge­setz): Your employment relationship has existed for six months, and the company has more than ten full-time employees ( Section 23 Paragraph 1 KSchG ).
• You are terminated for operational reasons, such as economic difficulties, necessary restructuring, etc. The termination letter must reference the urgent operational requirements that lead to your dismissal.

When are you not entitled to severance pay in Germany?

You won’t receive severance pay in the following situation.

• Your employer terminates you because of wrongful behavior. For example, you insulted your boss, hit a fellow colleague, etc.
• You quit the job for personal reasons.

What factors do the severance pay depend on?

The amount of severance pay depends on four factors:

1. Your last gross monthly salary
2. Industry and region
3. Duration of employment
4. Your negotiation skills

Salary and duration of employment

The higher the gross monthly salary and the duration of employment, the higher the severance pay. You can expect an even higher severance pay in the following cases.

• You believe your termination is unfair.
• You have special protection against dismissal. For example, you are on maternity or parental leave, you are a member of the workers’ council, etc.

The time you were not working also counts as periods of employment. This applies to parental leave and sick leave for which you received sick pay. 

Moreover, the partial year is rounded to a full year if you worked more than six months in that year.

The employer must also consider the holiday and Christmas bonuses while calculating the severance pay amount.

Region

Based on the internal data of the Chevalier law firm, Employees in different German federal states received different severance pay. Employees in the West, on average, received more severance pay than those in the East.

Let’s look at the severance payment factor to get a fair picture.

Severance payment factor = (Severance payment) / (Gross monthly salary * Full years of employment).

The average severance payment factor in 2021 for  

• West Germany was 0.64. 
• East Germany, including Berlin, was 0.52.

This means you’ll receive 19% less severance pay if you work in East Germany than in the West. [1]

How should you behave when expecting or receiving a termination?

A termination is only valid if given in writing. Termination on WhatsApp, messages, or calls is not legally binding.

Here is how you should act when you are expecting a termination.

• Get Employment legal protection insurance if you don’t have one.
• Start looking for jobs.
• Prepare yourself mentally and financially.

Here is how you should act when receiving the dismissal news.

• You should always state clearly that you want to continue working for your employer.
• Never sign any document nor agree to the termination or severance package immediately. 
• Check if you have special protection against dismissal.
  • You are on maternity or parental leave.
  • You are a member of the workers’ council.
• Consult a lawyer specializing in labor law to clarify your doubts.

You should accept the termination agreement only after you have consulted a lawyer and found the termination and the severance package fair.

NOTE: In the labor law, the losing party doesn’t pay the legal costs of the winning party. This means that irrespective of you winning or losing the case, you must pay the lawyer’s and court’s fees.

If you have legal insurance, it’ll cover the legal costs.

NOTE: Top rating agencies in Germany rated Arag—Aktiv-Premium, WGV—Optimal PBV, and KS / Auxilia—Jurprivat as the best legal insurance plans in Germany.

What does accepting the severance pay mean?

Companies offer money (severance pay) in exchange for a waiver of action. This means you waive your right to sue the company against the termination. 

The termination agreement contains the waiver of action ( Section 1a KSchG ). The “waiver of action” text may look something like this.

 “You can defend yourself against this dismissal within three weeks by filing a lawsuit with the local labor court. However, we assume that your job has been permanently eliminated.

You can claim severance pay if you allow the deadline to file a lawsuit to pass without filing a lawsuit with a labor court.

The amount of the severance payment is 0.5 monthly wages for each year of the employment relationship. According to our calculations, this results in a severance payment claim of xxx euros.”

The termination agreement will be in German. The above text is written in English for your reference only.

What taxes do you pay on severance pay in Germany?

Severance payments are exempt from social security contributions ( Section 14 of the Social Code Book IV ). However, they are part of your taxable income, and you pay tax according to your personal tax rate. 

One exception to the “social security contribution” rule is if you are voluntarily insured in statutory health insurance after leaving the job, a statutory health insurance premium is levied on your severance pay. 

You’ll be voluntarily insured if

• you do not have a new job after leaving your old company,
• and your entitlement to unemployment benefits is suspended.

How do you save taxes on your severance pay?

1. Apply for a so-called fifth rule (Fünftelregelung)

This rule calculates the tax on the severance pay as if you received it over five years. The fifth rule reduces your tax in the following way.

• By considering one-fifth of the severance pay instead of the whole, your taxable income in a year is reduced, thus lowering your tax rate.
• The total taxable amount in a year is reduced, thus reducing the tax. 

2. Contribute full or part of the severance payment to the statutory pension scheme

You can save taxes by voluntarily contributing full or part of your severance pay to the state pension scheme if you are 50 or older.

This saves you taxes as half of the contribution (i.e., employer’s part) is tax-free ( Section 3 No. 28 EStG ). You can contact the state pension provider to check how to do it.

Benefits of paying severance package for employers

Terminating the employment relationship via a mutual agreement is the best for both the employer and the employee. 

If an employee decides to appeal the dismissal in labor court, the termination cost for the employer may increase for the following reasons.

• If the responsible labor court rules that the termination was wrongful, the severance pay will get much higher.
• Suppose the proceedings before the labor court drags on, and the employer loses the case. The employer must pay the entire wage from the end of the notice period until the final decision of the labor court. Moreover, the employee was working for the employer during this period. Additionally, the employer will also incur legal and court costs. 

References

• https://www.finanztip.de/aufhebungsvertrag/arbeitsrecht-abfindung/
• https://www.kanzlei-chevalier.de/blog/abfindungszahlungen-im-ueberblick-ostdeutschland-weiterhin-benachteiligt