A termination agreement can be both an opportunity and a risk for employees. This amicable termination of the employment relationship between employer and employee offers flexibility, but also involves considerable legal and financial pitfalls. In this comprehensive guide, you will learn everything you need to know about the advantages and disadvantages, legal aspects and what you should be aware of before signing.
What is a termination agreement and when is it used?
A termination agreement is a written agreement between the employer and employee that terminates the existing employment relationship by mutual consent at a specific point in time. In contrast to a unilateral termination, both parties must agree to the contract. According to Section 623 of the German Civil Code (BGB), the written form is mandatory - verbal agreements or e-mail agreements are invalid.
Termination agreements are used in various situations: in the event of planned plant closures, downsizing, ongoing conflicts in the workplace or when employees want to move flexibly to a new employer. Companies often offer termination agreements as an alternative, particularly in the event of impending redundancies.
The advantages of a termination agreement for employees
Flexibility in the time of termination
A key advantage is the flexibility in terms of time. While statutory or contractual notice periods must be observed for regular terminations, these can be agreed individually in a termination agreement. This allows both a shortening and an extension of the notice period, depending on the employee's needs.
Settlement negotiations
A severance payment is usually part of the termination agreement. Employees can often negotiate higher severance payments than would be usual under statutory severance arrangements. The amount is often based on 0.5 to 1.0 gross monthly salary per year of employment, but can vary depending on negotiating skills and circumstances.
Protection of professional reputation
Unlike dismissals for conduct-related or personal reasons, no reason for dismissal is stated in the termination agreement. This protects your professional reputation and makes it easier to apply to future employers. In addition, the wording of the reference can be stipulated in the contract.
Avoidance of protracted legal disputes
If a controversial dismissal is pending, a termination agreement can save both parties from a time-consuming and costly dismissal protection lawsuit. Employees have planning security and can concentrate on their job search instead of waiting months for a court ruling.
The disadvantages and risks for employees
Loss of protection against dismissal
The most serious disadvantage is the complete waiver of statutory protection against dismissal. Employees can no longer take action against a potentially invalid dismissal after the contract has been concluded. This also applies to special protection for pregnant women, severely disabled persons or works council members.
Blocking period for unemployment benefit
The Federal Employment Agency often imposes a blocking period of up to twelve weeks, as the employee has actively contributed to the termination of their employment relationship. This blocking period can only be avoided if it can be proven that the termination agreement was concluded to avert a dismissal for operational or personal reasons.
Tax burden of the severance payment
The one-fifth rule for severance payments will undergo a significant procedural change in 2025: until now, employers have applied this tax relief in accordance with Section 39b (3) sentences 9 and 10 EStG directly in the payroll tax deduction procedure, which meant that employees immediately benefited from a reduced tax rate. From January 2025, this responsibility will shift completely to the tax offices - employers will no longer be allowed to take the provision into account directly when making payments. Affected employees must now independently apply for the application of the one-fifth rule in their tax return in order to receive the usual tax advantage through the arithmetical distribution of the severance payment over five years and the associated mitigation of the progression effect.
Loss of social security cover
After leaving the company, employees must take out their own health insurance if they do not immediately start a new employment relationship. The contributions to voluntary health insurance can be considerably higher than the previous employee contributions.
Legal pitfalls and formal requirements
The effectiveness of a termination agreement stands and falls with compliance with legal requirements. In addition to the mandatory written form, both parties must sign the agreement without pressure and in full knowledge of the consequences.
A breach of the requirement of fair negotiation can lead to invalidity. This is the case, for example, if the employer threatens dismissal without notice without a valid reason or if insufficient time is granted to consider the matter.
A lawyer for employment law can help to identify such grounds for invalidity and legally review the contract. Professional legal advice is particularly recommended for complex matters or high severance payments.
Negotiation tips and important contract clauses
Key contractual contents
A complete termination agreement should regulate the following points:
- Exact termination date of the employment relationship
- Amount and due date of the settlement
- Regulations on leave of absence and vacation compensation
- Formulation of the reference
- Return of company property
- Non-compete clauses and confidentiality obligations
Avoiding the blocking period
In order to avoid a blocking period, the contract should explicitly state that the termination agreement is concluded to avert a dismissal for operational or personal reasons. This clause is particularly important if the employer actually intended to terminate the contract.
Use the scope for negotiation
Employees should not accept the first offer that comes along. There is often room for negotiation, particularly when it comes to the amount of severance pay, the date of termination and the wording of the reference. A realistic assessment of your own negotiating position is crucial.
Reflection period and professional advice
The decision for or against a termination agreement should never be made under time pressure. Reputable employers allow a reasonable reflection period of at least one week. During this time, all aspects should be carefully examined and professional advice sought if necessary.
An experienced employment lawyer can not only assess the legal aspects, but also help to optimize the terms of the contract. The cost of advice is often disproportionate to the potential financial disadvantages of a poorly negotiated contract. Contact Rotwang Law for a free initial assessment.
Before signing, the effects on unemployment benefit, health insurance and tax should also be clarified. Discussions with the employment agency, health insurance company and a tax consultant can be helpful in this regard.
Conclusion: carefully weigh up the opportunities and risks
A termination agreement can be advantageous for employees, but it also entails considerable risks. The decision depends heavily on the individual circumstances: If a termination is imminent anyway, a well-negotiated termination agreement may be the better alternative. If the employment relationship has not been terminated, the disadvantages should be examined particularly critically.
Careful preparation and a realistic assessment of your own situation are crucial. Ultimately, a termination agreement should only be signed if the advantages clearly outweigh the disadvantages and all consequences have been fully understood.
The legal framework can change, so it is important to keep up to date with the latest developments and seek expert advice if in doubt. A well-thought-out termination agreement can lay the foundation for a successful new career start.
