Understanding Severance Payment in Germany

Germany is known for its stringent employment and labor laws compared to other European countries. These regulations are established to protect employees from exploitation and unfair treatment while preserving employers from contractual breaches. One such law is the rule of severance payments on layoffs and employment termination.

This post provides a detailed guide to severance payments for expats in Germany.

What is a Severance Payment?

Globally, dynamic labor markets face a wide range of challenges, requiring them to rethink their financial and policy models, and Germany is not an exception. In this regard, companies may be forced to terminate contracts, declare employee redundancy, or execute layoffs. The objective of German severance payment law is to reserve an employee's rights during such processes.

A severance payment, also known as a severance package, refers to the amount of money an employee receives when their working agreement with an employer is terminated. Although there is no legal entitlement to severance payment, it is customary for German employers to compensate employees during layoffs.

In some instances, under court orders, collective bargaining agreements, or social plans, employees are legally entitled to severance payment. This is called a standard severance package.

Agreement to Severance Payment

The principle rule to severance benefits is that both the employer and employee must be in agreement to compensate upon dismissal or termination. Against such agreement, unless otherwise provided by the German Dismissal Protection Act, claims to severance payments are null and void.

Where both parties mutually agree to terminate a working relationship accompanied by a severance package, the amount to be paid can always be negotiated.

Eligibility to the Severance Package

Employees dismissed or laid off for legitimate reasons, such as organizational restructuring, corporate collapse, or redundancy, are eligible for severance pay. This includes termination of employment based on employment conduct or their health.

Where employers fail to provide severance pay, employees are entitled to claim compensation under the German Dismissal Protection Act. Employees entitled to a severance package under this act include:

• Employees dismissed for 'urgent operational needs' by the employer.
• Employees dismissed for business-related reasons.
• Employees that have successfully filed for prevention of dismissal after the 3-week window of legal motion submission.

The German Labor Law also protects a special class of employees from employment termination, including pregnant mothers, disabled people, and workers on parental leave. Their dismissal warrants payment of a severance package.

Conditions for Which Employees are Not Entitled for Severance Payment

While German employment rules protect employees against unfair dismissal, certain factors may exempt workers from enjoying or even claiming a standard severance payment. Such factors include:

• Resignation or termination of employment for an employee's personal reasons
• Termination of employment by behavioral misconduct
• Dismissal during probation
• Extraordinary dismissal

How the Severance Package is Calculated

There is no specific formula for the calculation of severance payments in Germany. Most companies determine severance packages based on various factors, including the number of years worked and the employee's basic monthly salary.

However, under a standard severance package, there is a statutory requirement for its calculation. The law requires employers to pay 50% of the employee's monthly income for every year of service to a maximum of 12 months' salary. This applies to employees under the 50-year age bracket.

The calculation formula follows as below:

(50% of Gross Monthly Salary) * Number of Years Worked

The severance package increases to half of 15 months' salary for every year of service for employees above the 50-year age bracket who have worked for 15 years.

The calculation formula follows as below:

(50% of Gross Monthly Salary) * 15

For employees above the 55-year age bracket and having worked for over 20 years, the severance package is increased to half of 18 months' salary for every year of service.

The calculation formula follows as below:

(50% of Gross Monthly Salary) * 20

Taxation of Severance Payments

In general, severance benefits are not subject to social security contributions. However, employees whose work contracts are breached as a result of dismissal or termination and to whom a severance package is paid are required to pay their taxes in full. Where the severance payment was issued in full within one calendar year, recipients are entitled to a tax reduction under certain conditions.

How to Apply for a Severance Package

For individuals entitled to a severance payment, the following actions should be taken to apply for the benefit;

Get a Written Notice of Termination/Dismissal

The first step is to have a written letter or notice of dismissal. This must be accompanied by an explanation of your dismissal. Notices of termination should also bear the amount of severance package to which one is entitled.

Submit a Claim

With a written notice of dismissal, employees can now claim for payment of the standard severance benefit. Submission of claims should include any crucial employment documentation, including contracts, agreements, termination notices, and warnings, if any.

Receive Your Pay

Most employers will take time to evaluate your claim. Where successful, you will receive your severance package when due. While some employers may pay out severance payments in full immediately, it is customary to pay out the benefits every month.

Cultural Differences in Employment Practices in Germany and Other European Countries

In Germany, employment laws exist to ensure that dismissal or termination of employment is only done justifiably. Employers must notify their employees in advance with explanations for the termination. This scope of the labor laws compares to most European countries, including France, Italy, and Poland.

However, unlike Germany, where statutory provisions of severance benefits are non-existent, countries like Poland and France provide conventional statutory guidelines for payment of severance packages. Dismissal or termination of contracts by an employer is largely considered to be their fault.

The advantage of the German severance package to employees is its compensation weight. Employees get to receive at least half of their monthly gross pay for a minimum of one year, which is calculated against the number of years worked. Most European countries provide severance benefits for a limited number of months or as a one-off proportion of their annual gross salary.

Conclusion

In principle, severance payments provide a cushion to employees subjected to dismissal, layoffs, and contract termination. While Germany does not provide a statutory framework for severance packages, severance payments are common practice and can be negotiated or obtained with the help of a lawyer filling a dismissal protection suit.