Understanding Severance Payment in Germany: An Updated Guide for Expats (2025-2026)

Germany is renowned for its stringent employment and labor laws, which are meticulously established to protect employees from exploitation and unfair treatment while simultaneously safeguarding employers from contractual breaches. One significant aspect of this legal framework concerns severance payments upon layoffs and employment termination. While the fundamental principles governing severance in Germany remain largely consistent, crucial procedural updates, particularly regarding taxation, have come into effect for the 2025-2026 period. Given these complexities and the evolving legal landscape, consulting a specialized labor lawyer is highly advisable for expats to ensure full understanding and protection of their rights. This guide provides a detailed and updated overview, ensuring expats are equipped with the most current information.

What is a Severance Payment?

Globally, dynamic labor markets face a wide range of challenges, often necessitating a re-evaluation of financial and policy models, and Germany is no exception. In this context, companies may be compelled to terminate contracts, declare employee redundancy, or execute layoffs. The German approach to severance payment aims to preserve an employee’s rights during such processes.

A severance payment, also referred to as a severance package, denotes the monetary sum an employee receives when their working agreement with an employer is concluded. It is important for individuals to understand that, in Germany, there is generally no direct legal entitlement to a severance payment. Despite this absence of a universal statutory right, it is a well-established and customary practice for German employers to offer compensation to employees during layoffs or dismissals. This custom often arises as a strategic measure for employers to avoid potential legal disputes, particularly wrongful termination lawsuits.

In specific circumstances, however, employees may indeed have a legal claim to a severance payment. These instances typically arise under court orders, collective bargaining agreements (CBAs), or social plans. When such conditions are met, the payment is often referred to as a “standard severance package”. The consistent absence of a general statutory entitlement to severance is a fundamental characteristic of German labor law. For expats, who may originate from jurisdictions where statutory severance is common, this distinction is particularly important. It underscores that severance in Germany is frequently a matter of negotiation or specific agreements, rather than an automatic right, thereby guiding individuals to understand the importance of proactive engagement, potentially with legal assistance, rather than passive expectation of a payment.

Agreement to Severance Payment

The foundational rule governing severance benefits in Germany is that both the employer and the employee must mutually agree to compensation upon dismissal or termination. Without such an explicit agreement, and unless otherwise stipulated by the German Dismissal Protection Act (Kündigungsschutzgesetz), any claims to severance payments are typically considered null and void. 

Where both parties reach a mutual agreement to terminate a working relationship, and this agreement includes a severance package, the specific amount to be paid is always subject to negotiation. This emphasis on negotiation is a cornerstone of severance outcomes in Germany. Given that there is no general statutory entitlement to severance, an employee’s ability to negotiate effectively becomes paramount. For expats, who might be less familiar with the intricacies of German labor relations and the nuances of the Kündigungsschutzgesetz, recognizing that the severance amount is not fixed but rather a product of discussion is a critical insight. This understanding empowers individuals to seek legal counsel to assess their leverage and enhance their negotiation position, especially when the employer seeks to avoid a dismissal protection lawsuit, which can often lead to a mutually agreeable severance settlement.

Eligibility to the Severance Package

Employees dismissed or laid off for legitimate reasons are generally considered eligible for severance pay. Such reasons commonly include urgent operational needs, organizational restructuring, corporate collapse, or redundancy.  Eligibility can also extend to terminations based on an employee’s conduct (provided it does not constitute severe misconduct) or health conditions. 

Under the German Dismissal Protection Act (Kündigungsschutzgesetz – KSchG), employees are entitled to claim compensation if employers fail to provide severance pay in specific scenarios.  This includes employees dismissed for ‘urgent operational needs’ or business-related reasons, as well as those who have successfully filed a lawsuit for prevention of dismissal after the initial 3-week legal motion submission window. 

The KSchG provides protection to employees who have completed a minimum continuous service period of at least six months with the employer and are assigned to an establishment that usually engages more than ten employees.  It is important to note the precise calculation of this 10-employee threshold: part-time employees are counted proportionally based on their weekly working hours. For instance, employees working up to 20 hours per week count as 0.5, those working between 20 and 30 hours per week count as 0.75, and employees working above 30 hours count as 1. Employees on maternity or parental leave are also included in this count unless a temporary cover has been hired.  For expats, understanding this precise condition for KSchG protection is crucial, as it directly determines their ability to challenge a dismissal and potentially secure severance. This detailed clarity on the threshold calculation is vital for accurately assessing one’s legal standing and the viability of a dismissal protection lawsuit.

Furthermore, special categories of employees are afforded enhanced protection against employment termination, and their dismissal typically warrants a severance package. These include pregnant mothers, disabled individuals, and workers on parental leave.  These eligibility criteria and protections remain consistent for the 2025-2026 period.

Conditions for Which Employees are Not Entitled for Severance Payment

While German employment regulations provide robust protection against unfair dismissal, certain factors may exempt workers from receiving or even claiming a standard severance payment. These conditions remain unchanged for 2025-2026. Such factors include:

• Resignation or termination of employment for an employee’s personal reasons: If an employee voluntarily quits their job, they are generally not entitled to severance pay. 
• Termination of employment due to behavioral misconduct: If an employee’s contract is terminated because of severe behavioral misconduct, they typically forfeit the right to severance.  In such cases, the employer bears the burden of providing clear evidence of the misconduct to justify dismissal without notice or severance. This evidentiary requirement implies that mere allegations are insufficient; the employer must prove the misconduct’s severity to justify such a dismissal. For an expat facing dismissal due to alleged misconduct, understanding this burden of proof is critical, as it necessitates immediate legal counsel to assess the strength and validity of the employer’s evidence.
• Dismissal during probation: During the probationary period, either party can typically terminate the contract with minimal notice and without cause, and severance is generally not applicable.
• Extraordinary dismissal: This refers to termination for severe cause without a notice period. Such dismissals are typically reserved for extreme breaches of contract or company rules.

How the Severance Package is Calculated

There is no single, universally mandated 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, for what is considered a “standard severance package,” there is a widely accepted customary calculation. This customary calculation, which often aligns with offers made under Section 1a of the Dismissal Protection Act (KSchG) to incentivize employees not to file a lawsuit, typically involves paying 50% of the employee’s gross monthly income for every year of service. This general rule and its age-related variations remain unchanged for 2025-2026. Years of service are generally rounded up to a complete year if the employment has lasted for more than six months within that year.

The distinction between a general statutory right (which does not exist for severance) and a widely accepted customary calculation (which does) is crucial for expats. This clarifies that while the “0.5 gross monthly salary per year” is a strong benchmark, it is not an automatic right but rather a common outcome of negotiation or an employer’s strategic offer to avoid litigation. This nuance is vital for managing expectations and understanding the role of legal counsel in achieving this “standard” amount.

The calculation formula follows as below:

The customary calculation for severance payments, often used in settlement negotiations or as an offer under Section 1a KSchG, is generally structured as follows:

• General Rule (for employees under 50 years old): The standard calculation is 50% of the employee’s gross monthly income for every year of service, up to a maximum of 12 months’ salary.
  • Formula: (50% of Gross Monthly Salary) * Number of Years Worked

• For employees above the 50-year age bracket who have worked for 15 years or more: While the base calculation (0.5 gross monthly salary per year of service) often applies, the maximum total severance payment can be higher, often capped at 15 months’ salary.
  • Formula based on customary calculation: (0.5 * Gross Monthly Salary) * Number of Years Worked, capped at a higher maximum (e.g., 15 gross monthly salaries in total)

• For employees above the 55-year age bracket and having worked for over 20 years: Similarly, for these employees, the maximum total severance payment can be further increased, often capped at 18 months’ salary.
  • Formula based on customary calculation: (0.5 * Gross Monthly Salary) * Number of Years Worked, capped at an even higher maximum (e.g., 18 gross monthly salaries in total)

Years of service are typically rounded up to a complete year if the employment has lasted for more than six months within that year.

Taxation of Severance Payments

This section contains the most significant legislative changes for 2025-2026 concerning severance payments.

Social Security Contributions: Severance benefits are generally not subject to social security contributions. This remains unchanged.

Income Tax Liability: Severance payments are fully subject to income tax. To mitigate the progressive tax burden that would otherwise arise from a large, one-off payment, a special tax reduction rule known as the “Fünftelregelung” (Fifth Rule) under Section 34 of the Income Tax Act (Einkommensteuergesetz – EStG) has traditionally been applied.

Key Change from January 1, 2025 (Growth Opportunities Act):

From January 1, 2025, a fundamental procedural shift has occurred regarding the Fünftelregelung due to the Growth Opportunities Act, which came into force on March 28, 2024.

• Abolition of Employer Application: Employers are no longer obligated to apply the Fünftelregelung automatically during the wage tax deduction process. This change aims to simplify payroll calculations and reduce the administrative burden on companies.
• Employee’s Responsibility: The tax benefit of the Fünftelregelung can still be claimed by the employee, but this must now be done personally as part of their annual income tax assessment (Einkommensteuererklärung). This means that while the administrative responsibility has shifted, the underlying tax relief mechanism remains available to the individual.
• Implications for Employees:
  • Higher Initial Withholding: More wage tax will be withheld directly from the severance payment by the employer at the time of payment.
  • Delayed Tax Relief: The tax reduction will only be realized after the employee submits their annual income tax return in the following year and it is processed by the tax authorities.
  • Need for Proactive Action: Employees must be aware of this change and actively ensure the Fünftelregelung is correctly applied in their tax declaration to benefit from the reduced tax rate. Professional tax advice is highly recommended to ensure correct application and maximize potential savings.

The Growth Opportunities Act brings two distinct but related impacts concerning severance payments. While it streamlines employer processes by shifting the administrative burden of the Fünftelregelung to employees, it also introduces a new, specific tax-free allowance for severance payments. This demonstrates a legislative intent to balance administrative simplification for businesses with continued financial relief for individuals.

Conditions for Fünftelregelung Application (Unchanged): The Fünftelregelung applies if the severance payment constitutes a “Zusammenballung von Einkünften” (concentration of income) and is paid within one calendar year. This means the severance payment, combined with any other income received in that year, must be significantly higher than the income the employee would have received had the employment continued normally. If the employee begins a new, high-earning job in the same calendar year, the “concentration of income” condition might not be met, potentially rendering the rule inapplicable. This condition is not merely a technicality; it is a fundamental requirement that can significantly impact or even negate the tax benefit. For expats, especially those actively seeking new employment quickly after dismissal, this is a crucial planning consideration, as the timing of a new job and its salary level can directly affect the tax efficiency of their severance payment. Employers are generally advised against agreeing to apply the Fünftelregelung in settlement agreements due to potential liability risks if the conditions are not met.

New Specific Tax-Free Allowance: The Growth Opportunities Act introduces a new, specific tax-free allowance for severance payments. This allowance, often referred to as a “Freibetrag nach § 3 Nr. 9 EStG” directly reduces the taxable amount of severance. The exact amount can vary based on factors like the number of years of service and age, and specific thresholds are typically defined by law. This is in addition to the Fünftelregelung. Professional tax advice is essential to determine the precise amount applicable to your individual situation.

General Tax Allowances (Impacting Overall Tax Burden):

Beyond the Fünftelregelung, general tax allowances that can indirectly reduce the overall tax burden for severance recipients have also been adjusted:

• Basic Tax-Free Allowance (Grundfreibetrag): This allowance, which reduces taxable income, will increase to €12,069 for 2025 and €12,348 for 2026.7
• Solidarity Surcharge (Solidaritätszuschlag): The exemption limit for this surcharge will be raised to income tax amounts of €19,950 for 2025 and €20,350 for 2026.7

Church Tax and Solidarity Surcharge: Applicable church tax (8% or 9%) and the solidarity surcharge (calculated on tax burdens above certain thresholds) are still deducted from the severance payment.

The following table summarizes the key procedural changes for the Fünftelregelung:

How to Apply for a Severance Package

The application process for individuals entitled to a severance payment generally involves a series of practical steps, which remain consistent for 2025-2026.

Get a Written Notice of Termination/Dismissal

The first crucial step is to receive a formal written letter or notice of dismissal. This notice should ideally include an explanation for the dismissal and, if applicable, the amount of severance package to which the individual is entitled. It is important to note that termination notices communicated via platforms like WhatsApp or through phone calls are not legally binding in Germany; written form is mandatory for a valid termination.

Submit a Claim

With a valid written notice of dismissal, employees can then proceed to claim their severance benefit. Submission of claims should include all crucial employment documentation, such as contracts, agreements, termination notices, and any warnings issued, if applicable. It is critically important to remember the strict 3-week deadline to appeal a dismissal in court (a “Kündigungsschutzklage”). This deadline is not merely a procedural formality; it is a critical legal window that directly impacts the ability to secure severance, especially if the initial dismissal is contested or if the employer has not offered a package. Missing this deadline can lead to the dismissal becoming legally valid, often forfeiting the right to challenge it or claim severance. This highlights that “applying for severance” is often intertwined with “challenging a dismissal” or entering into a strategic negotiation, underscoring the time-sensitive nature of the legal strategy.

Receive Your Pay

Most employers will take time to evaluate a claim. If successful, the employee will receive their severance package when due. While some employers may pay out severance payments in full immediately, it is customary for benefits to be paid out monthly or as agreed upon in a settlement.

Cultural Differences in Employment Practices in Germany and Other European Countries

German employment laws are meticulously designed to ensure that dismissal or termination of employment occurs only for justifiable reasons. Employers are typically required to notify employees in advance and provide clear explanations for the termination. This emphasis on employee protection and justified dismissal aligns with labor laws in many other European countries, including France, Italy, and Poland.

However, a key distinction lies in the statutory provisions for severance benefits. Unlike Germany, where there is no general statutory framework for severance packages (though it is customary), countries like Poland and France often provide conventional statutory guidelines for payment of severance packages.

Despite the absence of a general statutory right, the German approach often results in a significant compensation weight for employees. Employees typically receive at least half of their monthly gross pay for a minimum of one year, calculated against the number of years worked. This is often more generous than severance benefits in many other European countries, which may offer payments for a limited number of months or as a one-off proportion of their annual gross salary. The explanation for this apparent paradox lies in the strength of the German Dismissal Protection Act (KSchG). Because it is legally challenging for employers to lawfully dismiss employees without cause, especially in larger companies where KSchG applies, offering severance becomes a strategic and often cost-effective tool for employers to avoid lengthy, costly, and uncertain legal disputes. The “customary” amount (0.5 gross monthly salary per year) becomes a de facto standard because it is what employment courts often suggest in settlement negotiations to resolve disputes. This helps expats understand that while the legal pathway to severance is different (often through negotiation or a dismissal protection lawsuit rather than an automatic, statutory right), the outcome can still be financially favorable due to the strong protective framework of German labor law. These comparative aspects remain relevant for 2025-2026.

Conclusion

In principle, severance payments continue to provide a vital financial cushion for employees facing dismissal, layoffs, or contract termination in Germany. For 2025-2026, while the core legal framework regarding the entitlement and calculation of severance packages remains largely stable, a significant procedural shift has occurred in their taxation. The Fünftelregelung, a crucial tax-relief mechanism, will no longer be automatically applied by employers from January 1, 2025. Employees must now actively claim this benefit in their annual income tax assessment. This change, alongside the strict deadlines for challenging dismissals, underscores the increased importance of seeking expert advice.