Common mistakes in termination agreements – and how to avoid them

This article describes the legal position under German law.

I. The typical situation

Your employer invites you to a meeting and puts a pre-drafted termination agreement (Aufhebungsvertrag) in front of you: „Sign today, or by next week, and you get three months’ salary as severance. Tomorrow the offer is off the table.“ Under pressure you sign – and only notice the consequences weeks later: a suspension period on unemployment benefit, lost bonus payments, an overly broad non-compete clause. What looked like a fair solution ends up costing you tens of thousands of euros.

II. What is a termination agreement in legal terms?

A termination agreement is a mutual agreement between employer and employee to end the employment relationship (section 623 of the German Civil Code, BGB). Unlike a dismissal, statutory protection against dismissal falls away entirely – you cannot challenge the ending of the relationship. The agreement must be in writing, and there is no statutory right of withdrawal. Once signed, you are bound. Alongside the end date, the agreement may also cover severance, garden leave, references, remaining holiday, non-compete clauses and settlement clauses.

III. Common mistakes and legal pitfalls

Mistake 1: signing immediately under pressure

Employers frequently create artificial time pressure: „This offer is only valid until …“. In reality you have no statutory right of withdrawal. Once signed, you can only challenge the agreement on grounds of mistake, deception or duress (sections 119, 123 BGB) – a high hurdle. Ask for at least a week to consider, and have the agreement reviewed by a lawyer.

Mistake 2: overlooking the benefit suspension period

The employment agency regularly imposes a suspension period (Sperrzeit) of up to twelve weeks on termination agreements (section 159 of the Social Code III, SGB III), on the basis that you „caused“ your own unemployment. During that time you receive no unemployment benefit – on a previous gross salary of €4,000 that means roughly €6,000 net lost. The suspension can only be avoided if a dismissal by the employer was imminent and the agreement meets certain conditions: the notice period is observed, there is good cause for dismissal, and no longer notice period was agreed.

Mistake 3: setting the severance too low

The usual rule of thumb is 0.5 gross monthly salaries per year of service. With ten years of service and a gross salary of €5,000 that would be €25,000. Many employees accept considerably less because they underestimate the value of an unfair dismissal claim. If you have strong arguments against an ordinary dismissal (works council membership, severe disability status, long service), factors well above 1.0 or 1.5 are achievable.

Mistake 4: not securing variable pay

A classic exclusion clause reads: „On signature, all mutual claims are settled.“ That excludes bonuses, commission, Christmas pay or profit shares – even where you have already earned them pro rata. Insist on itemisation: „The employer shall pay the pro rata bonus for the current financial year in the amount of €X, due on …“

Mistake 5: overlooking tax optimisation

Severance is fully taxable and can push you into a higher tax bracket. Without planning, a payment of €50,000 alongside an annual salary of €60,000 quickly means €15,000–€20,000 in tax. The one-fifth rule (Fünftelregelung, section 34 of the Income Tax Act, EStG) reduces the burden considerably – but only if the severance is paid within one calendar year and no further income is added. Timing is decisive: payment in January of the following year, where employment ends in late December, can save thousands. Splitting models and direct insurance arrangements are also worth examining.

Mistake 6: an overly broad non-compete clause without compensation

Post-contractual non-compete clauses are only effective if the employer pays compensation – usually at least 50% of your most recent salary for the duration of the restriction (section 74(2) of the Commercial Code, HGB). Many termination agreements contain restrictions with no compensation, or too little – which makes them unenforceable. Also check that the restriction is reasonable in geographical, temporal and substantive scope.

Mistake 7: no concrete agreement on the reference

„The employee will receive a favourable reference“ is not a precise provision. Insist on concrete wording: a grade of „good“ or „very good“, a list of specific duties and achievements, and a closing paragraph expressing thanks and regret. Ask for a draft reference and attach it to the agreement as an annex.

Mistake 8: garden leave that is unpaid or revocable

„The employee will be released from duties“ does not automatically mean paid garden leave. Use wording such as: „The employee is irrevocably released from the obligation to work, with continued payment of remuneration and set-off against holiday entitlement.“ Otherwise the employer can call you back at any time.

Mistake 9: settlement clauses that go too far

„All mutual claims are settled“ can also exclude damages claims for bullying, discrimination or working-time fraud. Carve such claims out expressly: „Claims arising from intentional breaches of duty and from breaches of the General Equal Treatment Act (AGG) remain unaffected.“

Mistake 10: repayment clauses for training remain in force

If you recently completed employer-funded training, your employment contract may contain repayment clauses. These do not lapse automatically with the termination agreement. Agree expressly: „Repayment claims arising from training agreements are waived in full.“

Mistake 11: overlooking the early-exit clause

A so-called Turboklausel or sprinter clause allows you to end the employment relationship early if you find a new position – without giving up your severance. Suggested wording: „The employee may terminate the employment relationship early on two weeks’ notice on proof of new employment. The severance shall be adjusted pro rata.“

IV. Concrete steps

Step 1: never sign on the spot

However great the pressure: never sign in the first meeting. Ask for at least a week. If the employer is unwilling to grant it, that is a warning sign. There is no legal obligation to sign immediately.

Step 2: minimise the suspension-period risk

Ask the employer to confirm in writing that a redundancy dismissal was imminent – ideally with reasons (job cuts, restructuring). Make sure the contractual notice period is observed. Clear the agreement with the employment agency in advance, or have it reviewed by a lawyer.

Step 3: negotiate severance realistically

Work out your position: how strong is your dismissal protection? What would unfair dismissal proceedings cost the employer? Use online calculators or legal advice to establish a realistic figure. Negotiate not only the amount but also the payment date and the tax treatment.

Step 4: model the tax position

Have a tax adviser or lawyer calculate how different payment dates affect your tax burden. Payment in January rather than December can save several thousand euros. Also check whether part of the severance can go into direct insurance or an occupational pension – which can be free of social security contributions and partly tax-free.

Step 5: itemise every variable pay component

Draw up a list: bonus, commission, Christmas pay, holiday pay, profit share, outstanding overtime, untaken holiday. Have each item governed individually in the agreement – with concrete amounts and due dates.

Step 6: agree the reference in advance

Request a concrete draft reference and attach it as an annex. Agree: „The employer shall issue a reference in accordance with Annex 1. In the event of deviation, the employee may claim a contractual penalty of €XXX.“

Step 7: remove or compensate the non-compete clause

Check whether a non-compete clause is necessary at all. If it is included, insist on at least 50% compensation. Limit it in time (maximum two years), geography (specific region only) and substance (direct competitors only).

Step 8: make garden leave irrevocable and paid

Insist on irrevocable release from duties with set-off against holiday and continued pay. That lets you focus on the job search without being called back.

Step 9: limit settlement clauses

Expressly exclude claims arising from intentional breaches of duty, AGG violations and damages. Suggested wording: „Excluded from this provision are claims arising from intentional and grossly negligent breaches of duty, as well as claims under the AGG.“

Step 10: get a professional review

Have every termination agreement reviewed by an employment lawyer – before you sign. The cost pays for itself several times over if it prevents a suspension period, an inadequate severance or disadvantageous clauses.

V. Frequently asked questions

Do I have to sign a termination agreement?

No. There is no obligation to agree. If you decline, the employer must issue an ordinary or extraordinary dismissal – which you can challenge with an unfair dismissal claim.

Can I withdraw from an agreement I have already signed?

In principle no – there is no statutory right of withdrawal. Only in cases of fraudulent misrepresentation, unlawful duress or mistake can you challenge it (sections 119, 123 BGB). The hurdles are high.

How do I avoid the suspension period on unemployment benefit?

Ask the employer to confirm in writing that a redundancy dismissal was imminent. Observe the ordinary notice period. Do not agree an earlier end date. Submit all documents to the employment agency.

Is severance tax-free?

No. Severance is fully taxable, but free of social security contributions. The one-fifth rule (section 34 EStG) can reduce the burden – the payment is taxed as if you had received it spread over five years.

What is a Turboklausel or sprinter clause?

An arrangement allowing you to end the employment relationship early if you find a new position – without losing your severance. It benefits both sides: you move on sooner, the employer saves salary costs.

Can the employer pay the severance in instalments?

Only if you agree. Insist on a single payment on a fixed date – ideally shortly after the end of employment. Instalments carry insolvency risk.

What happens to my remaining holiday?

Remaining holiday must either be granted or paid out (section 7(4) of the Federal Holiday Act, BUrlG). Agree it concretely: „The employee has 15 days of holiday remaining. These shall be taken during the period of release from duties“, or „Remaining holiday shall be paid out.“

How does severance affect my pension?

Severance is free of social security contributions and does not reduce your pension entitlements. However, you pay no pension contributions during a suspension period – those months are missing from the later calculation.

VI. What you should do now

A termination agreement is not a simple signature – it is a far-reaching decision with substantial financial and legal consequences. A suspension period, lost severance, tax disadvantages or unfavourable clauses can cost you tens of thousands of euros.

Use our quick check in the initial consultation. We examine your termination agreement for the most common mistakes, assess your negotiating position and show you concretely which clauses need renegotiating. You receive a clear view of whether the agreement is fair – or where there is still room to move.

Get in touch for your personal termination agreement check – so that you avoid expensive mistakes and get the most out of the situation.

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Andreas Schruff is a partner at the law firm KBS Legal in Munich and a cooperation partner of abfindungshero.de