Severance pay – entitlement and calculation

This article describes the legal position under German law.

I. The typical situation

After a dismissal, employees often assume a severance payment follows automatically: „I’m owed €15,000 – I was with the company for five years!“ The disappointment comes quickly: in most cases there is no statutory entitlement to severance. Without negotiation or an unfair dismissal claim, no payment materialises. Those who don’t know their rights and don’t act often give away five-figure sums.

II. When is there an entitlement to severance?

Contrary to widespread belief, there is no general entitlement to severance when an employment relationship ends. Severance is only provided for in certain constellations, or can be negotiated.

Statutory severance under section 1a KSchG:

In a redundancy dismissal the employer may offer severance in the dismissal letter if the employee waives an unfair dismissal claim. The amount is 0.5 gross monthly salaries per year of service. Note: this is rare – employers are not obliged to make the offer.

Social plan severance (section 112 BetrVG):

Where operational changes involve mass redundancies, the works council and employer often negotiate a social plan. It sets out severance entitlements – usually staggered by length of service, age and family status.

Negotiated severance:

In most cases severance is negotiated as part of a termination agreement or unfair dismissal proceedings. The employer pays in order to avoid lengthy litigation or to end the relationship by mutual agreement.

Court settlement (section 9 KSchG):

If the labour court finds the dismissal invalid but continued employment unreasonable, it may dissolve the employment relationship on application and award severance – usually at a factor of around 0.5.

III. How is severance calculated?

The common rule of thumb is 0.5 gross monthly salaries × years of service. With ten years of service and a gross salary of €4,000, that gives €20,000. But the formula is only a starting point – the actual amount depends on several factors and is usually considerably higher.

Dismissal protection:

The stronger your protection against dismissal, the higher the basis for negotiation. Special protection (severely disabled employees, works council members, pregnant employees) pushes the factor to 1.0 or above. Long service, older age and limited prospects on the job market also increase the amount.

The employer’s litigation risk:

If the employer made mistakes (flawed social selection, no works council consultation, unclear grounds), the litigation risk rises – and so does your negotiating position. Where a claim has strong prospects, factors of 1.0 to 1.5 are realistic.

Company size and financial strength:

Large corporations often pay more than small businesses. Urgency matters too: if the employer needs legal certainty quickly, severance rises.

Negotiating skill:

Good preparation, legal advice and strategic negotiation can increase severance considerably. Those who negotiate without a lawyer often give away 30–50% of what was achievable.

IV. Common mistakes and misconceptions

Mistake 1: confusing severance with net pay

Many employees assume €20,000 severance means €20,000 in the bank. In fact severance is fully taxable. On a payment of €50,000 with an annual salary of €48,000, progressive taxation quickly means €15,000–€18,000 in tax. Social security contributions do not apply, but the tax burden is massively underestimated.

Mistake 2: not optimising the tax position

Without tax planning you give away real money. The one-fifth rule (Fünftelregelung, section 34 of the Income Tax Act, EStG) reduces the burden considerably – but only if the severance is paid as a lump sum within one calendar year and no further income is added. Payment in January rather than December, or splitting across two years, can make a difference of several thousand euros.

Mistake 3: the wrong moment to negotiate

Many employees negotiate too early or too late – only after the filing deadline has passed, or after months of silence. Your position is strongest when the employer most wants the separation, which is usually after the unfair dismissal claim has been filed.

Mistake 4: accepting severance without a legal review

Employers often offer low amounts and create time pressure: „This offer is only valid until tomorrow.“ Without checking the grounds and the prospects of a claim, you give away negotiating potential. A dismissal that would not survive court scrutiny justifies substantially higher severance.

Mistake 5: negotiating without clear financial goals

„I want a fair severance“ is not a concrete target. Work it out in advance: how long will you realistically need to find a new job? What financial commitments do you have? Where is your limit? Those who know their numbers negotiate better.

Mistake 6: overlooking the benefit suspension period

If you accept severance in a termination agreement without a dismissal being imminent, you risk a suspension period (Sperrzeit) of up to twelve weeks on unemployment benefit (section 159 of the Social Code III, SGB III). At €1,500 per month that is around €9,000 lost – the severance has to be considerably higher to compensate.

V. Concrete steps

Step 1: analyse your financial situation

Calculate what you need: what are your monthly fixed costs? How much have you saved? How long will you realistically need to find new employment? That gives you your minimum severance – the figure below which you should not negotiate.

Step 2: have your dismissal protection assessed

Have the dismissal reviewed by an employment lawyer within the first week. Are there formal errors, a flawed social selection, a missing works council consultation or other grounds for invalidity? The stronger the prospects of a claim, the stronger your negotiating position.

Step 3: model the alternatives

Compare three scenarios: A – unfair dismissal claim seeking continued employment; B – severance settlement; C – accepting the dismissal without severance. Work through the costs, time, risks and opportunities of each. That shows you which route makes financial sense.

Step 4: develop a negotiating strategy

Define three figures: your ideal severance, your target severance and your minimum. Open above your ideal figure to leave room. Give concrete reasons: dismissal protection, litigation risk, long service, limited job prospects.

Step 5: use the claim strategically

File the unfair dismissal claim within the deadline – even if you are willing to negotiate. The claim increases pressure on the employer and signals resolve. More than 70% of these proceedings end in a severance settlement.

Step 6: plan the tax position

Discuss the optimal payment date with your lawyer or tax adviser. Payment in January of the following year, where employment ends in late December, can save several thousand euros. Direct insurance or occupational pension arrangements as part of the severance are also worth examining.

Step 7: use professional negotiators

Have an employment lawyer negotiate. Employers take legal representation more seriously, and experienced lawyers achieve on average 30–50% higher severance. The fees almost always pay for themselves.

VI. Frequently asked questions

Am I automatically entitled to severance after a dismissal?

No. There is no general statutory entitlement. Severance is usually negotiated, or agreed through social plans, termination agreements or court settlements.

How much should my severance be?

The rule of thumb of 0.5 gross monthly salaries per year of service is a starting point. Depending on dismissal protection, litigation risk and negotiating skill, factors of 1 to 2 or more are possible.

Do I have to pay tax on severance?

Yes, severance is fully subject to income tax. Social security contributions do not apply. The one-fifth rule (section 34 EStG) can reduce the burden.

Can I receive severance and unemployment benefit at the same time?

In principle yes, but termination agreements carry the risk of a suspension period of up to twelve weeks. If the notice period is not observed, benefit may be suspended (section 158 SGB III).

Is an unfair dismissal claim worth it for a higher severance?

Usually yes. More than 70% of these proceedings end in a settlement. The claim is often the only route to an appropriate payment.

Which is better: a termination agreement or an unfair dismissal claim?

It depends on your situation. A termination agreement offers certainty and a quick resolution, but carries the suspension-period risk. A claim strengthens your position but takes longer. The combination is often best: file the claim, then negotiate.

How long until I receive the payment?

With termination agreements, usually at or shortly after the end of employment. With court settlements, after the conciliation hearing (usually four to eight weeks after filing) or after judgment (several months).

VII. What you should do now

Severance does not fall from the sky – it has to be negotiated or fought for. Without a legal review, a clear strategy and professional negotiation you often give away five-figure sums. Tax mistakes can cost thousands more.

Use our initial consultation to assess your severance potential. We examine your dismissal for weaknesses, evaluate your prospects in an unfair dismissal claim and calculate a realistic figure. You receive a clear recommendation: negotiate, litigate or accept – with concrete numbers.

Get in touch for personal advice on your severance – so that you get what you are owed and avoid costly mistakes.

‍

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