The most important things at a glance:
- The termination agreement represents an alternative to dismissal, whereby the employment relationship is terminated by mutual consent.
- A termination agreement can be worthwhile, but it also carries risks: Before you, as an employee, sign a termination agreement, you should therefore take sufficient time to consider it and seek support from a specialist lawyer for labor law to avoid costly mistakes.
- Your lawyer will also advise you on whether a severance package is possible and how much it could be.
Relevance of the termination agreement: In recent months, it has become apparent that there is an increasing trend towards terminating employment relationships through mutual termination agreements. However, it is important to note that a mutual termination agreement presents both opportunities and risks for employees.
What is a separation agreement?
A termination agreement ends the employment relationship by mutual consent. However, if the former employee then intends to claim unemployment benefits, serious problems can arise with the employment agency. A distinction is made here between a blocking period and a suspension period.
Difference between termination by employee and mutual termination agreement by employee
Termination is the unilateral declaration by the employee or employer to end the employment relationship, governed by Section 623 of the German Civil Code (BGB). In contrast, an employment termination agreement ends the employment relationship by mutual consent. Therefore, both the employee and the employer must agree to the contract.
Distinction from the settlement agreement
The settlement agreement, like the termination agreement, is a contract that requires the mutual consent of the employee and employer. While the termination agreement brings about the end of the employment relationship, the settlement agreement makes arrangements for an employment relationship that has already been terminated (usually by the employer). The settlement agreement thus addresses the Follow after termination.
What does the termination agreement regulate?
The termination agreement initially governs the termination and the termination date of the employment relationship. This termination date can generally be freely chosen, regardless of a possible notice period. This means that the termination can also take place before the expiry of any notice period. However, for the employee, non-compliance with the long employer-side notice periods can lead to disadvantages when receiving unemployment benefits and to a set-off of severance pay.
In addition, the termination agreement can include additional provisions, such as severance pay, a letter of recommendation, work equipment, and vacation.
Termination agreement: Benefits for the employee
- As part of the termination agreement, there is a possibility of receiving severance pay. The amount of severance pay is generally a matter of negotiation.
- Furthermore, a longer notice period can be agreed upon than is stipulated by the statutory notice periods the case would be.
- It is possible to agree on a so-called „sprinter clause.“ This provides for the retention of a (possibly higher) severance payment in the event of early termination of the employment relationship.
- Notice periods can be shortened if the employee has an interest in doing so, for example, because a new job is already in prospect.
- The content of the reference letter can be precisely specified in the termination agreement.
Termination agreement: Disadvantages for the employee
- In the context of the termination agreement, the regulations of dismissal protection do not apply. This applies to both social justification according to the Dismissal Protection Act and special dismissal protection, for example for pregnant women and severely disabled individuals, whereby longer waiting periods from the Federal Employment Agency are to be feared.
- In addition, works council hearings and co-determination are also dispensed with
- Retirement benefits may cease.
- There is a risk of a waiting period at the employment agency. Since signing the termination agreement constitutes an termination of the employment relationship, the employment agency will initially impose a waiting period. The reason for this is that the employment agency generally assumes that the employment relationship was terminated through the employee's fault. The consequence of this is that the former employee, who is now unemployed, will not receive any payment from the employment agency for at least twelve weeks.
- At the same time, it should be noted that the Employment Agency does not pay contributions to health insurance for this period. The now unemployed person must therefore insure themselves for this period.
- The revocation or contestation of a termination agreement is hardly possible
What content should a termination agreement have?
Here, the various and sometimes opposing efforts of the contracting parties come into play.
For employees, regulations concerning the date of termination, severance pay, release from duties, and vacation are important. Employers, on the other hand, usually request provisions for the crediting of vacation entitlement during the release from duties and a comprehensive settlement and release clause.
Termination Agreement: Formal Requirements
According to § 623 of the German Civil Code (BGB), a termination agreement must always be concluded in writing. Faxes, copies, or emails are not sufficient and do not meet the mandatory written form requirement.
Severance pay upon termination agreement by employee
Unlike a termination agreement presented by the employer, severance pay is generally not agreed upon in the case of a termination agreement initiated by the employee.
Severance pay amount in a termination agreement
If a severance payment is agreed upon, which is typically the case when the termination agreement originates from the employer, the severance payment is based on the severance payment prescribed for dismissal by the employer, as provided for in § 1a of the German Dismissal Protection Act (KSchG). This amounts to 0.5 gross monthly salaries per year of employment. However, in practice, there can be deviations both downwards and upwards. This means that severance payments of 0.25 and 1.0 gross monthly salaries per year of employment are not uncommon. The amount therefore depends significantly on the negotiation skills of the parties and the appropriateness in the individual case.
A small calculation example: An employee worked for a company for 20 years. His gross annual salary was €54,000. With a factor of 0.5, this results in: 0.5 * €4,500 (gross monthly wage) * 20 = €45,000. With a factor of 1.0, the severance pay would already be €90,000.
Factors influencing the severance pay amount include:
- Employer's financial capacity
- Existence of a social plan for severance payments
- Employee protection against dismissal
- Employer's interest in a quick termination
- Employee's ability to quickly find a new job
Tax implications of a severance payment
What impact does a severance package have on your tax progression? First of all, a severance package increases your income for the relevant year. This can cause you to fall into a higher tax bracket. Of course, this is only possible if you are not already paying the top tax rate.
Within the framework of the so-called "Fünftelregelung" (one-fifth rule) according to § 34 of the German Income Tax Act (EstG), the additional tax burden of the severance payment is taken into account and favored by the legislator. When applying the "Fünftelregelung," the severance payment is treated as if it had been spread over 5 years, thereby reducing the tax burden.
However, the five-year rule is only worthwhile if the employee's gross annual salary (as a single person) is below €53,000. The same applies to married couples with a gross annual salary of €106,000. The reason for this is that employees already pay the top tax rate from this annual salary. Therefore, a split over 5 years no longer results in tax relief.
Important: To have the 5ths rule taken into account, you must submit a corresponding application to the tax office.
Employer's duty to inform
Due to the extensive risks associated with signing a termination agreement, your employer has certain disclosure obligations. These include, among other things
- The suspension of unemployment benefits
- The effects on company pension schemes
- The crediting of severance pay against unemployment benefits
Important: If the employer violates their duty to inform, they can be held liable for damages.
Employment reference in case of mutual termination agreement
Upon termination of the employment relationship, the employee is entitled to a letter of reference according to § 109 of the Trade Regulation Act (GewO). As a mutual termination agreement constitutes the termination of the employment relationship, the employee is also entitled to a letter of reference within the framework of such an agreement.
In addition, the employment reference must meet the following requirements:
- The written form
- It must be written in clear and understandable language
- Provide information on the type and duration of employment
From a strategic perspective, employees in a termination agreement situation should first check what kind of reference letter their employer intends to issue. This is because a qualified employment reference is more advantageous for the next job, as it reveals more details about their previous work and performance to the future employer. Ultimately, this increases the chances that the future employer will have a better picture of the employee.
Employer's Obligation to Consent: Employer Refuses to Sign Termination Agreement
What happens if the employer refuses to sign a termination agreement presented by the employee? Is the employer obligated to sign the agreement? This question can generally be answered with no. Therefore, the employee has no right to demand that the employer sign the termination agreement.
Furthermore, simply stopping going to work in these cases is not a solution, as this can lead to a termination for misconduct. It is more sensible to understand the reason for the employer's refusal and to provide the right incentives to change their mind.
Termination Agreement: Sample Wording
- Termination of employment
Both parties agree that the employment relationship between them will end on MM.DD.YYYY, to avoid the necessity of formal termination by the employer.
- Severance pay
In compensation for the loss of employment, the employee will receive a severance payment of X,XXX Euros gross. The severance payment is due upon conclusion of the contract and is inheritable. It is payable with the final payroll statement.
- Release
The employee is hereby released from the obligation to perform work, effective immediately and until the termination of the employment relationship, with continued payment of the contractually agreed remuneration, and with credit for accrued vacation and other time off.
- Certificate
Upon termination of the employment relationship, the employee receives a favorably qualified employment reference with a performance and conduct evaluation, e.g., „always to our full satisfaction.“.
The certificate will include a final formula of regret, thanks, and good wishes.
Negotiating a severance agreement: Do you need a lawyer?
First and foremost, you must be aware that in the case of a termination agreement, there is rarely an equal footing between you and your employer. This is because they typically have a team of experts at their side who can advise them on personnel or financial matters.
Furthermore, the termination of an employment relationship and any associated severance pay is often an emotionally charged topic with a lot at stake. Lastly, an employee lacks experience in such negotiation situations. Certified Specialist in Labor Law has many years of practical and theoretical experience, the necessary detachment, and helps you fully assert your interests.