Severance pay in Germany

In Germany, there are around 200,000 disputes about unfair dismissal every year (BMAS). In a number of cases where employers dismiss employees, the employees concerned often receive compensation, even though there is no legal obligation to offer such compensation. Nevertheless, the majority of dismissals by employers are accompanied by severance payments. The total amount of severance pay is strongly influenced by factors such as negotiating skills. Key determinants for calculating a fair value of severance pay in Germany are length of service, last salary and a factor known as the “multiple”. This “multiple” varies between 0.5 and 1.5 and is determined according to the specifics of your case. In particular, cases of “unfair” dismissal often have a higher “multiple”.

What severance pay can you expect?

It really depends! First of all, it’s important to clarify that there is no legal obligation to pay severance in Germany. Although there is a common misconception that there is a statutory redundancy payment in Germany, this isn’t generally the case. Although Germany has a reputation for being relatively employee-friendly, particularly when it comes to terminating employment contracts, it is only in rare cases, such as a ‘social plan’ with the works council (often agreed in the event of mass redundancies) or under a collective agreement, that employees have a guaranteed statutory redundancy payment.

However, it’s quite common for employers and employees to agree on severance payments when the employer terminates the employment relationship. The amount of severance pay in these situations depends largely on specific circumstances, such as the employee’s age, length of service and any special protection against dismissal. Such dismissal exemptions may apply to roles such as works councils, people with severe disabilities, pregnant employees or employees on parental leave. In the absence of any of these ‘special circumstances’, there are some general guidelines for estimating the ‘fair’ amount of severance pay.

How is the severance payment calculated?

There are some general guidelines that are often referred to when considering a “fair” amount of severance pay in Germany:

One common calculation uses a formula that takes half a month’s pay per year of employment as a benchmark for the “standard severance payment”. For example, an employee with ten years’ service and a gross income of EUR 3,000 per month from his last employer will receive a lump sum of EUR 15,000 (0.5 * EUR 3,000 * 10 years). The three decisive variables are the multiplier of 0.5, the last gross monthly salary and the length of employment.

Another approach to the calculation, which varies with age, suggests that the 0.5 multiplier could increase to 0.75 or even 1.0 depending on the age of the employee. Following this rule, a 52-year-old in the above example could receive a severance payment of €30,000, derived from 1.0 * €3,000 * 10 years.

Individual circumstances of the employee are relevant

In reality, the multiplier may also vary depending on the individual circumstances of the employee and other specific factors. Labour court districts and the size of the employer’s business are known to influence the factor, with some courts applying a factor of 1.0 (instead of 0.5) in most situations, regardless of age. The multiplier can sometimes reach 1.2 or more, for example in cases where the dismissal is manifestly invalid and unlawful. A specialist in labour law would be familiar with these particularities.

• How is “fair” severance calculated in detail? As mentioned above, the total severance payment is mainly influenced by three elements: salary, length of service and “multiple”.
• Last gross (pre-tax) income: The final gross (pre-tax) salary at the time of termination is a significant factor in the severance calculation. It’s based on the gross monthly salary at the time of termination. For one-off payments, overtime and additional allowances, the monthly gross salary is usually calculated by dividing the “annual salary by 12”.
• Length of service: The length of an employment relationship contributes significantly to the calculation of seniority. Parental leave, part-time employment and periods of training are included in the length of service. On the other hand, certain periods, such as when an employee was only working as a temp/freelancer, don’t count. If you’ve taken a sabbatical, it is subject to the terms agreed between the employer and employee.

What influences the individual multiple?

The “multiple” (e.g. 0.5 according to the general guideline mentioned above) is not strictly determined by age, but is also significantly influenced by the legitimacy of the dismissal and the effectiveness of any dismissal protection:

• The legitimacy of the termination: Obviously, the validity of the dismissal has a significant impact on the value of the “multiple”. If the termination is obviously unlawful, an employee will generally only accept a (voluntary) termination in court if the employer offers a significantly higher severance package. Even if the dismissal is legal and there is technically no right to severance pay, many employers will “voluntarily” offer some kind of severance package. These tend to be lower and usually follow the guideline mentioned above (with a factor of 0.5).
• The strength of dismissal protection: Even if a dismissal is invalid, the robustness of dismissal protection can play a key role in the negotiation of a termination agreement. Various legal impediments, such as enhanced protection against unfair dismissal for certain categories of employees, can play an important role. It is also important to ensure that the ‘formal’ requirements for dismissal (such as consultation with the works council) have been met before the notice is given.

What else can have an impact on severance pay in Germany?

In Germany, there are several types of payments that, although not directly included in the calculation of the primary severance payment, can have a significant impact on an employee’s financial situation:

• This includes compensation for lost wages during the job search period. Usually, a person experiences a significant loss of income while looking for a job, even if he/she receives unemployment benefits. This loss of income can often be compensated by the former employer. For example, an individual can file a claim for protection against unfair dismissal. If the court declares the dismissal invalid about six months after the date of dismissal, the employer would be obliged to pay wages for that period, regardless of the fact that the employee did not work during that period. Legally, this is called “default of acceptance” by the employer, who is then obliged to pay the dismissed employee. In essence, this means “receiving money without work”. In addition, a short period of protection against dismissal could potentially affect the total severance pay.

• Bonuses, commissions and other one-off or variable payments also fall into this category. Employees often overlook bonuses, commissions and other one-off payments that they haven’t yet received. Of course, these payments should be claimed in addition to the severance payment and should not be offset against the severance payment.

• Other wage-related components such as unpaid overtime, pro-rata holiday pay and Christmas bonuses, as well as other ‘outstanding’ wage payments. These should also be claimed in addition to the primary redundancy payment.

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