The termination of an employment raises the question of a possible severance payment for many employees. But how much is a severance payment? While last month's blog entry explained the possible bases for claims relating to severance pay, this month's post focuses on the amount of potential severance pay. This article highlights the most important aspects of calculating the amount of severance pay and provides an overview of common calculation formulas and negotiation options.

The amount of the severance payment is based on the following three points:

• half a gross monthly salary per year of employment
• the duration of the employment (rounded up to one year after six months)
• the last monthly salary of the existing employment

Although this requirement for severance pay only applies in the event of dismissal for operational reasons, it is often used as a starting formula for termination agreements. However, the amount of the severance payment in detail is always a matter for negotiation and depends on the chances of winning an action for unfair dismissal.

Socially unjustified dismissal

If the dismissal is socially unjustified, there is an alternative to reinstatement:

• According to § 9 KSchG, the court must determine that the dismissal is socially unjustified
• Continued employment is not reasonable for the employee

At the employee's request, the court can then terminate the employment relationship in return for a severance payment.

• The amount of the severance payment is up to twelve months' salary in accordance with § 10 Abs. 1 KSchG
• The monthly salary is calculated as the value to which the employee is entitled in the month in which the employment relationship ends, including all benefits in cash and in kind

Good to know:

Different amounts apply for employees who have reached the age of 50 in conjunction with a certain length of service in accordance with § 10 Abs. 2 KSchG:

50 years of age and at least 15 years of service = 15 months' salary

55 years of age and at least 20 years of service = 18 months' salary

Tax and unemployment benefit entitlement

Good to know:

For tax purposes, severance payments are considered extraordinary income and are subject to income tax. However, they are not subject to social security contributions. In order to avoid an excessive tax burden, the so-called fifth rule could be applied until 2024. This rule spreads the tax burden arithmetically over five years and thus mitigates the progressive effect of income tax.

From 2025, however, the procedure will change so that employers will be relieved. They will no longer have to carry out the complex calculation of the one-fifth rule. For employees, this means that the severance payment will be fully taxed as wages in the month of payment. The tax relief provided by the one-fifth rule can be claimed retrospectively by submitting an income tax return.

Für die Arbeitnehmenden bedeutet dies, dass die Abfindung im Monat der Auszahlung voll als Arbeitslohn versteuert wird. Die steuerliche Erleichterung durch die Fünftelregelung kann nachträglich durch die Abgabe einer Einkommensteuererklärung geltend gemacht werden.

Good to know:

A severance payment can affect unemployment benefit entitlement. For example, if the notice period was not observed. There does not have to be a blocking period. In this case, employees do not receive any wage replacement benefit until the employer's notice period has expired. For a maximum of one year and only until the severance pay is deemed to have been used up.

written by Carolin Wagner

April 04, 2025

In employment law practice, the question often arises as to the circumstances under which an employee is entitled to severance pay. Contrary to popular belief, there is no automatic statutory entitlement to severance pay on termination of employment. Rather, such claims arise from specific situations or are reached as part of court settlements.
It is important to know that anyone who has worked for more than six months in a company with more than ten employees benefits from protection against dismissal under the KSchG. This means that an ordinary dismissal - also known as a dismissal with notice - can be reviewed in court.
Scenarios worth considering:

1. Severance pay solution pursuant to § 1a KSchG

Employers must make a conscious decision to offer severance pay in accordance with Section 1a KSchG and preferably offer it in the notice of termination. The prerequisites for this are

• The KSchG must be applicable, which means that the dismissed employee must have worked for more than six months in a company that employs more than ten employees
• The employer must have given notice of termination for operational reasons. In the case of employees who cannot be dismissed with notice, this can also be an extraordinary dismissal for operational reasons with the granting of an expiry period
• The letter of dismissal must state that the dismissal is based on urgent operational requirements and that the employee can receive a severance payment in accordance with Section 1a KSchG if he or she does not make use of the statutory period for taking legal action (against the dismissal)
• The dismissed employee must allow the statutory period of three weeks to lapse unused in accordance with Section 4 sentence 1 KSchG, so that the dismissal becomes legally effective

Good to know: § Section 1a KSchG does not contain a general or even mandatory statutory entitlement to severance pay.

2. Socially unjustified dismissal and unreasonableness of the continuation of the employment relationship

A statutory entitlement to severance pay arises from §§ 9 and 10 KSchG. The following requirements must be met:

• Filing an action for protection against dismissal within three weeks of receipt of the dismissal by the employer
• Determination by the labor court that the dismissal is socially unjustified and the employment relationship is therefore not terminated
• Determination of the unreasonableness of continuing the employment relationship, or determination that it is no longer to be expected that further cooperation in the interests of the company can take place

Good to know: Unreasonableness is to be assumed if the employee would be entitled to terminate without notice. Reasons that do not justify termination without notice can nevertheless make continuation unreasonable. For example, cases in which inaccurate defamatory allegations about the employee have been carelessly noted as grounds for termination or the relationship of trust has been destroyed in the course of the process through no significant fault of the employee. In such cases, the employment relationship is terminated by the court in return for a severance payment to the employee.

3. Contractual compensation claims

In addition to the options mentioned above, there is also the option of contractually agreeing a severance payment between the employee and employer. The best-known form is the termination agreement, which leads to the amicable termination of the employment relationship. It is important to note that the employee's consent to such an agreement can lead to disadvantages in terms of unemployment benefit. Specifically, this means the potential imposition of a suspension period.

written by Carolin Wagner

March 17, 2025