Anyone negotiating the termination agreement should pay attention to all the details - otherwise they may be giving away five to six-figure amounts. A checklist and examples show what is important.
Think through the farewell: It is not uncommon for large amounts of money to be given away in a termination agreement. Photo: Getty Images
Dusseldorf. The head of marketing at a German insurance company receives a severance offer of 700,000 euros - at first glance, a considerable sum. But on closer inspection, that's not necessarily the case.
The 55-year-old manager currently earns 450,000 euros gross per year, and his employer pays an additional 50,000 euros per year into his company pension plan. By the time he reaches his earliest possible retirement without deductions at the age of 65, around 500,000 euros would have been added. These claims are now lost with the termination agreement, especially since the manager has 360,000 euros left of the severance payment after taxes.
Labor lawyer Christoph Abeln, who specializes in representing managers, is familiar with cases like this in abundance. He warns: “A hasty signature on a termination agreement can be costly.” Even business-savvy managers were often blinded by their own interests. It is not uncommon for five to six-figure amounts to be given away. The Handelsblatt shows which details are important now.
In Germany, many companies are currently reducing their workforce. German industry alone cut more than 120,000 jobs last year. Managers were particularly hard hit: Volkswagen, for example, just cut around 5,500 management positions worldwide - a quarter of management. This makes it all the more important to address the issue of severance pay.
Often more possible than the social plan promises
There is no general right to severance pay in Germany. However, when restructuring with staff cuts, the works council and the employer often negotiate a social plan that determines severance payments based on social criteria such as length of employment or number of children. “This is one of the rare cases in labor law in which the employee has a claim to severance pay that can no longer be taken away,” says Abeln.
Specialist lawyer Abeln: The severance payment amount specified in the social plan is only a minimum entitlement. Photo: abeln
The so-called standard severance payment according to the Dismissal Protection Act serves as a guide: half a gross monthly salary per year of service. With a monthly salary of 8,000 euros and 15 years in the company, that would be 60,000 euros.
Important to know: The amount specified in the social plan is only a minimum entitlement, even if employers like to suggest: "We negotiated that with the works council. There is nothing more."
However, you can often get more out of it individually. Especially from long-standing managers such as department or division heads without a solid reason for termination. A full monthly salary per year of employment is considered normal. Only the so-called “senior employees” are excluded from the validity of the social plan. They include board members and managing directors.
Staying can be worth it
You are entitled to a salary for every month that the employment relationship lasts. André Kasten, a labor law specialist at the Abeln law firm, says: “The notice period is worth money in severance pay poker.” Therefore, those affected should check the termination agreement carefully to see whether it at least adheres to the statutory or contractually agreed deadline.
Companies often try to undermine this calculation advantage and offer a sprinter bonus for everyone who signs particularly quickly. Because such a financial incentive usually only amounts to up to three gross monthly salaries, leaving quickly is only worthwhile in individual cases - for example if a new job is already in prospect.
Also negotiate a bonus, company car and vacation
“Most managers negotiate the amount and overlook the benefits,” says Kasten. “These often determine the larger part of the actual value.” Exemption with or without vacation days being taken into account, continued private use of the company car, open bonus or commission claims for the current financial year: all of this is negotiable, but is often not even discussed because those affected are fixated on the severance payment amount.
But if you only look at the severance payment amount, you are leaving more money on the table. This is shown by the case of a sales manager with a gross annual salary of 300,000 euros. Attorney Kasten negotiated twelve months of continued salary payment for him - plus six additional months in the form of competitive compensation. What is meant is financial compensation for the fact that the sales manager is not allowed to work for a competitor during this time. The compensation corresponded to 60 percent of his salary. A package worth 390,000 euros was created.
Consider participation rights for shares
Stock options are also relevant. They are a common incentive system for managers of listed companies. The manager is allowed to buy shares in his company at a set price after a certain period of time - often after three years - or he is allocated shares at regular intervals. If the price rises, he makes a profit when he sells the shares.
“If a manager leaves the company early through no fault of their own, their acquired participation rights must also be taken into account when calculating the severance payment,” says Kasten. Rules in the employment contract are usually decisive for this, especially the so-called “good leaver/bad leaver” clause. It determines whether and under what conditions a manager retains or loses his financial rights.
Tax on severance pay using the fifth rule
Until 2025, the fifth rule was the most important instrument for reducing the tax burden of a severance payment. Because a high one-off payment drives up the tax rate due to progression. The tax office therefore calculated as if the sum had been spread over five years and not paid out in one fell swoop.
Since last year, however, employers are no longer allowed to use this trick when deducting payroll taxes. When we talk about the fifth rule today, what is meant is that the severance payment is initially taxed in full according to the normal progression. The benefit can then be reclaimed via the tax return.
An example: A single employee with a gross monthly salary of 4,000 euros receives a severance payment of 120,000 euros. Without the fifth rule, your employer immediately deducts around 45,475 euros in tax and 2,478 euros in solidarity surcharge. With the regulation it would only be around 39,640 euros in tax plus 2,180 euros in solidarity surcharge. The employee can therefore get the difference totaling 6,133 euros back via her tax return.
The effect is even greater if there is no further income after termination. Lawyer and tax advisor Thorsten Kuhn from the Frankfurt tax law firm Kuhn & Partner names the ideal case: “This savings works best if you have no further income after changing jobs, for example because you become self-employed as a consultant or take a sabbatical year.”
Tax law expert Kuhn: Under certain conditions, the severance payment remains tax-free. Photo: TaxIt Consulting
With a severance payment of 100,000 euros, the tax office calculates as if the person had only earned 20,000 euros for the entire year. For married couples who file jointly, this is often within the basic allowance. The tax rate is then zero percent and the entire severance payment remains tax-free.
It is therefore crucial to plan the payment date precisely and record it in writing with the employer - for example by postponing it to the next calendar year when there is less income anyway. Individual compensation components such as bonuses or company pension schemes can also be scheduled accordingly.
In addition, a change to self-employment can be used for tax purposes. Anyone who postpones invoices to the following year in the year of severance pay and brings forward planned investments creates an arithmetic loss, which further reduces the tax burden.
Secure unemployment benefits despite a termination agreement
A termination agreement is often viewed by the employment agency as voluntary participation in one's own unemployment. What follows is a blocking period of up to twelve weeks, which also shortens the entire duration of receipt of unemployment benefits.
Lawyer Kasten therefore recommends: “You should contact the employment agency before you sign the termination agreement.” And he adds: “Get confirmation that the proposed regulation does not result in a blocking period, or include this in the severance payment.”
Specialist lawyer Kasten: Possible blocking period for unemployment benefits should be factored into the severance payment. Photo: Studio Steffen Jänicke
Anyone who still risks the blocking period can wait it out over the so-called disposition year: those affected are free to decide when they officially register as unemployed, as long as their previous employment was no longer than 30 months ago.
Anyone who ends their employment relationship at the end of the year and only reports at the beginning of the year after next will have long since passed the blocking period without risking their claim. However, if you wait too long, you will lose it completely.
Health insurance can also be planned in time: those with voluntary statutory health insurance only pay their maximum contribution of currently around 1261 euros per month (including nursing care insurance) if the severance payment is paid in January and counts as income for the whole year. If the money doesn't come until December, only the minimum contribution of around 278 euros applies until November - a difference of several thousand euros per year.
Multi-level compensation beats a one-off payment
“Instead of accepting a large one-off payment, it is often wiser to structure a separation over several components,” says Abeln. The lawyer names two options that are often more lucrative than a pure severance payment: extended continued salary payments or a multi-stage transitional allowance.
Initially, the full salary continues until the end of the contract. Contractually guaranteed additional benefits are often continued in this phase, such as bonus payments, company cars or other compensation components.
This is followed by a transition phase, which is usually degressive: the benefits decrease over time. “This phase usually lasts six to 18 months,” says the Berlin labor lawyer. A typical model could then look like this: In the first half of the year after the separation, the manager still receives 100 percent of the previous salary, in the second half of the year 75 percent, and in the following six months 50 percent.
Such a model not only has tax advantages over a one-off payment. According to Abeln, because health, pension and pension contributions continue throughout the entire period, there are no gaps in provision. “In individual cases, clients achieve up to 30 percent higher net effects than with a classic severance payment,” says the lawyer.
Severance pay: The checklist for the negotiation
- Check the social plan entitlement and understand it as a minimum amount, not an upper limit
- Observe the notice period – every additional month is money
- Actively demand additional benefits such as company cars, bonuses, vacation days and participation rights
- Take into account the fifth rule
- Negotiate the payment date, if necessary postpone it to the next calendar year
- Take the blocking period and 30-month rule into account when calculating unemployment benefits
- Control health insurance contributions by the month of payment
- Consider multi-stage transitional remuneration instead of a one-off payment - extended continued salary payment plus a degressive transition phase ensure social insurance protection and often higher net effects
