Termination Agreement - Questions & Answers

Content of a Termination Agreement

A termination agreement is only effective in written form, as stipulated in §623 of the German Civil Code (BGB). The termination agreement must include at least the following key elements:

• The date of the agreement.
• The date on which the employment relationship will be terminated.
• The names of the parties involved (employer and employee) and their signatures.

In addition to these essential elements, the termination agreement should outline mutually agreed-upon provisions regarding topics such as severance payment, open vacation days, release from work, and the issuance of an employment reference. It is important to note that employers often include a release clause in termination agreements, which means that only the specific terms mentioned in the agreement are applicable, and any other rights or claims are thus waived.

A termination agreement is less constrained by legal regulations compared to regular dismissals. Employees may choose to enter into a termination agreement when they want a swift resolution without the potential disadvantages associated with statutory employment protection rules. This is often the case when a new employment contract is already in place, and any delays in starting the new position want to be avoided.

Difference Between a Termination Agreement and a Resignation?

A termination agreement is a mutual contract, while a resignation, whether initiated by the employer or employee, is a unilateral action. The other party does not need to provide consent for a resignation to be effective, although notice periods can impact the timing of the resignation. Similar to a termination agreement, a severance payment can be negotiated in the case of a resignation.

It's worth noting that employees can also request a termination agreement, but they do not have a legal entitlement to one, unless specified otherwise in their employment contract. However, such agreements can have implications regarding the eligibility for unemployment benefits. The same applies to resignations initiated by employees.

Thus, the key distinctions between a termination agreement and a resignation are as follows:

• The standard notice period does not apply to a termination agreement, unlike a resignation.
• An employer does not have to adhere to the typical requirements of the Employment Protection Act when entering into a termination agreement.
• The work council does not have the same influence over a termination agreement as it does over a standard dismissal.

Can I Receive Unemployment Benefits After a Termination Agreement?

In principle, you are eligible for unemployment benefits after a termination agreement. However, employment agencies often impose a waiting period following such an agreement. This waiting period typically lasts for 12 weeks. The reason for the waiting period is that when an employee agrees to the termination, they are considered to have caused their own unemployment without good reason. In other words, there is an assumption that the employee bears some responsibility for the loss of employment.

To avoid or reduce the waiting period, specific conditions must be met. These conditions include:

• The employer must have communicated a termination for operational reasons in advance.
• The termination agreement must not end the employment relationship before the date on which a termination by the employer would have become effective. In other words, the notice period must be considered.
• The severance payment must comply with legal requirements (i.e., it should not significantly exceed 0.5 monthly salaries per year of service, nor fall below 0.25 monthly salaries).
• No special job protection (e.g., due to parental leave) should be active.

It is essential to note that the agreement must explicitly state the respective grounds for the termination. Due to the complexity of the matter, seeking legal advice or discussing the situation with the employment agency before signing the termination agreement is highly advisable.

How High Can the Severance Payment Be?

As compensation for the immediate termination of the employment relationship, employers often offer a severance payment. The amount of this payment is often negotiated between the parties involved, primarily by the employee. However, it's crucial to understand that there is no statutory entitlement to a severance payment.

Where a severance payment is part of the agreement, employers frequently refer to the statutory regulations due to operational reasons when determining the amount. Under these regulations, the employer typically offers half a gross monthly salary for each year the employee has worked for the company. However, this initial offer is negotiable, and the parties can agree on a different amount that both parties find acceptable.

Do Taxes Apply on a Severance Payment?

Depending on the amount of the severance payment and the employee's previous salary, it may result in the employee entering a higher income tax bracket. To address this, the German legislature introduced the "Fünftelregelung" (fifth method) to calculate the income tax for severance payments. This method allows employees to spread the tax liability over five years, effectively reducing the annual taxable income.

It is important to note that the "Fünftelregelung" only applies if it is explicitly declared in the annual tax return. Other than that, severance payments are exempt from social security contributions.