Settlement: entitlement, amount and negotiation strategies

Ways part – that is quite normal. In professional life, this ideally coincides with a severance package. It sweetens the dismissal for the employer when he should go, but does not have to. However, the road to payment can be rocky. Find out if you're entitled to a settlement and how much it might be in this guide to the subject.

Basic information about the settlement

Severance pay is a one-time payment that the employee receives in the event of a dismissal. It is usually due upon termination of employment – as compensation for the loss of the source of income.

Unfortunately, it is a widespread misconception that severance pay is generally part of every dismissal. Not every employee can demand severance pay in the event of dismissal. For this to happen, certain situations and conditions must interact. However, there are also particularly clear examples:

  • Individual employment contracts: If both parties have agreed on severance pay in the employment contract, it must of course be paid out in the event of termination. The prerequisite is that the provisions of the employment contract have not been violated. A company treats a termination for behavioral reasons as a breach of contract. In this case, the employer most likely does not have to pay despite contractual provisions.
  • Social plans: If a plant is closed down or relocated, the employer must negotiate with the works council on a reconciliation of interests. Part of the settlement is often a social plan – including severance pay arrangements.
  • Individual regulations in the collective agreement: Independent of social plans, the works council can obtain company-internal regulations for severance payments. They differ from company to company. So it makes sense to keep yourself informed about the ongoing negotiations.

There are other cases in which the employer is legally obligated to pay severance pay.

Settlement: entitlement, amount and negotiation strategies

Ineffective terminations

If a dismissal is to be made that would have very little chance of success before the labor court, the employer faces a problem.

An example: An employer wants to terminate an employee in order to save a position. The employee's protection against dismissal may stand in his way. However, it may also be that he wants to enforce a termination for behavioral reasons, but would fail due to a faulty warning in the labor court. The severance payment can then serve as motivation for the employee to accept the termination anyway.

Dismissal protection proceedings

First and foremost, the employer can avoid time-consuming and cost-intensive litigation before the labor court by paying out a severance package. The lower the chances of success, the higher the potential costs for the company as a rule. Court costs, lawyers' fees, wage reimbursement, and a court-ordered severance payment: all this costs a lot of money.

If the employee claims his protection against dismissal, winning the case is particularly unlikely for the company and therefore risky. Protection against dismissal takes effect if an employee has been employed for more than six months in a company with at least ten employees. From this point on, the company can only dismiss the employee if there are factual, economic or operational reasons for doing so. The criteria for this are strict.

The protection against dismissal primarily serves to preserve the employment relationship. Often, however, this is no longer the employee's wish. Who wants to work in a company that throws them out the door at the next opportunity?? Thus, there are also good reasons for the employee to avoid proceedings.

Termination judgment and severance settlement

In most cases, however, the employer and employee reach an agreement before the case reaches the labor court. As a rule, this means that the employee leaves and receives a severance payment.

If there is disagreement about the amount, the employee may still go to the labor court. If successful, he is still entitled to his job. The employee can, however, file a petition for dissolution if he does not wish to resume his job.

The labor court then examines the reasonableness of the employment relationship in further proceedings – the so-called severance payment settlement. If the court confirms the unreasonableness, it determines a severance payment and dissolves the employment relationship. It is terminated after expiration of the notice period.

Out-of-court settlement

A dismissal protection lawsuit can therefore be a high risk, not least because the loser bears the legal costs. An out-of-court settlement is therefore an option for all parties involved. Here you can choose between two options: a termination agreement or a settlement agreement.

The settlement agreement

With the settlement agreement, the employee expressly waives the right to take legal action before the labor court. In return, the employer agrees to pay a severance package. The contract specifies the amount, but also the date of the release or the content of the job reference. However, notice of termination must be given in any case.

The termination agreement

Although the termination agreement also agrees the conditions of a termination, there is a decisive difference to the settlement agreement. Whereas the settlement agreement is only concluded after a termination, the termination agreement ends the employment relationship even without a previous notice of termination. From this point of view, it is the counterpart to the employment contract.

The termination agreement is particularly helpful if the employee wants to terminate the employment relationship himself/herself. There are several conceivable reasons for this. On the one hand, this can be an alternative job offer. A breach of contract by the employer is also a possibility.

In addition, the termination agreement can shorten notice periods as required. This is particularly practical if the employee has already found a new job.

Blocking period and unemployment benefit

However, the termination agreement also has disadvantages. If the employee terminates his employment contract himself, the employment office imposes a blocking period. It usually amounts to twelve weeks. During this time, the employee does not receive unemployment benefits.

Tip: However, you can avoid the lock-up period. In this case, your employer must only give notice of termination for personal reasons before drawing up the termination agreement. You agree this with your superior, depending on the situation. If you decide to take this measure, however, the usual notice periods apply.

Tip: Another factor for blocking periods is the amount of the severance payment: This may not exceed half a month's salary per year of employment.

Termination by the employee

If the employee terminates the employment contract himself, the entitlement to severance pay is also forfeited. The severance payment serves primarily as compensation for the loss of the job. With the own notice he accepts this loss of course voluntarily.

The situation is different in the case of termination of the employee without notice. It must always be preceded by a breach of duty by the employer. A company can also break the employment contract, for example by missing wage payments.

If the employer disregards the contract, the employee's own termination is also his responsibility. After all, the termination is the result of his breach of contract. In this case, the employee must be compensated – of course, only if the Dismissal Protection Act applies and he or she is therefore entitled to severance pay.

Get everything out: The amount of severance pay

The amount of severance pay depends on a number of different factors. In principle, it is freely negotiable and can be larger or smaller, depending on the legal situation and the negotiating skills of the parties.

The most important aspect is the protection of the employee's status quo. It is contractually stipulated that certain legal relationships must remain unchanged. Persons under this protection, such as a works council member, cannot be dismissed without further ado.

For the employee, this naturally means a solid basis for negotiation. If the desired termination depends solely on his good will, the company must offer him a convincing quid pro quo – for example, a high severance payment.

Orientation to the law: The rule of thumb

According to § 1a KSchG, the employer has the option of agreeing to a severance payment in the notice of termination. In return, the employee agrees not to appeal against the dismissal within the three-week period. Labor law has established a guideline for severance pay in this case, which you can also use as an orientation in other cases. It coincides with the so-called rule of thumb:

The severance payment is calculated as half a monthly salary multiplied by the duration of the employment relationship. If an employee has been working for a company for six years and earns 3.000 euros a month, his severance pay thus amounts to 9.000 euros.

Depending on the negotiation situation, the sum can be larger or smaller, but the rule of thumb is still suitable as a rough guideline. With strong grandfathering, you could receive, for example, three quarters or even more than one month's salary per year of employment. The industry and size of the company are also key factors in this regard.

Default of acceptance wages

A dismissal protection lawsuit involves yet another risk for the employer: the default of acceptance wage. If the court agrees with the plaintiff, the employer must pay the employee's salary until the end of the notice period.

The company then has to pay its employee retroactively – annoyingly without any compensation in return. This sum can sometimes be significantly higher than a generous severance payment.

Severance pay as a favorable alternative: a thought experiment

An employee has worked in a company for twelve months. His monthly salary is 3.000 euros. He is to be dismissed for operational reasons and despite protection against dismissal.

The employer offers a severance payment according to the rule of thumb. It amounts to 1.500 euros. However, the employee is not satisfied with this. He decides to sue and wins after half a year before the labor court.

The employer must therefore pay the employee's full salary for these six months in arrears, i.e. 18.000 euros. In addition, there are social security contributions of 20 percent. All this costs the company at least 21.600 euros. This doesn't even take into account litigation costs and a new severance package.

All this he could have avoided from the beginning with a reasonable severance payment. You can therefore also estimate which sum is appropriate on the basis of the follow-up costs of an action for protection against dismissal.

Tips and strategies: Severance pay thanks to a lawyer

As a layman, it is easy to lose track of this amount. Companies, on the other hand, have significantly more time and resources than the individual employee can spend. In case of emergency, it is therefore advisable to hire a specialist attorney for labor law.

A lawyer can precisely assess your chances and the risk of a negotiation and thus achieve the best possible severance payment amount. He also checks a possible termination agreement and conducts negotiations. This creates support and security.

Turbo clause

The so-called turbo clause can be agreed as part of the termination agreement. Then both parties separate before the actual end of the employment relationship. In addition, the severance payment can then be counted as outstanding compensation.

The reason for this is that the company can pay out such high severance payments that do not fully count as such. The severance pay is divided into two piles, so to speak. In this way, the company does not create a case that other employees can invoke for future severance payments.

Take advantage of tax benefits: Payment in installments

Although severance payments are not subject to social security contributions, they must be taxed. It therefore makes sense to postpone the payment of the sum or to divide it into installments. How to avoid an unusually high annual income and corresponding taxation.

Although this procedure is legally unobjectionable, it should not be overstimulated. Otherwise, the tax office will not consider the severance pay as a one-time payment, but as regular income. This means above all a higher tax rate.

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