When companies reduce staff, severance is a common practice. However, not everyone is entitled to it, and it is not always beneficial.
Whether it’s automakers like Volkswagen, suppliers such as ZF, or recently the Finnish paper producer UPM in Ettringen, Unterallgäu, when companies cut jobs or close locations, many employees lose their positions. Paying a certain amount as compensation is a standard approach.
No Legal Right to Severance
By law, there is no automatic entitlement to severance pay. Usually, payments are negotiated between works councils or unions and the employer as part of a social plan. Individual employees can also try to negotiate a payment.
Severance Under the Protection Against Dismissal Act
An exception is Section 1a of Germany’s Protection Against Dismissal Act. If an employee does not file a dismissal protection lawsuit, they may be entitled to severance—calculated as half a month’s gross salary for each year of employment.
Example: An employee worked ten years at a larger company, earning €3,000 gross per month. Ignoring extras like Christmas bonuses or shift allowances, the calculation is:
10 × (0.5 × €3,000) = €15,000
This rule is controversial. Critics argue it allows employers to “buy their way out,” while supporters say it avoids lengthy legal disputes, which often end in settlements anyway.
Financial Consequences
Whether severance pay is worthwhile depends on individual circumstances. The German Trade Union Confederation (DGB) recommends considering the overall picture. While severance payments are not subject to social security contributions, they are taxable and can increase your personal tax rate. Since January, employers no longer automatically report severance pay; employees must declare it themselves in their tax return.
Impact on Unemployment Benefits
The Federal Employment Agency also reviews severance agreements carefully. If an employee signs a termination agreement with severance, unemployment benefits may be delayed. The dismissal is considered self-initiated, so benefits may start later (often three months delayed) and may be reduced in duration—from twelve to nine months.
Whether severance fully compensates for lost income depends on its size. Unemployment benefits amount to 60 percent of previous net income, or 67 percent for parents. Extended unemployment leading to citizen’s allowance results in even greater financial loss.
Early retirement funded by severance can also be disadvantageous. While early retirement is possible, it comes with permanent pension reductions—even after the severance money is spent.
Correction:
A previous version incorrectly stated “0.5 percent of monthly income.” The correct calculation under the Protection Against Dismissal Act is 0.5 months’ salary per year of employment.
Ways Companies Can Reduce Staff in Germany
Operational Dismissal: Allowed for economic difficulties, technological changes, or restructuring. Selection is based on social criteria like age, children, disability, or length of employment.
Termination Agreement: Mutually agreed end of employment, often with severance, but not mandatory.
Early Retirement: Offered to older employees, sometimes with severance or early retirement benefits. Partial retirement is also possible.
Hiring Freeze: Open positions are not refilled, reducing staff over time.
Fixed-term Contracts: Contracts expire and are not renewed.
Transfer: Employees are relocated to other sites, and their previous positions are eliminated.
Temporary Work: Employees are assigned through staffing agencies, often at lower costs than permanent staff.
Source: dpa
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