Abfindung (Severance pay)

A one-time payment made by an employer to an employee when the employment relationship ends. It is not automatically granted under German law but can result from negotiation or legal proceedings.

German Labor Law (Arbeitsrecht)

The legal framework regulating employment relationships in Germany, including conditions under which severance may be paid.

No Automatic Right

In Germany, employees do not generally have a right to severance. It must be contractually agreed, ordered by a court, or arise under specific legal conditions.

Kündigungsschutzgesetz (KSchG)

The Dismissal Protection Act, which provides protection against unfair dismissal and outlines cases where severance may apply, such as terminations for operational reasons.

§ 1a KSchG

A legal clause that allows employees to claim severance if the employer issues a termination for operational reasons and explicitly offers compensation if the employee does not sue within three weeks.

Settlement Agreement (Abfindungsvergleich)

A mutually agreed termination of employment in exchange for severance pay, often reached to avoid court proceedings.

Judicial Dissolution (§ 9, § 10 KSchG)

If a court finds continued employment unreasonable, it may dissolve the contract and order the employer to pay severance, depending on age and length of service.

Social Plan (Sozialplan)

A negotiated agreement between employer and works council to mitigate the effects of mass layoffs. It often includes formulas to calculate severance payments.

Tariff Agreement (Tarifvertrag)

A binding agreement between unions and employers that can contain severance provisions, especially in the public sector or during restructuring.

Turbo Bonus (Turboprämie)

An extra payment for employees who leave the company earlier than the agreed termination date, helping employers save costs.

Gross or Net Severance

Severance payments are usually agreed on a gross basis, meaning the employee is responsible for taxes. A net agreement means the employer covers the tax burden.

Inheritability

If an employee dies before the termination date, severance is usually not paid unless contractually agreed to be inheritable.

Justified Resignation (§ 628 BGB)

If an employee terminates the contract for serious reasons, they may claim severance as damages for the employer’s breach of duty.

Unequal Treatment

Employers must treat employees fairly when offering severance. Discrimination based on age, working hours, or other factors may violate equal treatment laws.

Process Risk

The legal and financial uncertainty faced by employers and employees in court proceedings. Severance is often used to avoid this risk.

Annahmeverzugslohn (Back Pay)

Wages owed if a dismissal is found invalid and the employee should have been working. Employers often pay severance to avoid this.

Court Costs (§ 12a ArbGG)

Each party pays its own legal fees in the first instance of labor court. Legal aid may be available in some cases.

Social Security Law

True severance payments are free from social insurance contributions. False severance (e.g., bonuses disguised as severance) may be subject to contributions.

Unemployment Benefits (ALG I / ALG II)

Receiving severance may affect unemployment benefits. Employees should ensure that the reason for termination is not misconduct to avoid sanctions or delays.

Sperrzeit (Waiting Period)

A penalty period during which unemployment benefits are denied, often triggered by voluntary resignation or certain severance agreements.

Fünftelregelung (One-Fifth Rule)

A tax relief method that spreads the severance amount over five years for tax purposes. As of 2025, this must be claimed via the tax office, not payroll.

Tax Optimization

Parties may delay severance payment to a new tax year to reduce the overall tax burden. However, this increases the risk of non-payment.

Social Security-Free Income

Severance is not subject to pension, unemployment, or health insurance contributions if it is clearly a termination-related payment.

Abwicklungsvertrag (Settlement Contract)

A contract where the employee agrees not to sue in return for severance. It may result in unemployment penalties if not carefully worded.

Divisor Method

A calculation model used in social plans where severance equals age times years of service times monthly salary, divided by a negotiated divisor.

Point System

An alternative severance calculation model based on assigning numerical values to age, service, and other factors.