Anyone who is shown at the door by their employer has to rearrange their life – and find out more quickly. Because the separation of employees often costs companies a lot. What you should know about severance pay.
The termination has arrived, all deadlines have been met, the dismissal is effective. This is a shock for employees who receive dismissal after many years in the company. But you shouldn’t take a lot of time to process the termination – and seek expert support quickly.
the Deutsche Bank announced in July 2019 that up to 10,000 jobs could be lost in Germany alone. Germany’s auto suppliers are also planning to have fewer employees in 2021: every third company in the industry wants to reduce. Especially in sectors in upheaval and companies in distress, there are regular layoffs – including long-term employees. But a common misconception quickly causes trouble. Because anyone who believes that severance payments are a guaranteed benefit will quickly be disappointed. Severance payments are voluntary payments by the company in order to be able to part with employees quickly.
When a severance payment will be made
Employees who have been terminated can invoke common law if their colleagues who have been laid off generally receive severance pay. Sometimes this is also regulated by a collective bargaining agreement, a works agreement or a social plan that has been negotiated by the works council. However, the amount is variable upwards, because only a minimum is stipulated by law.
Some companies take the employee’s status into account when determining the severance pay: Does he have a family? Is he an older employee who barely has any chances on the job market? But another point plays a role in the amount of the severance payment: What are the prospects in court? If the employee can successfully defend himself, it usually becomes really expensive for the company.
Employers have the option of offering severance pay to the dismissed employee (§ 1a KSchG), if he in turn does not seek dismissal protection action in return. Most employers shy away from this legal dispute. Therefore, they prefer to offer a termination agreement and protect themselves by excluding legal recourse.
That is how high the severance payment is
According to the Dismissal Protection Act, the severance payment amounts to “0.5 monthly earnings for each year of the existence of the employment relationship.” Periods of more than six months are rounded up to a full year. About the absolute amount, § 10 says: “As a severance payment, an amount of up to twelve monthly earnings is to be set.” For employees who are at least 50 years old and have worked in the company for at least 15 years, 15 monthly salaries are due. From the age of 55 with at least 20 years of employment, there are up to 18 monthly earnings. The monthly salary that was last paid to the employee is used as the salary.
These regulations are the minimum; of course, employees can also negotiate better terms. It is important that the termination is responded to quickly. The lawsuit must be initiated 21 days after the termination. Otherwise the termination is considered lawful. It is imperative that the works council be informed as soon as possible and that a consultation appointment be booked there. Legal help is also advisable in order to meet the deadline and start negotiations quickly. Especially the point of the waiver of legal action can be paid for by employees.
The severance payment is taxed after the termination
But what remains of the severance payment in the end? Which taxes have to be paid? According to the law, the severance payment does not count as contributory income – therefore social security contributions are not to be paid from it. This means: Neither pension, long-term care, unemployment or health insurance are deducted from the severance payment (except for those with voluntary health insurance, they have to pay additional health and long-term care insurance). But the farewell payment is not tax-free. The wage tax is due. The employer usually calculates the amount of the tax deductions and forwards this to the tax office.
The severance payment is usually a one-off, high amount – of course, this has an impact on the tax burden. However, if the severance payment is paid out in a calendar year, redundant employees can apply for a tax reduction, the so-called fifth rule (Section 24 No. 1a EStG). This regulation is important because income tax rates are progressive, which means that they increase with the amount of income. If the severance pay is concentrated on the income list, the tax deductions can also increase quickly.
This is how the one-fifth rule is calculated for severance pay
The fifth rule mitigates this effect by dividing the severance payment by five and then adding the result to the annual salary. This total amount is then taxed. Then comes the offsetting: the annual income is taxed without severance pay – and the amount is compared with the first. The resulting difference is multiplied by five to produce income tax.
A calculation example of “steer.de “explains how the Fifth rule works: An employee (married, subject to church tax) earns an annual salary of 45,000 euros. As a severance payment, he receives 25,000 euros. If the severance payment is added to the salary without a fifth regulation, the employee only has 16,705 euros, with the regulation it is 17,361 euros – an increase of more than 600 euros.
Especially employees who earn a low taxable income can benefit from this regulation because they do not slip into a less favorable tax rate.
This is how the severance pay affects unemployment benefits
As a rule, the severance pay has no effect on unemployment benefit I. ALG I is not a basic security, but an insurance benefit that is only paid out if the employee has worked for a longer period and has paid unemployment insurance for at least twelve months. Any assets – or the severance payment – have no influence on the payment of ALG I. However, early exit from the company: If the employee leaves the company without observing the notice period and leaves the employment relationship, the entitlement to ALG I is suspended ( In addition: § 158 SGB III). This can be done through a termination agreement or the conclusion of a court settlement. The rest phase is based on the duration of the shortened notice period.
“Do not agree on a termination agreement or a winding-up agreement if there really isn’t one for it good reasons and / or an extremely attractive severance pay. The safest way for you as an employee to respond to a termination request from your employer is to wait for a proper declaration of termination from the employer with a correctly calculated notice period and then quickly file a dismissal protection suit “, so the recommendation of the law firm Hensche. In the case of sensible severance pay arrangements, it is necessary that notice periods are adhered to. “Do not sell your notice period for payment or an increase in severance pay”, so the advice of lawyers.