Companies in Germany are cutting jobs, increasing the importance of severance negotiations for employees and executives. While some employers offer substantial sums to encourage departures, employment lawyers warn that signing an agreement too quickly can result in the loss of significant financial benefits.
Germany has no general statutory right to severance pay. During restructurings, however, employers and works councils often agree on a social plan that calculates payments according to factors such as length of service and the number of children. The amount set out in such a plan should generally be viewed as a minimum, not necessarily as the maximum available.
A common benchmark under the Dismissal Protection Act is half a gross monthly salary for every year of employment. At a monthly salary of €8,000 and 15 years of service, that would amount to €60,000. For senior managers without a strong legal basis for dismissal, negotiations can sometimes produce a higher figure, with one gross monthly salary per year of service described as a common reference point. Boards and managing directors are generally excluded from social-plan arrangements for senior executives.
The total value of an offer must also be compared with the income and benefits that would be lost. One example concerns a marketing director offered €700,000. The manager earned €450,000 per year, while the employer contributed another €50,000 annually to an occupational pension. Over the ten years until the earliest unreduced retirement age, those contributions could have amounted to around €500,000. After taxes, only €360,000 of the severance would remain, making the offer less advantageous than it initially appeared.
The notice period is another important negotiating factor. Employees continue to receive their salary for every month the employment relationship lasts, so the contractual or statutory notice period should be checked carefully. Companies may offer a so-called sprint bonus for signing quickly, but this often amounts to no more than three gross monthly salaries. Accepting an early departure is therefore mainly worthwhile when a new job is already available or other circumstances justify it.
Executives should not focus only on the severance amount. The continued use of a company car, outstanding bonuses or commissions, holiday entitlement and the treatment of paid leave can all affect the package’s real value. In one example, a sales director earning €300,000 annually secured 12 months of continued salary payments and a further six months of compensation for a non-compete obligation. The resulting package was valued at €390,000.
Stock options and other equity arrangements also require review. Their treatment is often governed by the employment contract and by good-leaver or bad-leaver clauses. If a manager leaves involuntarily before the expected vesting or exercise date, acquired participation rights may need to be reflected in the settlement, depending on the applicable contractual rules.
Tax planning can make a considerable difference. Since 2025, employers can no longer apply the German one-fifth tax rule directly through payroll withholding. The severance is initially taxed under the normal progression, but the tax advantage can be claimed later through the tax return. In the example of a single employee earning €4,000 gross per month and receiving €120,000 in severance, applying the rule would reduce income tax and solidarity surcharge by a combined €6,133 compared with immediate withholding without the rule.
The effect can be greater when the recipient has little or no other income after leaving the job. The payment date should therefore be negotiated carefully and recorded in writing. Moving the payment into a later calendar year with lower income may reduce the overall tax burden. Bonuses and occupational pension contributions may also be scheduled differently, where the employer agrees.
An agreement can also affect unemployment benefits. The employment agency may treat a termination agreement as voluntary participation in unemployment, potentially imposing a blocking period of up to 12 weeks and reducing the overall benefit period. Employees are advised to contact the agency before signing and obtain confirmation about the consequences, or factor any potential loss into the severance package.
The timing of registration can also matter. Under the so-called disposition year, affected employees may choose when to register as unemployed as long as the previous employment ended no more than 30 months earlier. Waiting too long, however, can lead to the loss of the entitlement entirely.
Health insurance costs may likewise depend on the payment month. For voluntarily insured members of the statutory system, a severance payment made in January can cause the maximum monthly contribution, including long-term care insurance, to apply for the entire year. If the payment is made in December, lower minimum contributions may apply for the earlier months, potentially creating a difference of several thousand euros.
Instead of one large payment, a staged compensation model may be more advantageous. One possible structure keeps the full salary and contractual benefits running until the end of employment, followed by a transition period with gradually reduced payments. A typical arrangement might provide 100 percent of the former salary for six months, 75 percent for the next six months and 50 percent for a further six months.
Such a model can preserve health, pension and occupational retirement contributions during the transition. In individual cases, lawyers cited in the report say that staged arrangements can produce net benefits up to 30 percent higher than a conventional lump-sum severance payment.
Before signing, employees should verify the social-plan entitlement, protect the notice period, negotiate benefits beyond the headline payment, review equity rights, assess the tax treatment and agree on the payment date. The possible effects on unemployment benefits and health insurance should also be calculated, while a staged transition package may be preferable to a single payment.
Sources: Handelsblatt.