After a dismissal, many employees decide not to take legal action. They opt for a quick out-of-court solution (außergerichtliche Einigung) in form of a termination agreement (Aufhebungsvertrag) with severance pay. It saves time, money and stress, but carries risks if entered into without proper consideration. In this article you will learn what employees should bear in mind before signing an out-of-court settlement, which deadlines apply and the main advantages and disadvantages.
Key points at a glance:
- An out-of-court settlement is the resolution of legal disputes between employee and employer without going to the court. Usually, it is in form of a written termination agreement.
- Advantages: An out-of-court settlement is a faster and more cost-effective.
- Disadvantages: can arise if employees sign out-of-court agreements hastily and without prior legal advice or careful consideration.
- Costs: Employees can make a fee agreement with their lawyer. Otherwise the Lawyers’ Remuneration Act (Rechtsanwaltsvergütungsgesetz, RVG) applies.
- Out-of-court negotiations do not interrupt the 3-weeks-deadline (Dreiwochenfrist) for legal proceedings against the dismissal. The deadline starts with receipt of the dismissal. If the parties do not reach an out-of-court settlement within those three weeks, the employee must file a legal claim against the dismissal (Kündigungsschutzklage).
Contents
What is an out-of-court settlement?
An out-of-court settlement is the resolution of a legal dispute between employee and employer without going to the Labour Court.
An out-of-court settlement (außergerichtlicher Vergleich) is a written contract between employee and employer. It resolves the dispute through mutual concessions. After a dismissal it is usually a written termination agreement. In rare cases it can also be an agreement to continue the employment relationship.
Even when a court action is already pending, employee and employer can still reach an out-of-court settlement up until the final judgment.
How an out-of-court settlement after dismissal works
If an employee receives a dismissal, there are several important steps to take.
If an employee would like to challenge the dismissal, he must take legal proceedings against it within 3 weeks of receipt of the dismissal. The Labour Court (Arbeitsgericht) will then examine the validity of the dismissal and whether the employment relationship continues. If the employee misses the 3-weeks- deadline, the dismissal is valid and terminates the employment relationship.1
Before the employee initiates legal proceedings, it is advisable to consult a trade union or a lawyer specialized in employment law. In an initial consultation, the employee receives a first assessment of the litigation risks, the existing legal issues, the costs and initial information on how to proceed.
If the employee opts for legal representation, the lawyer or trade union will first contact the employer to announce the representation and offer talks for an out-of-court settlement. Employees can do the same without instructing a lawyer or trade union.
Out-of-court negotiations start with initial talks to clarify the legal positions and discuss possible solutions. If the parties reach an agreement, it must be in writing (usually in form of a termination agreement).
Out-of-court settlement vs. court settlement
An out-of-court settlement is a written agreement between the employee and employer.
In contrast, a court settlement (Prozessvergleich) is a written agreement that has been recorded before a court in the prescribed form. It must be set out in the minutes of a court’s hearing, in which it must have been read aloud and approved by the parties. The Presiding Judge must sign the minutes.
An out-of-court settlement:
- is a binding contract between employee and employer.
- does not automatically end court proceedings. The employee must withdraw the legal action. Alternatively both parties declare the settlement of the proceedings.
A court settlement:
- is also a binding contract between employee and employer.
- automatically ends the court proceedings.
- is an enforceable title (Vollstreckungstitel), meaning that if the employer later fails to meet the obligations, enforcement can take place based on the court settlement (as with a judgment).
Advantages and disadvantages of an out-of-court settlement
An out-of-court settlement offers a faster solution than court proceedings. Both employees and employers have a strong interest in this. Employees want quick clarity about the future of their job and their financial security. Employers will have more certainty in planning their workforce.
It is also more cost-effective. The parties can avoid Court costs and reduce legal fees. Likewise, employers avoid uncertainties regarding paying salaries (Annahmeverzug) arising from an invalid dismissal after lengthy court proceedings.
Possible disadvantages can arise if employees sign out-of-court agreements hastily and without prior review. Employees should always allow themselves time and either review the contents themselves or have a lawyer review them. You find more details in our article on termination agreements.
Costs of an out-of-court settlement
Employees can make a fee agreement with their lawyer for an out-of-court matter. Fees based on such an agreement may be higher than the statutory fees. As an exception to this rule, the agreed fees may be lower than the statutory remuneration, as long as the lower fee is appropriate in relation to the service and the lawyer’s risk of liability.
If there is no agreement, the statutory rules (Lawyers’ Remuneration Act) apply, together with its fee schedule (Vergütungsverzeichnis, RVG VV). For an out-of-court settlement the following applies:
- Consultation fee (Beratungsgebühr): For an initial consultation, a fee of up to a maximum of €250 applies. If further fees accrue, the consultation fee is deducted from the other fees, unless otherwise agreed.
- Business fee (Geschäftsgebühr): For a dismissal, the factor of the business fee is around 2.0. Legal fees are calculated based on the amount in dispute (Streitwert). Example: the amount in dispute for a dismissal is three gross monthly salaries (€4,000 x 3 = €12,000). The business fee based on this amount is €707 (see Annex 2 RVG) × 2.0 = €1,414.
- Settlement fee (Einigungsgebühr): For an out-of-court settlement, a lawyer can charge a settlement fee multiplied by a factor of 1.5. Example: the amount in dispute is €12,000 (three gross monthly salaries). The settlement fee is €707 (Annex 2 RVG) x 1.5 = €1,060.50. If there is already a court action at the time of the settlement (anhängig), the factor for the settlement fee is 1. The fee would then only be €707.
- If several fees apply, they are partially offset against each other.
Frequently asked questions (FAQ)
- §§ 4, 7 KSchG ↩︎
