Severance pay in Germany: What is the “fair amount”?

Every year, more than 200.000 lawsuits against unfair dismissal are filed in Germany. Whenever an employer dismisses employees, most of them will receive a severance payment. Even though technically, there is not always a legal claim to such payments. In practice, however, in the event of termination by the employer, severance payments will be made most of the time. It is very often triggered by the lawsuit that many employees use as part of the negotiation process. The amount of severance pay depends on many factors – including your negotiation skills. However, three factors are typically the most relevant drivers for the “fair” amount of severance pay in Germany. These are the length of service, the latest gross salary, and a “multiple”. This “multiple” is a factor, typically between 0.5 and 1.5, and very much depending on the circumstances of the individual case. Especially if a dismissal is “obviously unfair”, the “multiple” can be higher.

What is a “fair” severance pay in Germany anyway?

Well – that depends! First, we need to state clearly that for most people, there is no statutory severance pay in Germany. It is a widespread misconception that there is a general statutory severance pay in Germany. That is not the case, at least not in general. Even though Germany tends to be among the more employee-friendly countries, especially regarding ending employment contracts. But only in the rare cases of a “social plan” with the works council (often agreed on in the case of mass layoffs) or under a collective bargaining agreement), do employees have the legal right to a certain severance payment.

In practice, however, employers and employees will often agree on severance payments in the event of termination by the employer. The amount of severance payment in these cases depends greatly on the individual circumstances. For example age, length of service of the employee, as well as special protection against dismissal. Such “non-cancellation” reasons apply e.g. for works councils, severely disabled people, pregnant employees, or employees on parental leave. In the absence of any such “special circumstances”, there are a few “rules of thumb” to estimate the “fair” amount of severance pay:

Different rules of thumb apply

There are a few “rules of thumb” to estimate the “fair” amount of severance pay:

A widespread calculation determines the “standard severance payment” using half a month’s salary per year of employment as a basis. For example, an employee who has worked for 10 years at his last employer and last earned a gross (pre-tax) income of EUR 3,000 per month would receive a severance payment of EUR 15,000 (0.5 * EUR 3,000 * 10 years). The three decisive variables are the factor of 0.5, the amount of the last monthly salary paid (gross), and the length of service.

A different calculation and “rule of thumb” differentiates further by age. The multiple of 0.5 increases to 0.75 or 1.0, according to the age of the employee. In the example above, a 52-year-old employee would then receive a severance payment of €30,000 (i.e. 1.0 * €3,000 * 10 years).

In practice, the multiple not only depends on the individual circumstances of the employee but also on numerous other influencing factors. Depending on the labor court district and the size of the employer’s company, some courts will apply a factor of 1.0 (not 0.5) to most cases, even regardless of age.  And depending on the circumstances of the individual case, the factor can also be 1.2 or higher in some cases. For example, when the dismissal was obviously void and illegal. A specialized labor lawyer will know all the details.

How to calculate the “fair” amount of severance pay in detail?

As already described above, the three factors of salary, length of service, and “multiple” determine the amount of the severance payment:

1. Last gross (pre-tax) salary

The last gross (pre-tax) salary at the time of termination is particularly important for the calculation of a severance payment. It depends on the monthly gross salary at the time of termination. In the case of one-off payments, overtime, and other supplements, “annual income / 12 ” is standard practice to calculate the monthly gross wage

2. Duration of service

The existence of the employment relationship is decisive for the calculation of the length of service. Maternity leave, part-time work and training periods are part of the service period. Other periods, for example, when an employee was only working as a temp/freelancer, are not taken into account. If you have taken a sabbatical, it depends on the agreements between employer and employee.

3. Individual multiple

The “multiple” (e.g. 0.5 according to the rule of thumb, see above) depends not only on age but also on the effectiveness of the termination and the strength of any protection against dismissal:

• Effectiveness of the termination: Of course, the question of the effectiveness of the termination is highly relevant for the value of the multiple. If the termination is obviously void, an employee will typically only agree to a (consensual) termination in court, if the employer offers a significantly higher severance payment. But even if the termination is effective and there is no entitlement to severance pay, many employers will offer some severance pay “voluntarily”. However, these are usually lower and are based on the rule of thumb presented above (with a factor of 0.5).

• Strength of the protection against dismissal: Even in the case of an ineffective dismissal, the strength of the protection against dismissal is important when negotiating an annulment. Among other things, legal hurdles such as special protection against dismissal (“non-cancellation”) for certain groups of employees have an increasing effect here. It also depends on whether the “formal” requirements for termination (e.g. the correct works council hearing) are met before the notice of termination is given.

What other payments may be relevant?

Other payments are technically irrelevant for the calculation of the amount of “core” severance pay in Germany. However, they can still significantly improve the employee’s financial situation. These include:

• Lost salary payments for the time of the job search. As a rule, there is a considerable drop in salary when you are looking for a job, despite unemployment benefits. However, these can often be “replaced” by the old employer. For example, an employee may file an action for protection against unfair dismissal. The court concludes that the dismissal was invalid about six months after the termination date. Then the employer must pay the wages for that period. Even though the employee did not work as a result of the invalid dismissal. Legally speaking, the employer was in “default of acceptance” and must therefore pay the employee who was dismissed. That means essentially “no work, but money anyway”. In addition, a short dismissal protection procedure can affect the amount of the actual severance payment
• Bonuses, commissions, other variable or one-off payments. Employees often forget the existence of bonuses, commissions, and other one-off payments that have not yet been paid out. Of course, these should always be claimed on top of the actual severance pay. And not “settled” by the severance pay.
• Other wages: Such as unpaid overtime, pro rata vacation pay, and Christmas bonus as well as other “open” wage payments. They should also be claimed in addition to the actual severance pay.

What other factors might count

There are several “edge cases” where even higher severance payments (multiples) are possible. This is often related to the special protection provided to certain groups of employees who generally face a greater risk of dismissal – such as handicapped or pregnant employees and members of the works council. Disabled or pregnant employees as well as employees on parental leave, enjoy special protection against dismissal. Often, a “permission” of the authorities is required prior to issuing a dismissal. Furthermore, members of the works council can only be dismissed where there has been prior approval of the works council. Similar story during parental leave in Germany. You can find more information on this in our article “Termination during parental leave“.

Notice of termination received: What’s next?

If you have received a written notice of termination in Germany, it is first important that you act quickly. You may have to file an action for protection against unfair dismissal with the labor court within three weeks. This is a no-brainer if your dismissal is (probably) invalid. This is an important part of your negotiation process. You should file a claim at the local labor court and apply for a declaration that the employment relationship has not ended (Kündigungsschutzklage) within the three-week period after having received the termination letter. However, even if the termination is valid, employees in Germany very often use such a lawsuit to apply pressure on the employer to pay a “fair” severance. In any case, you should carefully examine any offer from your employer and seek advice from an employment lawyer. Your lawyer can also best compare the amount of the offer with the “fair” severance pay:

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