A settlement contract (Abwicklungsvertrag) defines the conditions that are important for the termination of the employment relationship after a termination. These include, for example, the agreement of a severance payment, the amount of the payment or the return date of the company car. A settlement agreement can be useful for regulating the consequences of termination in detail and avoiding possible disputes. This often makes sense for the employer in particular. Employees, on the other hand, need to be careful – especially with regard to a possible waiting period for unemployment benefits. The following blog article contains the most important tips for employees.

The most important information at a glance:

• A settlement contract (or ‘settlement agreement’) is an agreement between an employer and an employee that regulates the ‘how’ of a termination.
• This is what distinguishes it from the termination agreement, which terminates the employment relationship itself. The settlement contract only clarifies the consequences, e.g. of a termination that has already been announced.
• In terms of content, a settlement contract often regulates topics such as waiver of action, severance pay amount, the exact conditions under which the employment relationship is terminated (e.g. when a company car is to be returned) and possible ‘ points of contention’.
• However, with a termination agreement, you risk a blocking period for unemployment benefits, loss of rights due to the waiver of an action against unfair dismissal and – depending on the specific agreements – also unfavourable conditions. We therefore always advise you to have a lawyer take a look at a draft of the termination agreement before signing it.

What does a settlement agreement regulate?

A settlement agreement (also: ‘settlement contract’) is an agreement between employer and employee. It is concluded after the termination of the employment relationship. The aim is to regulate the terms of the termination by mutual agreement. Unlike a termination agreement, the settlement agreement does not directly terminate the employment relationship, but clarifies the consequences of an already issued termination.

Typical subjects of a settlement agreement may include the following:

• Severance pay (in particular, the amount of the severance pay)
• ‘Sprinter clause’
• ‘Employment certificate’
• ‘Exemption’
• Handling of remaining leave and overtime
• Timing and modalities of return of a company car
• Waiver of a claim for protection against dismissal
• Confidentiality agreements

Difference between a termination agreement and a settlement agreement

A termination agreement amicably ends the employment relationship itself – without any prior notice of termination. In the case of a settlement agreement, however, notice of termination (or a termination agreement) has already been given. The employment relationship is therefore officially already terminated. At least if the termination is effective.

The focus of the settlement contract is therefore on simplifying the settlement of the termination after the termination (or cancellation agreement) has taken place, avoiding disputes and regulating the consequences of the termination. Typical provisions include severance payments, the issuance of a favourable employment reference or compliance with confidentiality agreements (see above).

Differences between a termination agreement and a notice of termination

A notice of termination ends the employment relationship by means of a unilateral declaration, without the consent of the other party being required. A settlement contract, on the other hand, requires the consent of both parties and is concluded by means of a joint agreement.

The most important differences are:

• Unilateral nature: A notice of termination is declared unilaterally, whereas a settlement contract is a mutual, ‘consensual’ agreement
• Purpose: A notice of termination is used exclusively to terminate the employment relationship, while a settlement contract regulates the consequences of this termination, such as severance payments or release from duty.
• Timing: Settlement contracts are usually concluded after a notice of termination (but they can also be useful for fixed-term contracts that are about to expire).

In summary, the notice of termination ends the employment relationship itself, while a termination agreement regulates the framework conditions of an impending or planned termination due to an already issued notice of termination.

Why a termination agreement?

A termination agreement can offer advantages to employees in several areas:

1. Severance pay: The agreement often includes severance pay. This financial compensation helps employees to bridge the period of reorientation and offers a certain degree of security.
2. Clarification of disputes: A termination agreement quickly clarifies the professional future. This can help to alleviate the psychological pressure and uncertainty that often come with protracted disputes. Employees know exactly when and under what conditions their employment will end.
3. Employment references: Employees have the opportunity to influence the content of their employment references. A positive and qualified reference can still be a factor when looking for a new job.

What are the risks of a severance agreement?

Even though a termination agreement (or ‘termination contract’) can offer many advantages, there are some risks that employees should be aware of, depending on the contents of the respective contract:

1. Waiting period for unemployment benefits: If the contract is considered by the employment agency to be a mutually agreed termination, there is a risk of a waiting period of up to 12 weeks. This can mean significant financial losses.
2. Waiving a dismissal protection suit: By signing a termination agreement, employees generally waive their right to file a lawsuit against the termination. This means that any potential invalidity of the termination can no longer be reviewed by the competent labour court.
3. Unfavourable terms: Without legal scrutiny, there is a risk that the contract is designed unilaterally in favour of the employer. Employees should therefore always seek professional advice before signing.

What should employees look out for?

A well-designed termination agreement can avoid many problems. However, there are some key points that should be considered:

1. General information: We generally recommend that a lawyer specialising in labour law review the contract to ensure that it does not contain any ‘pitfalls’ (e.g. with regard to a waiting period for unemployment benefits). This applies not only to questions regarding the waiting period for unemployment benefits, but also, in particular, to the ‘fair’ amount of a severance payment.
2. Employment reference: If an employee wants an employment reference, they should make sure that the contract contains an obligation for a specific, ‘very good’ and detailed regulation on the employment reference. It is helpful if the wording of the reference is specifically defined in the contract.
3. Formulations regarding blocking periods: Certain clauses can help to avoid a blocking period for unemployment benefits. These are formulations where every word counts and should therefore be checked carefully.
4. Confidentiality and competition clauses: Employees should ensure that post-contractual non-competition clauses, confidentiality clauses and similar agreements, some of which extend far into the future, are checked by a lawyer and are appropriately remunerated. A competition clause that is too broadly defined can significantly restrict your professional future.

What are typical clauses in a termination agreement?

A termination agreement often contains several standardised clauses, which can, however, be individually adapted:

• Severance payment: This regulates the amount and the date on which the severance payment is to be made. The exact wording should be clear and binding.
• Exemption: An exemption clause clarifies whether and under what conditions the employee is released from their work obligation until the end of the contract. It is important that the period of exemption is paid.
• Issue of references: The contract should ensure that a qualified employment reference is issued. Employees can request that wording be agreed in advance.
• Return of work equipment: Employees should clarify which work equipment, such as laptops, mobile phones or company cars, must be returned in order to avoid disputes.

Unemployment benefit blackout period due to termination agreement?

A particularly critical point in a termination agreement is the question of blackout periods for unemployment benefit. The Federal Employment Agency often views such an agreement as an indication of a mutually agreed separation, which can lead to a blackout period. Employees can avoid this if they observe the following:

1. wording of the notice of termination: the contract should make it clear that the termination was initiated by the employer alone. This can be a decisive factor in avoiding a blocking period.

2. Appropriate severance pay: The severance pay should not be significantly higher than the legal limit in order to avoid misunderstandings with the employment agency.

3. Advice: Expert advice helps to avoid legal pitfalls and minimise the impact on unemployment benefits.

Frequently asked questions (FAQ)

What is the difference between a termination agreement and a severance agreement?

While a termination agreement terminates the employment relationship itself, a severance agreement already involves a termination. It regulates the modalities of the termination of the employment relationship after a termination.

What must be included in the severance agreement in order to avoid a blocking period?

The notice of termination should be worded in such a way that it is clearly unilaterally issued by the employer. In addition, the severance pay should be within the legal framework. With the help of a specialist lawyer, the risk of a possible waiting period can be minimised.

Which is better, a termination agreement or a settlement agreement?

In the case of a settlement agreement, the employee loses the opportunity to file an action against unfair dismissal. If an effective termination has already occurred, a settlement contract is advisable. It should only deal with the modalities of the termination of the employment relationship. A termination agreement, on the other hand, is advisable if no effective termination has occurred yet. For employees, there is the advantage of a shortened notice period if they find a new job at short notice.

Is a settlement contract a termination?

A termination agreement is not the same as a dismissal. A dismissal unilaterally terminates the employment relationship. A termination agreement amicably regulates the consequences of the termination of an employment relationship. The termination agreement is usually concluded after the dismissal.

(When) should you sign a termination agreement?

Employees should never sign a termination agreement without thinking about it first, but should seek professional advice from a specialist lawyer beforehand. Whether or not to sign a termination agreement depends on the individual situation. It should be checked whether there is protection against dismissal and whether the claims regulated in the contract are sufficient. The waiver of rights, such as protection against dismissal, must be in proportion to the benefits offered. Claims such as remaining leave, bonuses or surcharges should be correctly taken into account.

What are typical clauses in a termination agreement?

A termination agreement often regulates severance payments, leave of absence and the issuance of references. It determines when and how the severance payment is made, whether the employee is released from their work obligations and the return of work equipment such as laptops or mobile phones.

How do you negotiate a termination agreement?

Preparation is important when negotiating a termination agreement. Employees should be aware of their rights and how much severance pay is typical in the market. It helps to use the leeway for negotiation, as employers often want to avoid disputes. A lawyer or works council can provide support.