Settlement agreement after termination: pros and cons

A settlement agreement (Abwicklungsvertrag) regulates the consequences of a dismissed employment relationship, including severance pay, payment terms, and the return of company property. It helps avoid disputes but can also affect unemployment benefits, so employees should review it carefully before signing.

What does a settlement agreement regulate?

A settlement agreement (also: ‘settlement contract’) is an agreement between the employer and the 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. It clarifies the consequences of an already issued termination.

Practical tip
Many employees assume that a settlement agreement is a sign that the employer wants to improve the offer. In reality, employers often use settlement agreements to obtain legal certainty after a dismissal. Before signing, employees should check whether they are giving up valuable rights, such as the right to bring an unfair dismissal claim or negotiate a higher severance payment.

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 notice of termination, termination agreement, and settlement agreement

Notice of Termination:
The employer ends the employment relationship unilaterally. The employee does not need to agree.

Termination Agreement:
The employer and the employee jointly agree to end the employment relationship. The agreement itself ends the employment.

Settlement Agreement:
The employment relationship has already been terminated. The agreement only regulates the consequences of the termination, such as severance pay, references, and outstanding claims.

Why a Settlement Agreement (Post-Termination)?

A settlement agreement (post-termination) can offer advantages to employees in several areas:

1. Severance pay: The agreement often includes severance pay. Fringe benefits, like the use of the company car, can be part of the settlement agreement as well.
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 settlement agreement (post-termination) can offer advantages, there are some risks that employees should be aware of, depending on the contents of the respective contract:

• Waiting period for unemployment benefits: The Employment Agency may impose a waiting period of up to 12 weeks if it views the agreement as evidence that the employee helped bring about the termination of the employment relationship. Properly drafted agreements can often prevent this issue.
• Unfavourable terms: Employers usually prepare settlement agreements themselves. As a result, the agreement may contain clauses that favour the employer unless the employee carefully reviews the document or seeks legal advice.

What should employees look out for?

A good termination agreement can avoid many problems. However, some key points should be considered:

1. Legal review (General information)
Employees should have any settlement agreement reviewed by a lawyer before signing. A legal review helps them identify potential risks, such as clauses that affect unemployment benefits or limit future legal claims. It also helps them assess whether the severance payment is fair and whether the agreement properly covers all relevant issues.

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2. Unemployment benefit waiting periods
Certain clauses can influence whether the Employment Agency imposes a waiting period for unemployment benefits. Careful wording is crucial because even small changes in language can affect the outcome. Employees should therefore ensure that the agreement clearly reflects that the employer initiated the termination and that the settlement only regulates its consequences.

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3. Employment reference
Employees who want an employment reference should actively ensure that the settlement agreement includes a clear obligation for a specific, very positive and detailed reference. It helps to define the exact wording of the reference directly in the agreement to avoid later disputes.
Federal Labour Court (BAG) principle:
If an employer states in the reference that the employee performed above average, the employee must present and prove the facts that justify an even better overall evaluation.

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4. Confidentiality and non-compete clauses
Employees should carefully review post-contractual non-compete clauses, confidentiality obligations and similar restrictions that may apply long after the employment ends. They should ensure that the employer clearly defines and appropriately compensates these restrictions, since overly broad clauses can significantly limit future career opportunities.

Common mistake:
Many employees focus exclusively on the amount of severance pay. In practice, disputes often arise because other important issues have not been addressed. Examples include bonus payments, commission claims, company cars, stock options, restrictive confidentiality clauses or post-contractual non-compete obligations.
A settlement agreement should always be reviewed as a whole rather than focusing solely on the severance amount.

What are typical clauses in a settlement agreement (post-termination)?

A settlement agreement (post-termination) often contains several standardised clauses:

• 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.

Benefit blackout period due to settlement agreement?

A particularly critical point in a settlement agreement (post-termination) is the question of blackout periods for unemployment benefits. The Federal Employment Agency can view such an agreement as an indication of a mutually agreed separation, which could lead to a blackout period. Employees can avoid this if they observe the following:

• 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.
• Appropriate severance pay: Have your legal advisor look into this; the amount of severance pay can cause trouble with the agency.
• Get help: Expert advice helps to avoid legal pitfalls and minimise the impact on unemployment benefits.

Frequently asked questions (FAQ)