Severance pay during insolvency in Germany: Employee rights explained

When an employer files for insolvency, many employees fear losing not only their jobs but also any outstanding payments – including severance. But under what circumstances can employees still receive severance pay, and who is responsible for paying it – the employer or the insolvency administrator? This article explains when severance payments are possible during insolvency, why the timing of your claim matters, and how to protect your rights.

Das Wichtigste im Überblick:

• Insolvency does not automatically end employment. Employment contracts remain valid even after insolvency proceedings are opened.
• Dismissals must still be justified. The insolvency itself is not a legal reason for termination, although related restructuring measures can be.
• Severance may still be possible. It can result from an agreement with the employer or insolvency administrator, from Section 1a KSchG, or from a social plan.
• The timing of the claim is crucial. Whether your entitlement arose before or after insolvency determines if it counts as an “insolvency claim” or a “mass liability.”
• Legal advice pays off. An employment lawyer can help secure or negotiate your severance and ensure deadlines are met.

Effects of employer insolvency on employment

An employer’s insolvency (financial inability to pay) does not automatically terminate employment. German law explicitly states that the employment relationship continues even after insolvency proceedings are opened.¹

Insolvency alone is not a valid reason for termination. A dismissal must still be socially justified under the German Dismissal Protection Act (Kündigungsschutzgesetz – KSchG). If another company takes over the business, the employment continues unchanged. However, if the company closes, relocates, or restructures, those operational changes can form legitimate grounds for redundancy. The general and special protection against dismissal still applies, even after insolvency proceedings begin.

When employment continues after insolvency has been declared, two main questions arise:

1. How are employees’ wage claims secured during ongoing work?
2. What happens to potential severance entitlements once employment ends?

Important distinction: insolvency claim vs. mass liability

Whether you are entitled to severance pay during insolvency depends mainly on two factors:

• When your entitlement arose — before or after insolvency proceedings were opened, and
• What assets are still available in the insolvency estate (Insolvenzmasse).

If your wage or severance claim arose before the opening of proceedings, it is classified as an insolvency claim (Insolvenzforderung). Payment then depends on the number of creditors and remaining assets. The insolvency administrator calculates a percentage (“quota”) for all creditors, including employees. Employees then receive a proportional payment — usually quite low.

If your entitlement arises after insolvency proceedings have started, it becomes a mass liability (Masseforderung). These claims must be paid in full. The logic is simple: if you continue working after insolvency begins, you must also receive your full wages or agreed severance. If the estate lacks funds, special rules apply — in such cases, consulting a specialized employment lawyer is strongly advised.

Severance entitlements during insolvency

A severance claim in insolvency can arise from different legal sources. The exact timing and legal basis are decisive for how the claim is treated in proceedings:

• Before insolvency proceedings open:
  Severance agreed in a termination agreement (Aufhebungsvertrag) or social plan before insolvency is considered an insolvency claim. Even if payment becomes due only after insolvency starts, the underlying cause existed before. Therefore, it is treated as a pre-insolvency claim and paid only proportionally – if at all.
• After proceedings begin:
  If a termination agreement is concluded with the insolvency administrator, the severance counts as a mass liability and must be paid in full – provided the insolvency estate has enough funds.
• Under the Dismissal Protection Act (KSchG):
  Section 1a KSchG allows severance for dismissals with reference to redundancy. Whether this counts as an insolvency or mass claim depends on who issued the dismissal – the employer (insolvency claim) or the insolvency administrator (mass liability).
• Under a social plan:
  If the insolvency administrator and works council agree on a social plan after insolvency begins, the resulting severance is also a mass liability. However, its amount is legally capped and it can only be paid after all other mass liabilities are settled.

Even in insolvency, severance can be negotiated – for example, in a social plan or settlement with the administrator. But these payments depend heavily on timing, available funds, and proper legal advice.

Frequently asked questions (FAQ)

1. § 108 InsO = Section 108 German Insolvency Code ↩︎