Severance pay is a common tool used during workforce reductions. For employees, the sometimes substantial amounts can be tempting. However, no one should accept a severance offer too hastily.
We clarify the most important questions:
What exactly is a severance payment?
A severance payment is a lump-sum amount that an employer pays an employee as one-time compensation for the loss of their job. The payment is generally voluntary.
Is there a legal right to severance pay?
No. There is no general legal right to severance pay. The assumption that an employer must always pay severance pay when giving notice of termination is incorrect.
In general, a severance payment is a matter of negotiation between the employee and the employer.
Employers and employees can agree on severance payments, for example, in a settlement agreement or a termination agreement.
Employees are entitled to severance pay if the employer has committed to providing it—for example, in a (collective) bargaining agreement or a social plan.
An entitlement also exists in the following, albeit very rare, case: if the employee waives the right to file a lawsuit for unfair dismissal and the employer offers the severance payment in the termination letter. In this case, Section 1a of the Unfair Dismissal Protection Act applies.
In this case, the severance pay is limited to half a month’s salary per year of employment.
What does a termination agreement have to do with severance pay?
Severance payments are often made in connection with a termination agreement. The employment relationship is then terminated by mutual agreement—at least officially. The employer does not have to issue a notice of termination and avoids a potential unfair dismissal lawsuit by the employee.
What does protection against dismissal have to do with severance pay?
Waiving the right to file a wrongful termination lawsuit may entitle the employee to severance pay if the employer offers this in the termination letter (see above).
If employees file a lawsuit against their termination, an unfair dismissal proceeding ensues. During this proceeding, an amicable settlement is possible at any time: for example, the proceedings may end with a settlement between the employer and the employee. A severance payment is then made as compensation for the loss of employment.
Important: For unfair dismissal claims, there is a three-week deadline starting from the date the notice of termination is received. If a claim is not filed with the labor court within these three weeks, the termination is considered valid. Employers then no longer have any obligation to pay severance pay. Therefore, any IG Metall member who receives a notice of termination should seek legal protection as soon as possible.
How much should a severance payment be?
The amount of the severance payment is a matter of negotiation—unless it is specified in a (social) collective bargaining agreement or a social plan. There is no general statutory provision governing this. As a rule of thumb, many labor courts use the formula: half a month’s salary per year of employment. In companies with a union and a collective bargaining agreement, severance payments for layoffs due to operational reasons or workforce reductions are usually higher. In addition, IG Metall frequently negotiates bonus payments for union members (see below).
How often are severance payments actually made in Germany?
Less often than many people think. The relevant cases here are those involving terminations by the employer and those involving a mutual termination agreement. Only in about 25 percent of these cases was a severance payment made in 2024, as shown by a recent study by the Hans Böckler Foundation.
Do I have to pay taxes on the severance pay?
Yes. Severance payments are fully taxable, just like your regular salary.
A severance payment can significantly increase your annual income. Due to progressive taxation, much higher tax rates then apply. As a result, a large portion of the severance payment may end up going to the tax office.
But there is a way around this: Employees can use the so-called one-fifth rule on their tax return. This limits the impact of progressive taxation. But even with the one-fifth rule, a substantial portion of the severance pay goes to the tax office. Anyone who does not absolutely need the severance pay to cover living expenses and is at least 50 years old can, under certain conditions, take advantage of another option to save on taxes: making voluntary contributions to the pension fund. Such contributions are tax-free up to a certain amount.
Do I have to pay social security contributions on the severance payment?
No. True severance payments are exempt from social security contributions. This means no payments are due for pension, health, long-term care, or unemployment insurance. The situation is different for compensation payments, such as those for unused vacation time. These payments remain subject to social security contributions.
As a union member, do I have any advantages regarding my severance pay?
Often, yes. This is because, as a union member, you generally do not negotiate with the employer alone. IG Metall or the works council negotiates on behalf of the entire workforce or a specific group.
If a workforce is unionized, it can respond very differently to workforce reductions than a workforce made up entirely of individuals acting on their own. In many cases, IG Metall can then secure social collective bargaining agreements—with high severance payments and bonuses for union members.
Why do employers pay severance?
Because they want to avoid lengthy labor court proceedings and the uncertainty that comes with them. Employees can challenge their termination by filing a wrongful termination lawsuit. The likelihood of success in such a lawsuit depends on the individual case. If a lawsuit has a good chance of success in court or if the outcome is uncertain, an employer will generally be more willing to offer a (substantial) severance payment.
In addition, unions play a major role. If a company is unionized and collective bargaining agreements are in place, employees are not on their own when faced with layoffs. Often, IG Metall and the works council can then negotiate significantly better terms than individual colleagues. Organized workforces can build massive pressure—if necessary, through a strike—and thus secure the best possible outcome.
What are the arguments against accepting a severance package?
A severance package can be generous. But this comes at the cost of losing one’s job. Anyone faced with this choice should therefore always think it through carefully and crunch the numbers. Whether accepting the severance package is a good choice depends on many factors:
- Is there a chance of continued employment with the company in the longer term?
- Is the company facing a crisis that threatens its very existence, and might it be unable to pay severance in one or two years?
- Does the company offer alternatives to severance pay, such as further training or retraining followed by continued employment?
- What are my personal prospects on the job market?
- How long do I have left until retirement?
In any case, it’s important not to be blinded by the seemingly large sum of money. If you have to rely on the severance pay to cover your living expenses for an extended period, even a large amount can quickly dwindle.
Does a severance package affect unemployment benefits?
In certain cases, anyone who receives a severance payment risks having their entitlement to unemployment benefits suspended for up to one year—in principle, until the severance payment has been “used up.” Only then will unemployment benefits be paid. This applies primarily to cases in which the employment relationship is terminated before the end of the regular notice period. With a termination agreement, the timing and adherence to deadlines are therefore crucial.
When a termination agreement is signed, there is also a risk of a waiting period for unemployment benefits of up to twelve weeks. During this time, no unemployment benefits are paid. In addition, the entitlement to unemployment benefits is reduced by the number of days in the waiting period.
Both of these provisions may apply to termination agreements that do not comply with the notice period.
Where can I find help?
IG Metall members can take advantage of IG Metall’s legal protection. This service is covered by the membership dues. There are no additional costs. The local office is the point of contact for questions regarding employment contracts or for assistance with disputes with your employer. Important: Negotiations regarding termination agreements are not covered by legal protection.
