How to know if you're getting a good severance package in Germany

If you’ve had your eye on the business headlines in Germany lately it looks like people are losing their jobs left and right.

Many of Germany’s leading car makers – such as Volkswagen, Mercedes, BMW, Audi and more – have announced plans to cut costs by letting go of tens of thousands of workers over the coming years.

And it's not only car makers that are looking to downsize. Bavaria-based sportswear brands Adidas and Puma – both of which hire significant proportions of foreign workers – are also planning layoffs. 

READ ALSO: 

• German unemployment hovers under 3 million as economy stagnates
• Is Germany really on course to cut 140,000 auto industry jobs in a decade?

Workers in Germany who find their jobs on the chopping block are often offered a severance package, which can give the freshly unemployed a few months of breathing room before they need to land a new job or seek out other sources of income.

But the quality of severance packages, if offered at all, vary from company to company and are often negotiable. Workers experiencing their first layoff may be in the dark about whether they’re being offered a good deal.

So here’s what you need to know about severance pay in Germany, as told by a legal counsellor who focuses on employment law.

Are companies required to offer severance?

In Germany employers are not actually required to provide severance packages in all cases. However, employees are entitled to severance pay when the Dismissal Protection Act (Kündigungsschutzgesetz) applies, which is often the case when a company engages in widespread job cuts as a cost-cutting measure. 

Severance pay may also be required when a works council has negotiated severance terms as part of a social plan. Or if the works council has negotiated a collective bargaining agreement that stipulates severance payments.

In other cases, employers may voluntarily offer a severance package to help shield themselves from other liabilities related to letting an employee go. These packages generally come with an agreement that the employee won’t take further action against the company for their termination.

For these reasons, receiving a severance package is relatively common for workers in Germany, and especially for those whose lay-off comes as part of a company’s cost-cutting plan.

“Severance pay is offered at the employer's discretion, or as part of a negotiated (judicial) agreement," Mauricio Foeth, of counsel at international labour and employment law firm Fisher Phillips, told The Local in an email. 

From an employee's point of view, a good severance package can be a boon, allowing them to walk away with a bit of a financial cushion. However, ensuring a deal for oneself can be tricky, especially for people who haven't navigated the process before.

For this reason Foeth urges any readers currently navigating a severance negotiation to seek legal advice from a lawyer, as well as tax advice from a tax expert.

What’s a good deal for a severance package?

Severance pay is essentially determined by an agreement between an employer and an employee, so there are different ways to calculate it.

Foeth suggests a common basic calculation: Severance pay = Half of the gross monthly salary (0.5) × Number of years of employment.

However, depending on an employee's negotiation skills and leverage, they could feasibly increase the rate from a half month’s salary per year up to around one full month's salary per year, Foeth added. 

Based on this calculation an employee earning a gross salary of €3,000 per month, who has been with a company for ten years, might expect an initial severance pay offer to be between €15,000 and €30,000.

However, this calculation can change depending on your industry, your job market prospects, your marital status and a number of other factors.

Larger firms in Germany that are planning widespread layoffs will often negotiate a Sozialplan (social plan) with the works council, which can determine the terms for severance calculations. In these cases, they may set-up a points-based severance calculation instead of using the generic calculation above.

A points-based severance pay approach would also be determined based on your salary and time spent at a company, but it could also include factors like age, marital status or disability, etc. 

The argument for a points-based approach is that it allows a company to more fairly factor in employees' living situations when calculating severance. But these calculations can also get quite complicated, depending on how many factors are involved.

If you’re unsure if a points-based severance offer is a good deal, comparing the total amount offered back to the basic calculation above could be a useful place to start.

Lastly, keep in mind that severance pay is usually offered as a gross amount, so taxes and social security contributions will be deducted.

Are there any disadvantages to accepting severance?

From the position of a soon-to-be unemployed worker hoping to get the best severance deal, it’s important to keep a couple of things in mind.

First, note that in accepting severance pay from your employer you may be waiving your entitlement to Arbeitslosengeld I, or short-term unemployment money for up to three months.

Laid-off workers who are entitled to unemployment insurance collect 60 percent of their last salary (or 67 percent for people with kids) during this time. So at the very least you’ll want to make sure your severance pay exceeds this amount (assuming you're entitled) before signing anything. 

READ ALSO: What happens to your work permit if you lose your job in Germany?

Second, you’ll want to carefully consider what else you are effectively giving up by accepting the severance pay.

Keep in mind that from an employer’s point of view, the severance they are willing to offer is typically an amount that they have calculated is less than they might otherwise pay out - either if they kept you on as a worker for longer, or that they could be liable for if a labour dispute arose.

“Employers certainly consider the cost and benefit of a severance package,” Foeth told The Local, adding that when employers lose a labour dispute for wrongful dismissal, they pay the employee's full wage from the end of the notice period until the final decision of the labour court. 

“This is why employers often prefer to negotiate a termination agreement, which provides legal and planning security.”

Of course, bringing a wrongful termination claim (or other litigation) against your former employer always comes with its own set of risks, as well as significant effort and costs.

For that reason, there's no simple answer for whether accepting a severance package is a good deal, as it really depends on the specific case. 

Foeth emphasises that the best way to ensure a good deal for yourself is to “consult with a labour lawyer to make sure the deal is fair and to explore if there is any legal recourse for a better offer.”

READ ALSO: The jobs where employees earn the most (and least) in Germany

Please note that this article is just intended as guidance and not considered professional or legal advice. We recommend that you consult with a legal advisor or lawyer for advice tailored to your situation.