The severance payment – claim and reality

Almost everyone has heard of employees who received severance pay due to the termination of their employment relationship. There is therefore a widespread misunderstanding that employees can always claim severance pay when their employment relationship is terminated. However, this is by no means the case!
In fact, most dismissal protection processes end with a settlement in which the parties agree to terminate the employment relationship in return for the payment of severance pay. However, the fact that such severance payment settlements often come about is in no way based on the enforcement of the corresponding legal claims of the employees concerned, but rather is due to the special features of dismissal protection law.
On the one hand, this article is intended to make it clear under which circumstances a severance payment agreement can be reached between employer and employee, even without an enforceable claim, and which criteria are crucial in practice for determining the amount of severance payment. In addition, it is explained below in which cases, in exceptional cases, there may be a legal claim to payment of severance pay against the employer.
1. The usual case – no entitlement to severance pay upon termination

The undoubtedly enormous practical importance of paying severance pay in labor law practice is in stark contrast to the fact that an employee generally has no legal right to payment of severance pay. This discrepancy can be explained primarily by the fact that the right to protection against dismissal - to put it simply - is not a right to severance pay, but rather a right to protection of existing rights. In a dismissal protection process, an employee cannot generally demand that severance pay be paid for the termination of the employment relationship (for exceptions see 2.). Rather, the Dismissal Protection Act (KSchG) provides that the continuation of the employment relationship is disputed in the dismissal protection process.
Normally, an employee has no right to severance pay. If a severance payment is nevertheless made, this may be because an employer offers a severance payment due to social considerations. In most cases, however, the employer offers a severance payment primarily in order to avoid otherwise existing financial risks. The payment of a severance payment represents, figuratively speaking, the price for the legally secure termination of the employment relationship with the employee concerned. Without a severance payment settlement, the employer risks having to conduct a dismissal protection process - which may be very lengthy and complex - and thus not only the risk of the employee being injured in the event not only to have to re-employ after losing, but also to possibly have to pay the wages that have accrued since the end of the notice period. This applies at least in the event that the Dismissal Protection Act applies to the employment relationship and the termination therefore requires justification from the employer. In this case, the so-called “delayed acceptance wage” can amount to an annual salary or more in individual cases, which shows why paying a severance payment can be in the employer’s own economic interest.
It should not be overlooked that a settlement always requires the willingness of both parties. If a party absolutely refuses to enter into a settlement in the dismissal protection process, the labor court must decide on the effectiveness of the dismissal. In this case, it’s literally “champagne or seltzer” for both parties.
But if a severance payment is being negotiated, what magnitude must the parties assume? From the above you can quickly see that the assessment of the risks of a dismissal protection process is one of the most important factors that can influence the amount of a severance payment. The more justified the employer's confidence that a termination notice he has given will withstand judicial review, the less likely he is to be willing to pay severance pay. Conversely, the employer's willingness to pay severance pay is even greater if the reasons for termination appear rather unconvincing and there is a risk of a judgment from the labor court stating that the termination did not end the employment relationship. From the employee's point of view, the question is simply at what price he will give up his employment relationship. For him too, the chances of successfully passing the dismissal protection process play an important, if not the decisive, role. But the prospects of when he can expect to start a new, suitable position are also of great importance for the employee. For those who already have a new employment contract in their pocket, the offer of a relatively low severance payment can be quite lucrative. On the other hand, anyone who expects a longer dry spell will usually need a correspondingly larger financial buffer in order to accept the risk of prolonged unemployment.
In practice, it has become common practice for the concrete calculation of a severance payment to be based on the average salary of the employee on the one hand and the length of service with the employer on the other. When making a (preliminary) assessment of balanced litigation prospects, labor judges often use a so-called “rule of thumb” based on half a gross monthly salary per year of employment and propose such an agreement to the parties at an initial conciliation hearing. As a legal advisor in particular, you should free yourself from this approach, as it usually does not do justice to the specifics of the individual case. Ultimately, a targeted assessment of what level of severance payment appears appropriate can only be made after a closer examination and legal assessment of the circumstances of the individual case in question. It can only be small nuances that, if you recognize them, can significantly worsen your own position, but can also significantly improve it. The correct assessment of one's own position therefore plays just as important a role as the negotiating skills to be used in the negotiations. This assessment of the legal situation and its transfer to the specific negotiations are therefore also the core tasks of a lawyer working in labor law who advises his client, be it an employer or an employee, and represents them in the negotiations. This applies both before termination and during the dismissal protection process.
2. The exceptional case – Possible claims for severance pay upon termination
However, there are also cases in which, in exceptional cases, there may be a legal right to payment of severance pay by the employer. The following constellations are relevant in practice:
a) Entitlement to severance pay from a social plan

In companies that employ more than 20 people and in which a works council exists, a social plan must be negotiated and agreed with the works council in the event of major restructuring measures. Such a social plan regularly provides for severance pay claims for employees who lose their jobs due to restructuring. If an employee is covered by a social plan and their employment relationship ends due to the specific restructuring measure, they can assert a claim for severance pay from the social plan. In this case, the amount of the severance payment depends on the social plan itself, which must contain appropriate calculation formulas. It is important to understand that a claim to a social plan does not in any way exclude the possibility that an employee could still take legal action against termination. In a dismissal protection process, the employee is usually concerned with obtaining an increase in his social plan severance payment through negotiation. After all, he is entitled to the social plan severance payment even if the court considers the termination to be effective. However, the employee should be aware that under certain circumstances he could achieve a real Phyrrus victory. If the employee wins the dismissal protection case, he will keep his job. Then, of course, the social plan severance payment claim no longer applies, as the employer ultimately only has to pay the severance payment if the employment relationship is terminated. An employee who has already mentally said goodbye to his job and his employer and is only interested in the highest possible severance payment can literally “gamble away” in such a situation. The lawyers involved must therefore also include such scenarios in their considerations and when advising their clients.
b) Entitlement to severance pay in the event of termination for operational reasons with a severance payment offer
If an employer issues a termination for operational reasons, he can combine the termination with a severance payment offer in accordance with Section 1a KSchG. In this case, the employer offers the employee that he will receive a severance payment amounting to half his gross monthly salary per year of employment if he refrains from filing a lawsuit against the termination. In the case of such an offer, if the employee allows the three-week deadline for filing a complaint to elapse, he or she acquires a legal claim to the offered severance payment upon expiry of the deadline. The regulation of Section 1a KSchG, introduced as part of the Hartz reforms on January 1, 2004, was intended to stem the flood of lawsuits in the event of terminations, but in practice it has only achieved little significance.
c) Entitlement to severance pay in the event of a successful application for dissolution following ineffective termination

The third case of a possible severance payment claim - which can still be described as relevant in practice - is the constellation of a so-called application for dissolution. This is the possibility that both employers and employees can apply for the court to terminate the employment relationship (nevertheless) against payment of severance pay if the labor court considers a termination by the employer to be ineffective due to a lack of social justification . However, the success of such an application is linked to quite high hurdles, since the current law - as already mentioned - is fundamentally aimed at maintaining the employment relationship and not at terminating it. On the one hand, the application can be made if “there are reasons that further cooperation between employer and employee for operational purposes is not expected sen” (Section 9 Paragraph 1 Sentence 2 KSchG). However, the requirements for such “disruption” are very high. In particular, it is not sufficient justification that the employer has given notice of termination that has not proven to be effective. Otherwise, the application for dissolution would ultimately require no justification at all, as it can only be made in the event of an invalid termination. Such disruption can be due, for example, to the fact that the employer knowingly filed an unfounded criminal complaint against the employee or that the employee insulted the employer in the course of the process. If disruption cannot be demonstrated, the employer (but not the employee!) can justify its request for dissolution by saying that the employee is a managerial employee. The Dismissal Protection Act grants the employer that he does not have to employ employees in managerial positions against his will. However, a senior employee in this sense is only an employee who can independently decide on hiring or dismissing employees and who also makes sufficient use of this (Section 14 Paragraph 2 KSchG). In practice, only very few employees are granted such extensive rights, which is why justified applications for dissolution usually fail because the court is unable to share the employer's view that the employee in question is a senior employee. However, if a labor court considers a request for dissolution to be justified, it will decide to terminate the employment relationship and award the employee a severance payment. The court determines the amount taking into account the circumstances of the individual case and must in particular observe the maximum limits specified by the legislature in the KSchG. When determining the amount, the courts often use the rule of thumb described above, according to which half a gross monthly salary per year of employment is used to calculate the severance payment. In this case, it is the lawyer's job to inform the court of the facts that - from the perspective of the respective client - must be taken into account when calculating the severance payment.
3. Conclusion
The basis of every severance payment claim is ultimately the assessment of the opportunities and risks in the respective employment law dispute. In order to obtain severance pay in the event of an impending or already announced termination, the employee usually requires legal advice and representation. The same applies to the employer, who is usually interested in countering requests for severance pay. The fact that negotiating a severance payment is often referred to as playing poker may sound derogatory and certainly does not always do justice to the regularly serious situation. However, the comparison is appropriate in that a poker player also needs to be able to assess whether he has good or bad cards in his hands. Or to say it with the Roman philosopher Seneca: “If you don’t know the harbor into which you want to sail, no wind is right for you.”