severance pay in labor law

What is severance pay?

Is there a right to a severance payment?

How much severance pay am I entitled to?

Is the severance payment taxable?

Will the severance pay be credited to ALG I or ALG II?

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The severance payment is a one-off and voluntary agreement that is usually paid by the employer as a monetary payment to relieve the employee of the employment relationship.

Right to severance pay:


The employee is not entitled to a severance payment. The payment and amount of severance pay depends on the prospects of litigation and the extent to which the employer is interested in sticking to the employment contract.


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The legislature uses the term severance pay in connection with employment relationships in the following regulations:

If, exceptionally, an employee cannot be expected to continue the employment relationship, the court must, upon application, terminate the employment relationship through a judgment and award the employee a severance payment, Sections 9 and 10 of the Employment Protection Act.

A severance payment is regulated in Section 1 of the Employment Protection Act, which, however, requires that the employer has made an offer of severance payment and this offer is accepted by the employee after the three-week period for legal action against unfair dismissal has elapsed.


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Severance pay and income tax:


A severance payment is subject to wage tax liability:

According to Section 24 No. 1 EStG, compensation granted as compensation for lost or missing income or for giving up or not exercising an activity may be subject to a reduced tax rate in accordance with Section 34 Para. 2 No. EStG.

Severance pay and social security:

Severance payments are subject to social security contributions insofar as they contain wage components. This is the case if both agreements on severance pay, for example claims from the employment relationship, e.g. vacation pay, wages, etc., are waived for the period between the termination of employment and the comparatively later agreed end of the employment relationship. Social security contributions then only have to be paid for that part of the severance pay that is contained in the severance pay as a kind of hidden salary.


Severance pay and unemployment benefit (ALG I):


In principle, the entitlement to unemployment benefit I is suspended if the ordinary notice period has not been observed due to the premature and mutual termination of the employment relationship and the severance payment is to be paid to the employee precisely because of the termination of the employment relationship. Essentially, the individual regulations can be found in § 158 SGB III .


Every severance payment for the purpose of terminating the employment relationship without observing the ordinary notice period includes salary components that must first be used before unemployment benefit I can be claimed as an insurance benefit. This also means that not the entire severance payment, but only a "part" of it is counted towards unemployment benefit I. According to the provision of Section 158 SGB III Paragraph 2 Number 1 SGB III, a maximum of 60% of the severance payment may be offset against the entitlement to unemployment benefit I. In extreme cases, there is only an entitlement to unemployment benefit I if 60% of the severance payment has already been used. However, if it were only a question of whether the amount of the severance payment had actually already been "used up", the "suspension" of the entitlement to unemployment benefit I could be lifted by paying 60% of the severance payment within a very short period of time (possibly only for appearances). is "issued". Unemployment benefit I could then also be claimed in part for the period in which the otherwise existing ordinary notice period, which has been shortened, would have protected against unemployment.


Therefore, the law itself determines precise periods during which the eligible portions of the severance pay are considered "used." The rest period is therefore calculated according to the ratio of the amount of the severance payment to the last daily earnings. From a maximum of 60%, the percentage to be credited is reduced by 5% depending on length of service and age. The Federal Employment Agency illustrates this using the following table:


Length of service Age at termination of employment


under 40 over 40 over 45 over 50 over 55 over 60

Less than 5 years 60% 55% 50% 45% 40% 35%
5 and more years 55% 50% 45% 40% 35% 30%
10 and more years 50% 45% 40% 35% 30% 25%
15 and more years 45% 40% 35% 30% 25% 25%
20 years and more 40% 35% 30% 25% 25% 25%
25 and more years 35% 30% 25% 25% 25% 25%
30 years and more 30% 25% 25% 25% 25% 25%
35 and over years 25% 25% 25% 25%


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So if a 40-year-old employee earned €2,500 per month and thus €83.33 per calendar day (€2,500 / 30 days) and the employment relationship was terminated without observing a notice period against payment of a severance payment of €5,000 after four years of service on August 31, 2017, will be the one to be charged

Severance pay calculated as follows:


– Since the employee was employed in the company for less than 5 years, a 60% share of the gross severance payment of €5,000, i.e. €3,000, is to be offset against unemployment benefit I.

– For the sum of €3,000, the employee would have had to be employed for a total of 36 days (€3,000 / €83.33) with a daily wage of €83.33.

– The receipt of ALG I should not be able to begin until October 7th, 2017 (from August 31st, 2017).

– However, “the entitlement to unemployment benefit is suspended from the end of the employment relationship until the day on which the employment relationship would have ended if this period had been observed”, § 158 paragraph 1, sentence 1 SGB III . Unless longer periods have been agreed in the employment contract or collective bargaining agreement, the 1-month notice period in accordance with Section 622, Paragraph 2, Sentence 1, No. 1 of the German Civil Code applies to four years of service. Accordingly, the employment relationship on August 31, 2017 could have been terminated by ordinary termination on September 30, 2017, so that the entitlement to ALG I is only suspended up to this point in time.

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B. Severance pay and unemployment benefit II (ALG II):


Based on the means test in social assistance law, the entire (eligible) income of the beneficiary is also taken into account when checking the eligibility requirements for ALG II. This includes all benefits in money or money's worth accruing to the beneficiary, such as wages, insolvency benefits, tax refunds, disability pensions, but also severance payments. Therefore, if the beneficiary is paid severance payments in the month in which ALG II was already drawn, the severance payment in the amount of the ALG II benefit granted has been transferred to the Federal Employment Agency and must be forwarded to them immediately.



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