One of the most persistent myths in German employment law: „I’m entitled to a severance payment if I’m dismissed.” The blunt answer is no — German law does not give the dismissed employee a general statutory right to severance. But the real-world answer is more nuanced: in practice, the vast majority of legally contestable dismissals end with substantial severance payments. Understanding the gap between the theoretical and the practical is the key to negotiating well.
The legal starting position
Under the Kündigungsschutzgesetz (KSchG), an employee who has been employed more than 6 months in a company with more than 10 employees enjoys protection against socially unjustified dismissals. The legal remedy for an unjustified dismissal is reinstatement — the employment continues as if the dismissal had never been declared.
There is no statutory right to elect cash severance instead of reinstatement. The employee can choose to pursue the reinstatement remedy through a Kündigungsschutzklage, or to accept the dismissal — but not, as a statutory matter, to demand severance.
So where does the practical money come from? Three sources.
Source 1 — The negotiated settlement (Vergleich)
The single biggest source of severance in Germany is the settlement of a Kündigungsschutzklage. When the employee files a dismissal-protection claim, the court schedules a Gütetermin (conciliation hearing) typically 2–4 weeks later. In approximately 80% of cases, the parties settle at this hearing, almost always on a „cash for waiver of reinstatement” basis:
- The employer pays a severance payment.
- The employee accepts the dismissal as terminating the employment.
- Both sides waive further mutual claims (with exceptions for already-accrued statutory rights like pension entitlements).
The economic logic for the employer: even a strong reinstatement claim is costly to defend, the litigation risk is real, and continuing an unwanted employment relationship is operationally awkward. The economic logic for the employee: reinstatement into a hostile environment is rarely attractive; cash now is more useful than the legal right to a job.
The Cologne severance formula
The local norm — at the Arbeitsgericht Köln and the Arbeitsgericht Bonn (relevant for our clients) — is:
Severance = 0.5 monthly gross salaries × years of service
This is the starting point. The actual settlement number varies based on:
- Strength of the dismissal-protection case (weaker employer position → higher number, up to 1 monthly salary per year).
- Procedural defects in the dismissal (formal errors → higher number).
- Length of service (long-service employees often get above the formula).
- Age (older employees with limited re-employability often get above the formula).
- Reason for dismissal (operational dismissals in well-funded restructurings often pay above; behavioural dismissals against well-documented misconduct often pay below).
- Employer’s litigation appetite (well-resourced employers with reputational concerns often pay above; cash-stressed employers often pay below).
Our range in actual settled cases: 0.3–1.5 monthly salaries per year of service, with the median around 0.5–0.7.
Source 2 — § 1a KSchG (the „voluntary” severance route)
The most direct statutory route to severance is § 1a KSchG. Where the employer (a) issues an operational dismissal (betriebsbedingt), (b) declares in the notice that the dismissal is operational, and (c) offers severance equal to 0.5 monthly gross salaries per year of service if the employee does not file a dismissal-protection claim, the employee can simply not file — and the severance becomes due.
This route is rarely invoked in practice because:
- Employers don’t like committing to a fixed number upfront.
- Employees who file a Kündigungsschutzklage typically settle for more than 0.5 monthly salaries per year of service.
- The § 1a route is a one-way street — once you don’t file, you cannot later renegotiate.
Where § 1a is invoked, it often serves as a floor for negotiations rather than an end-state.
Source 3 — Social Plan severance (Sozialplan)
In larger restructurings (typically affecting 10% or 30+ employees, depending on company size — see § 17 KSchG), the employer must negotiate a Social Plan (Sozialplan) with the works council under § 112 BetrVG. The Sozialplan typically provides for severance payments to affected employees, with the formula and amounts negotiated between the works council and the employer.
Typical Sozialplan severance: 0.6–1.0 monthly salaries per year of service, often with floors and ceilings (e.g., minimum €5,000, maximum €150,000). Hardship factors (age, disability, dependants) can add multipliers. Where a Sozialplan exists, it forms the floor for any individual settlement — individual settlements rarely undercut the Sozialplan.
Source 4 — Court-imposed severance under § 9 KSchG
In rare cases where the employment relationship cannot reasonably continue (e.g., severe employer misconduct, complete breakdown of trust), the labor court can dissolve the employment by judgment and order the employer to pay a severance — even where the dismissal itself was unlawful. § 9 KSchG sets out the criteria; § 10 KSchG sets the maximum at 12 monthly salaries (extendable to 15 for older long-service employees, 18 for the oldest).
This route is rare because both parties usually prefer settlement. But the existence of the § 9/10 KSchG framework sets the upper end of the negotiating range and informs the parties’ expectations.
Source 5 — Damages from extraordinary termination
Where the employee terminates extraordinarily under § 626 BGB because of the employer’s serious breach (e.g., sustained non-payment of wages, harassment), the employee has a damages claim for the lost notice-period wages. This claim functions economically as severance and is typically equal to several months of salary.
The tax treatment: Fünftelregelung
Severance payments are subject to income tax (no social-security contributions, however). The good news: where the severance is paid as a one-time amount and represents compensation for the loss of employment, it qualifies for the Fünftelregelung under § 34 EStG. The mechanism:
- The severance is conceptually treated as if it were spread over 5 years for the purpose of calculating the marginal tax rate.
- The progressive German tax curve means the marginal rate on the smaller annual amount is lower than on the lump sum.
- The lump sum is then taxed at the lower effective rate.
The savings vary by individual tax situation but are typically 15–25% of the gross severance. For a €60,000 severance, this can mean €10,000–€15,000 in additional take-home.
Conditions for the Fünftelregelung
- The severance must be paid as a one-time amount (not in instalments crossing tax years).
- The payment must be in the same tax year — paying half in December and half in January typically destroys the Fünftelregelung benefit.
- The severance must be compensation for the loss of employment (Schadensersatz für entgangene Einkünfte), not deferred salary or accrued bonus.
- The employer typically applies the Fünftelregelung in the payroll calculation; the employee should check the payroll for correct application.
Should you negotiate or sue?
The 3-week deadline
Worked example
Daniel, a senior engineer at a Cologne tech company, is dismissed for „operational reasons” after 8 years of service. €92,000 gross/year. The company has 250 employees and is not in financial distress.
Standard formula severance: 0.5 × 8 × (€92,000/12) = €30,667. Cologne range: €18,000–€61,000.
Steps:
- Pre-litigation lawyer letter to the employer asserting the KSchG protection and proposing settlement at 1.0 monthly salary per year of service (€61,000). Employer responds with a counter at 0.4 × 8 (€24,500).
- File Kündigungsschutzklage within the 3-week deadline. Filing itself often shifts the employer’s negotiating posture.
- Gütetermin scheduled for ~3 weeks after filing. At the hearing, the judge facilitates negotiation; settlement at 0.75 monthly salaries per year of service (€46,000).
- Fünftelregelung applied in the payroll. Net to Daniel: approximately €32,000–€34,000 cash in hand, depending on his tax situation.
- Settlement also includes Grade-1 reference, full closing formula, no Sperrzeit risk at the Arbeitsagentur (operational dismissal).