Key Points
Severance pay in a termination agreement is not legally required under German employment law. It must be individually negotiated between employer and employee.
The amount is often based on the rule of thumb: Gross monthly salary × years of service × factor (typically between 0.5 and 1.5).
Key factors include negotiating position, length of service, and the employer’s interest in a swift resolution.
- Fundamentals of Termination Agreements and Severance Pay
- Calculating the Amount of Severance Pay
- Factors Influencing the Amount of Severance Pay
- Negotiation Strategies for Higher Severance Pay
- Tax Aspects: The One-Fifth Rule and Important Changes from 2025
- Current Case Law: What BAG Rulings 2024–2026 Mean for Your Severance Pay
- Conclusion
- FAQ
1. Fundamentals of Termination Agreements and Severance Pay
A termination agreement is a mutual agreement between employer and employee to end the employment relationship. Unlike a dismissal, there is no legal obligation to pay severance. The amount of severance pay is rather a matter of negotiation and depends on various factors.
The key difference from severance pay in a dismissal lies in the voluntary nature of the agreement. While in a dismissal, the path to severance pay is often paved only through an unfair dismissal claim, severance pay in a termination agreement is part of the negotiations from the outset.
Case Example: Sales employee Anna M. is invited to a meeting by her employer. The company wishes to restructure and offers her a termination agreement. Unlike a redundancy dismissal, she can directly negotiate the terms of separation and the amount of severance pay.
2. Calculating the Amount of Severance Pay
In practice, a basic formula for calculating severance pay has become established as a guideline:
Severance Pay = Gross monthly salary × years of service × factor
The gross monthly salary includes all regular payments such as:
- Base salary
- Regular allowances
- Average commissions
- Proportionate annual bonuses (such as Christmas and holiday pay)
Years of service are generally rounded up to full years. The factor typically varies between 0.5 and 1.5, with a factor of 0.5 as the minimum and 1.0 as the usual starting point.
Case Example: An employee with 8 years of service and a gross monthly salary of €4,000 could expect the following severance payments:
- Minimum severance: €4,000 × 8 × 0.5 = €16,000
- Standard severance: €4,000 × 8 × 1.0 = €32,000
- Good negotiating position: €4,000 × 8 × 1.5 = €48,000
Severance Pay Table: What is Realistic?
The following table shows guideline values for a gross monthly salary of €4,000 – depending on negotiating position and factor:
| Length of Service | Factor 0.5 (Minimum) | Factor 1.0 (standard) | Factor 1.5 (good negotiation) |
|---|---|---|---|
| 2 years | €4,000 | €8,000 | €12,000 |
| 5 years | €10,000 | €20,000 | €30,000 |
| 8 years | €16,000 | €32,000 | €48,000 |
| 10 years | €20,000 | €40,000 | €60,000 |
| 15 years | €30,000 | €60,000 | €90,000 |
| 20 years | €40,000 | €80,000 | €120,000 |
Note: This table shows guideline values based on the common rule of thumb. Your actual severance pay may differ significantly depending on your negotiating position, industry, and the specific circumstances of the separation – both upward and downward. Allenstein Legal has been able to achieve significantly higher results for clients in individual cases.
Calculation example for your salary: Multiply your gross monthly salary × years of service × selected factor. For a salary of €5,500 and 12 years of service, a factor of 1.0 results in severance pay of €66,000.
3. Factors Influencing the Amount of Severance Pay
The actual amount of severance pay is influenced by various factors that should be considered in negotiations:
Urgency of the employer:
If the employer has a particular interest in a swift and smooth separation, such as during restructuring or for sensitive positions, your negotiating position improves. In such cases, employers are often willing to accept a higher factor.
Unfair dismissal protection and prospects of success:
The better your unfair dismissal protection and the more difficult it would be to enforce a potential dismissal, the higher the severance pay should be. Particularly relevant here are:
- Long-term service
- Special unfair dismissal protection (e.g., severe disability)
- Strong works council position
- Weak grounds for dismissal on the employer’s part
Age and labor market prospects:
Your age and your prospects in the labor market play an important role. Older employees or those in difficult labor markets can often negotiate higher severance pay, as they need to bridge longer periods until re-employment.
Social factors:
Personal circumstances can also influence the amount of severance pay:
- Maintenance obligations
- Loans or other financial obligations
- Health limitations
- Specialized qualifications that make changing jobs more difficult
4. Negotiation Strategies for Higher Severance Pay
4. Negotiation
Strategies for Higher Severance Pay
When negotiating a termination agreement, a well-considered strategy is crucial. Here are the most important aspects for successful negotiations:
Thorough preparation:
Gather all relevant information about your position in the company, your rights, and the employer’s financial situation. The better prepared you are, the more confidently you can enter negotiations.
Timing of negotiations:
The right timing can be decisive. Favorable negotiating positions often arise:
- Before important projects or client relationships
- During periods of restructuring
- In sensitive company situations
Alternative benefits:
In addition to the pure severance amount, further benefits can be negotiated:
- Release from duties with continued payment of salary
- Coverage of outplacement consulting
- Continuation of company car or other benefits
- Positive references and qualified employment reference
5. Tax Aspects: The One-Fifth Rule and Important Changes from 2025
5. Tax Aspects: The One-Fifth Rule and Important Changes from 2025
The tax treatment of your severance pay has a direct impact on how much you actually receive in the end. Here are the current regulations – including an important change that has been in effect since January 2025.
How Does the One-Fifth Rule Work?
Severance payments are tax-privileged as “extraordinary income” under Section 34 of the Income Tax Act. The one-fifth rule works as follows:
- The severance pay is notionally distributed over five years
- One-fifth of the severance pay is added to regular annual income
- The resulting additional tax burden is multiplied by five
- The result is the actual tax due on the severance pay
This procedure mitigates the progressive tax effect – those who would otherwise move into a significantly higher tax bracket due to the severance pay generally pay less.
⚠️ Important Change Since January 1, 2025
Until the end of 2024, the one-fifth rule was applied directly by the employer in the payroll tax deduction. This has changed:
From January 1, 2025: The employer initially withholds the regular payroll tax on the entire severance pay. You only receive the tax relief through the one-fifth rule via your income tax return.
What this means for you: You initially receive less and must actively reclaim the difference in your tax return. Careful liquidity planning for the period between jobs is therefore more important than ever.
Calculation Example: One-Fifth Rule in Practice
Assumption: Employee, annual salary €48,000 gross, severance pay €60,000
Without one-fifth rule: The €60,000 would be fully added to annual income → total income €108,000 → significantly higher tax rate on the entire severance pay.
With one-fifth rule:
- 1/5 of severance pay = €12,000 is added to income → €60,000
- Additional tax burden on this increased income is calculated
- Result × 5 = actual tax on severance pay
- Typical savings compared to standard taxation: several thousand euros
Tip from Allenstein Legal: The timing of severance pay disbursement can significantly affect the tax burden. If the severance pay is paid out in a year when you have little or no other income (e.g., after changing jobs), the one-fifth rule can be particularly advantageous. Plan the timing strategically in the termination agreement – ideally with legal support.
Social Security: Severance Payments Are Contribution-Free
An important advantage: Severance payments are generally exempt from social security contributions. No contributions are due for health, nursing care, pension, or unemployment insurance. This significantly increases the net amount compared to regular wages.
6. Current Case Law: What BAG Rulings 2024–2026 Mean for Your Severance Pay
The case law of the Federal Labor Court (BAG) directly influences your negotiating position in a termination agreement. These three recent decisions are particularly relevant:
Requirement of Fair Negotiation in Termination Agreements (BAG 2022, still influential)
The BAG has clarified that employers must comply with the requirement of fair negotiation when concluding a termination agreement (BAG, judgment of February 24, 2022, case no. 6 AZR 333/21). A termination agreement may be voidable if the employer places the employee under unreasonable pressure – for example, by presenting the contract during sick leave in hospital or shortly after a psychological crisis.
What this means for you: If you signed a termination agreement under pressure, a challenge may be possible. Have the circumstances of the contract conclusion reviewed by a lawyer.
Stricter Requirements for Mass Redundancies (BAG/ECJ 2025/2026)
Following an ECJ ruling from October 2025 and subsequent BAG case law: Employers must follow a strict three-step process in mass redundancies – first works council consultation, then notification to the Federal Employment Agency, only then dismissal. Errors in this procedure render dismissals invalid.
What this means for you: If your termination agreement arose in the context of a larger restructuring or mass redundancy, you should have it reviewed whether your employer complied with the procedural requirements. A defective mass redundancy notification can significantly strengthen your negotiating position for higher severance pay.
Release Clauses: New Restrictions for Employers (BAG March 2026)
The BAG has ruled that standard release clauses granting the employer a unilateral right to paid release may be invalid under certain conditions (BAG, judgment of March 25, 2026, case no. 5 AZR 108/25).
What this means for you: Release provisions in termination agreements should be carefully drafted. Blanket clauses may be challengeable in your favor – another negotiating lever.
Important: Case law is constantly evolving. For a current assessment of your specific situation, we always recommend individual consultation.
7. Conclusion
The amount of severance pay in a termination agreement is the result of complex negotiations and is influenced by many factors. We at Allenstein Legal in Berlin recommend seeking professional advice before such negotiations. Good preparation and knowledge of your negotiating position are crucial for achieving appropriate severance pay. Also consider the tax aspects, as these can have a significant impact on the actual net amount.
8. FAQ
Yes – this is an important change: Since January 1, 2025, the employer no longer automatically applies the one-fifth rule in payroll tax deduction. The tax relief must now be actively claimed via the annual income tax return with the tax office. The net amount you initially receive is therefore lower than before 2025 – the refund comes later via the tax return.
A termination agreement cannot generally be simply revoked – there is no statutory right of revocation as with consumer contracts. However, a challenge is possible if you signed the contract through fraudulent misrepresentation or unlawful threat. The BAG has also established the “requirement of fair negotiation”: If the employer forced the signature under unreasonable circumstances (e.g., during a hospital visit, under extreme time pressure), the contract may be voidable. Have the circumstances of the contract conclusion reviewed by a lawyer.
In a mass redundancy – when many employees are dismissed simultaneously – employers must comply with strict procedural requirements. Errors in this procedure (e.g., inadequate works council consultation, defective notification to the Federal Employment Agency) can render dismissals invalid. This significantly weakens the employer’s position and strengthens your negotiating position for higher severance pay. Recent BAG rulings from 2025/2026 have further tightened these requirements.
The employer must grant you reasonable time to consider – exactly how long depends on the individual case; for complex contracts, it is usually several days in practice. You are not obliged to sign immediately. Use the time for legal review: At Allenstein Legal, you often receive an initial assessment of the contract on the same day.
No. In a termination agreement, there is no legal obligation to pay severance. Whether and in what amount severance pay is paid is a matter of negotiation between employee and employer.
A common rule of thumb is: Gross monthly salary × number of years of service × factor (approx. 0.5 – 1.5). If the factor is around 1, the severance pay corresponds roughly to the monthly salary per year of service. With a favorable negotiating position, the factor can be higher.
The employee’s negotiating strength, the employer’s urgency for separation, and personal factors such as age, health limitations, labor market prospects, and the employer’s social obligations.
Particularly relevant is the so-called one-fifth rule – it distributes the tax burden over five years and can thus help reduce tax on the severance pay. Strategic planning is also worthwhile: e.g., payment in a year with low other income, optimal use of allowances.