Cancellation Agreement: Dismissal by Mutual Agreement

Definition, Explanation

For terminating an employment relationship, there is one other way besides dismissals, namely the cancellation agreement, or termination agreement. The agreement bypasses the legal and tariff requirements and regulations as cancellation periods and dismissal protection in the various kinds of dismissals (e.g. dismissal on grounds of conduct, extraordinary dismissal, dismissal for operational reasons). Also, a cancellation agreement, in dubious cases, avoids labour court dismissal trials.

Unlike dismissals which are announced by one party, either by the employer or by the employee, a cancellation agreement is contracted by both parties. Reasons for cancellation need not be stated.

Motives for cancellation agreements:

Quick termination of the employment (e.g. when the employee wishes to start working in a new job, or the company needs to give away employees for quick restructuring measures)
No compliance with any cancellation periods required
Avoiding trials
Avoiding forced selection by social criteria
Bypassing dismissal protection regulations, e.g. for works council members or disabled
No approval of works council required
Exception: Cancellation agreements with executive employees have to be reported to the works council

Subjects of a cancellation agreement can be:

Payment of a severance money, mostly ½ monthly payment for each past year of employment / membership – however, there is no legal entitlement
Outplacement measures
Date of cancellation of the employment
Regulations of due payments (commissions, Christmas bonus, over hours remuneration, travelling expenses refund), residual leave to be compensated for, company car, company housing, royalties, inventions, company old-age provision
Exemption from work
Returning of company property (PC, mobile phone, company car, documents)
Statements in the employment certificate
Retroactive restraint on competition
Right of rescission
General assurance that unhandled claims on either side will be handled later

Consequences of a cancellation agreement:

If the cancellation agreement annihilates the regular cancellation period, then the entitlement to unemployment benefit is suspended and the severance payment is set off against the unemployment benefit
The cancellation agreement implies voluntary leaving by the employee. Therefore the labour agency imposes a suspension period of at least 12 weeks during which no unemployment benefit is given

§ 623 BGB dictates the written form for cancellation agreements.

A cancellation agreement is invalid if:

the termination of the employment relationship is contracted to depend on a future, uncertain event
the contract is backdated for bypassing the suspension period for unemployment benefit

In case of an invalid cancellation agreement, the employment relationship continues. Possibly there will be remuneration due in retrospect. If there are contracted clauses that the employer does not comply with, the employee can withdraw from the cancellation agreement.

Tips, Checklist

Use your right to take yourself an appropriate respite to make your decision. Consider that a rescission of the cancellation agreement is hard to achieve
Do not sign when you feel pressured. Also think whether a regular cancellation would be the better solution for you
Make sure that an exemption does not free you from your duty to be social-insured. As soon as such a cancellation agreement is contracted and valid, you must pay your contributions to pension-, health- and nursing care insurance yourself
Therefore, find out about ways to maintain your social insurance
Caution: For a cancellation agreement, there is no right of withdrawal
If the cancellation agreement is proposed by the employer, then the employer must also inform the employee about consequences that are potentially negative (suspension periods in the labour agency, legal social insurance consequences, dropping of company pensions)
Contract the cancellation agreement in written. Fax, email or oral agreement do not suffice
Look through the agreement carefully
Have some advice by trained works council members, by the labour agency or by specialized legal advisors
Check whether there are intern positions you can be transferred to, instead
Also negotiate about outplacement support and further education grants
Insist on being handed out a quality employment certificate. It is your right
Make sure that the cancellation agreement does not enforce an employment termination earlier than it would be in a regular dismissal. If it does, you risk a suspension period for your unemployment benefit
Before signing the cancellation agreement, have the labour agencies assurance about your options regarding the unemployment benefit suspension period
Immediately after contracting the cancellation agreement, or within 3 months before termination of the employment relationship, report to the labour agency
Find out how to secure your living during an unemployment benefit suspension period of 12 weeks
Influence the content of your employment certificate
For a cancellation agreement, there is no legal entitlement to withdraw, so that the agreement normally cannot be annihilated
For cancellation agreements, there are no cancellation periods, enforced selection of persons to dismiss by social criteria, or works council interviews, unlike for dismissals
The labour agency treats a cancellation agreement as equivalent to a cancellation by the employee. Therefore, they impose suspension periods and duration cuts for the unemployment benefit
Severance payments that exceed a certain amount are taxed, according to income tax law
Cancellation agreements with executive employees are under the same regulations as are the ones with regular employees

Information Sources

Last update: 02/26/2010

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