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Severance Payment as a Soft Dismissal
| Definition, Explanation | Tips, Checklist |
| Employment Law | Articles |
| Information Sources |
Definition, Explanation
To enforce a dismissal for operational reasons, employers often give a severance payment. It is normally a voluntary action of the company which nobody is entitled to. By severance payments, employers try to prevent claims against the dismissal. An amount-of-thumb of the severance payment is half a month’s payment per year employed. Sometimes, far higher amounts are paid in order to quickly get rid of an employee.
Source: Theodor Kreis
Definition of the term "severance payment"
Legislation names severance payment a sum of money paid by the employer to the employee to dismiss. That happens when, due to legal, tariff, or company regulations, the employer can no longer dismiss the employee in compliance with those, for instance when an employee has been employed for 25 years but still wants or has to leave.
The date of the severance payment
The payment must be timed relatable to the closing of the employment. It can be paid at the earliest within the month of end of the employment. Example: The employment ends on Dec 31 2005; the severance payment is done either on Dec 31 2005 or in Jan 2006.
Amount of the severance payment
The amount is not regulated. It can be agreed individually in a talk of employer and employee, or else, can be contracted as a part of a social programme. If no agreement is achieved, the labour court can define the amount. Here, a formula-of-thumb is applied according to which from a half to a whole monthly wage times the years of employment are paid (§10 dismissal protection act)
Effects of a severance payment
A severance payment always has effects on tax as well as on start and duration of the unemployment benefit payment.
Tax
In a change of law by the Bundestag, the German parliament, the up-to-then free severance payment amounts of 7,200 €, 9,000 € resp. 11,000 € were cancelled. Now, severance payments are completely taxed. However, not the usual tax rate is applied, rather severance payments are taxed with the so-called “fifth-regulation” (§10e income tax act) which divides the amount by 5 and then taxes each single part (all added up will be the final tax sum). This way, the tax on severance payments is lower than it would be if taxed as a whole.
Example: The severance payment is 100,000 €, the employee is unmarried and tax class I, there is no longer an income in 2006. The severance payment taxed in a whole would remain 70,461 €. Taxed with the fifth-regulation, it is 96,125 €.
Unemployment benefit
A severance payment affects unemployment benefits as follows:
Interruption period (Sperrzeit) acc. §§128, 144 SGB III
When a severance is paid that is under the condition that the employment is cancelled by mutual agreement (a cancellation contract is always signed by both employer and employee), legislation treats it as if the employee had voluntarily cancelled the employment. For that reason, the so-called interruption period is interposed, a time with no unemployment benefit paid. It can last for maximum 12 weeks. In parallel, the duration of remaining unemployment benefit payment is cut by ¼. (¼ of 18 months = 4.5 months; 13.5 months) The pause period does not affect the amount of the unemployment benefit.
Suspension period (Ruhenszeit) acc. to §§ 143, 143 of SGB III
Suspension period means that the payment of unemployment benefit is delayed for a certain period of time, that is, starts later. Whether a suspension period is imposed generally is conditioned by two factors:
- the period of dismissal notice has not been kept or
- severance money is paid
For calculating the duration of the suspension period, these two values are compared, and the higher value is used. Example: if a dismissal notice period of 7 months is not complied with and the amount of severance payment only yields 5 months of a suspension period, the 7 months will be the basis for calculating the duration of the suspension period.
Because of the severance payment, the payment of unemployment benefit is suspended for a certain period of time, maximum 12 months. Factors determining the duration of the suspension period are the severance payment amount, the annual income amount, the age and the former status of company membership of the unemployed. Payment of unemployment benefit starts after the suspension period has ended.
Table: Suspension period duration
|
Membership in company |
Age at the end of the employment |
|||||
|
|
Below 40 |
40 + |
45 + |
50 + |
55 + |
60 + |
|
|
in % |
in % |
in % |
in % |
in % |
in % |
|
Less than 5 y |
60 |
55 |
50 |
45 |
40 |
35 |
|
5 y + |
55 |
50 |
45 |
40 |
35 |
30 |
|
10 y + |
50 |
45 |
40 |
35 |
30 |
25 |
|
15 y + |
45 |
40 |
35 |
30 |
25 |
25 |
|
20 y + |
40 |
35 |
30 |
25 |
25 |
25 |
|
25 y + |
35 |
30 |
25 |
25 |
25 |
25 |
|
30 y + |
|
|
25 |
25 |
25 |
25 |
Calculation:
Severance payment: 100 * percentage from above table = severance payment to take into account
Wage of the last employment interval (last year’s payment incl. one-time payments) : number of days (standard 365) = wage per calendar day
outcome of a : outcome of b = suspension period duration in calendar days
Example: 159,993.30 severance payment, 45,835.29 last year’s income, 60 y age of the employee, 33 y membership in company. Result: (156,993.30 : 100) * 25 = 1,569,93 * 25 = 39,248.32 €
45,835.30 : 365 = 125.58 €
39,248.32 : 125.58 = 312 days
So, in this case, the suspension period amounts to 312 calendar days. This is, for a dismissal on Dec 31, the suspension period lasts up to and including Nov 8 of the subsequent year, that is, unemployment benefit is paid from Nov 9 on.
Tips, Checklist
- Severance payments are taxed since 2006
- Be sure to comply with dismissal notice period regulations. Otherwise you risk the unemployment benefit payment to be delayed
- For the negotiating of high severance payment sums it might well pay off to involve a legal counsellor or a severance-proficient works council
- Discuss your situation with responsible persons at the relevant authorities and have your questions answered
Employment Law
- Urteil IX R 1/09 vom 11.11.2009
Steuerwirksame Gestaltung einer Abfindung - Urteil Az: B 4 AS 47/08 R vom 03.03.2009
Abfindungen aus einem arbeitsgerichtlichen Vergleich sind zu berücksichtigendes Einkommen - Urteil Az.: 12 Sa 2165/04 vom 07.06.2005:
Gesetzliche Abfindung müssen Sie (Arbeitgeber) nicht immer zahlen; Verlag für die Deutsche Wirtschaft, 08.03.2006 - Urteil Az. 2 Ca 3966/05:
Elternzeit hat keine Auswirkungen auf Abfindungshöhe; GMX, 01.10.2005
Articles
- What to Do With Severance; AARP, March 17, 2009
Information Sources
Last update: 02/02/2010
Copyright: Angela Bauer
