top earners severance negotiations are reshaped by the planned 2027 dismissal protection reform, which loosens protection for employees earning above €177,450 gross per year. For affected managers and specialists, this means the previously strong job security will be considerably loosened, which will have direct implications for the enforceability and amount of a severance package in dismissal protection cases. Anyone who is already negotiating in this salary bracket or receiving a notice should familiarize themselves with the upcoming changes and adjust their strategy accordingly.
current dismissal protection for high incomes: job security until the reform
Under the prevailing law, employees with very high income enjoy the same general dismissal protection as all other workers – provided the business employs more than ten staff and the employment relationship has lasted over six months. The Dismissal Protection Act (KSchG) knows no income threshold that would generally lift the protection. A business‑related dismissal must be socially justified, the social selection must be carried out correctly, and for personal or behavior‑related dismissals strict proportionality requirements apply.
In practice this strong protection leads employers to pay high severance amounts to top earners in order to avoid or end a dismissal protection proceeding. The bargaining power of the employee side is traditionally large here, because the employer’s litigation risk is high if the social selection is missing or urgent operational requirements are not sufficiently proven. Exactly this dynamic is what the legislator intends to change.
from 2027: new threshold of 177,450 euros explained
According to the current plans of the black‑red coalition, for employees whose gross annual salary exceeds the limit of 177,450 euros the general dismissal protection will no longer apply in full. The amount is tied to the contribution assessment ceiling of the statutory pension insurance (West) and is adjusted annually. Whoever reaches this threshold will in future fall under a relaxed regulation: the employer no longer has to conduct a social selection for a business‑related dismissal and also no longer has to substantiate urgent operational requirements in the strict sense.
Instead, a kind of “termination freedom” is to be created for this group, comparable to today’s situation for managerial employees under § 14 KSchG, but with a clear income ceiling instead of a functional definition. Important: the reform is scheduled for 2027; details on the exact effective date and any transitional provisions are still pending. Until then the current law applies without restriction.
severance and top earners dismissal protection: what the 2027 reform means
The removal of the social selection and the reduced justification obligations considerably weaken the bargaining position of affected top earners. Previously the severance was often the result of a risk assessment: the employer pays to avoid the risk of a court declaring the dismissal invalid. If this risk is reduced by the legislative change, the willingness to pay high amounts also drops.
Nevertheless, no automatism arises that excludes severance payments altogether. Even after the reform an employer may offer a severance to buy legal peace, avoid reputational damage, or secure knowledge transfer. The options for top earners regarding the planned reform shift, however, from a payment forced by litigation risk to a purely negotiable component. The well‑known rule of thumb (0.5 to 1.0 gross monthly salaries per year of service) loses its function as an quasi‑judicial standard and becomes a pure matter of negotiation.
practical tips: how to secure a higher severance despite the changed legal situation
Even in an environment with loosened dismissal protection, aiming for a severance package requires a revised strategy. The following levers are decisive:
- Observe deadlines: The three‑week filing period under § 4 KSchG remains. Missing it forfeits any negotiating leeway. Even if the prospects of a dismissal protection suit decline, filing the suit formally creates the bargaining basis.
- Leverage procedural errors: Even with relaxed protection the employer must comply with formal requirements: written form, hearing of the works council (if any), adherence to the notice period. Mistakes here render the dismissal attackable.
- Use specific knowledge & projects as leverage: Top earners often hold critical knowledge or run ongoing projects. A structured handover plan that the employer needs is a strong argument for a severance plus garden leave.
- Review post‑contractual non‑competes: A post‑contractual non‑compete binds the employer to pay a compensation for the duration of the leave (at least 50 % of the last salary). If it is not agreed in writing or is invalid, it can serve as a negotiating lever.
- Consider litigation funding: As the cost risk rises with a weaker legal position, external litigation funding (such as that offered by RechtStark) can lower the financial hurdle for filing a suit and thus preserve bargaining power.
For those focusing on top earners severance, it is essential to keep detailed records of performance and contributions.
tax aspects: fifth‑rule and taxation of severance for top earners
Severance payments are fully taxable, but benefit from the so‑called fifth‑rule (§ 34 EStG). This spreads the tax burden over five years, which often yields considerable relief under a progressive rate – especially for large lump sums. For top earners who already reach the top tax rate, the effect is limited: the relief only applies if the taxable income without the severance is still below the top‑rate threshold.
Furthermore, since 2025 the former allowances for age‑related compensation (§ 3 Nr. 9 EStG a.F.) are no longer available for newly concluded contracts. The tax optimization of managerial severance therefore requires early planning: spreading payments over several years (e.g. via staggered disbursement), channeling into a company pension scheme (if legally permissible and tax‑privileged), or using loss carry‑back/forward. A tax adviser should be consulted without fail before signing a termination agreement.
frequent questions and pitfalls when concluding a termination agreement
Many top earners sign termination agreements under time pressure, without fully grasping the consequences. Typical pitfalls are:
- Blocking period for unemployment benefit: Without a valid reason (e.g. an impending business‑related dismissal that would be socially justified) the Federal Employment Agency usually imposes a blocking period of twelve weeks. The “valid reason” must be documented in the agreement.
- Waiver of variable remuneration: Bonuses, LTIP, RSU or phantom‑stock schemes are often “forgotten” or lump‑sum‑settled. Here it is worthwhile to scrutinize the plan provisions (good‑leaver / bad‑leaver clauses).
- Garden leave and salary continuation: A paid garden leave until the contract end secures the salary and often also social security (health insurance). Unpaid garden leave or “garden leave” without a clear rule on salary continuation is risky.
- Reference and certificates: A qualified reference with grade 1 or 2 and a clear arrangement for reference inquiries are essential for the next career step.
- Contractual penalty for breach: Many agreements provide high contractual penalties for violations of confidentiality or non‑poaching. These must be proportionate and limited in amount.
outlook: further planned changes in employment law for top earners
The increase of the dismissal protection threshold is only one element of a broader reform package. Also under discussion are: a simplification of fixed‑term contracts for highly qualified staff, amendments to the Continued Payment of Wages Act for long‑term illness, and changes to the Works Constitution Act that could affect co‑determination in the hiring of top earners. Moreover, the implementation of the EU Pay Transparency Directive is pending, which will create new disclosure and comparison obligations even for top earners.
For affected employees this means: the legal framework will noticeably shift against individual job security in the coming years. Anyone presently in a negotiation should not wait for the reform, but make use of the still‑strong protective mechanisms available today. An initial assessment by an independent specialist lawyer for employment law is the most important first step – ideally before the employer initiates the talk. RechtStark can, as a litigation funder, examine whether financing such a proceeding is viable, thereby minimising the cost risk for the employee side. The discussion around top earners severance continues as legislators consider additional changes.
Note: This article is for general information purposes only and does not replace individual legal advice. For a free initial assessment of whether litigation funding may be an option for your case, you can contact RechtStark.