Severance Legal Aid: What employees need to know after a termination.
A severance payment and legal aid – these are two topics that often arise after a termination. Many employees receive a severance payment after a dismissal protection proceeding and wonder whether it affects their legal aid. A recent decision of the Lower Saxony State Labor Court shows that this can indeed be the case: someone who receives a severance payment may, under certain circumstances, have to use part of it for court costs, even though they previously received legal aid. In this article you will learn what you need to know about the interaction between severance payment and legal aid and how to plan your finances properly.
Severance Legal Aid: How a severance payment affects legal aid
In the underlying case, an employee filed a dismissal protection lawsuit and was granted legal aid with installment payments. The proceedings ended with a settlement in which the employer paid a severance of 20,000 euros gross – net amount received was 18,792.28 euros. The labor court subsequently revoked the legal aid and demanded a one‑time payment of 4,048.20 euros. The plaintiff objected, but the Lower Saxony State Labor Court dismissed her complaint.
The reason: under section 115(3) of the German Code of Civil Procedure (ZPO), anyone who receives legal aid must use their income and assets to cover the litigation costs. A severance payment that compensates for the loss of a job counts as assets – irrespective of whether it is paid as a lump sum or in installments. Only a portion of it is protected as exempt assets.
Understanding Severance Legal Aid is crucial when negotiating any settlement.
Severance payment and legal aid: How does a severance payment affect your legal aid?
Legal aid is a state‑funded support for low‑income employees who could not otherwise afford a lawsuit. It is granted when the intended lawsuit has a prospect of success and the applicant cannot bear the costs themselves. Legal aid then covers the court fees and, if applicable, the attorney fees – but only if the applicant has no disposable assets.
If an employee receives a severance payment during the ongoing proceedings, their financial situation changes. The labor court can subsequently modify the legal aid and demand a higher contribution to the costs. Exactly this happened in the case decided by the Lower Saxony State Labor Court. The net severance of 18,792.28 euros clearly exceeded the exempt assets, so the plaintiff had to use part of it for the litigation costs.
Important to know: the severance payment is not fully offset; only the amount that exceeds the exempt assets is taken into account. How high this exempt amount is, you will read in the next section.
Knowing how Severance Legal Aid works helps you assess settlement offers more accurately.
Exempt assets: What really remains of your severance payment?
The law protects a certain amount of assets from being accessed by legal aid. This so‑called exempt amount has been 10,000 euros for single persons since 1 January 2023. For each person that the applicant mainly supports, an additional 500 euros is added. Only the amount that exceeds these limits must be used for the litigation costs.
In the concrete case, the severance payment amounted to 18,792.28 euros net. The labor court assumed that the plaintiff was single and had no maintenance obligations. Consequently, she was entitled to an exempt amount of 10,000 euros. The surplus of 8,792.28 euros had to be used to cover the litigation costs – the court demanded a portion of it, namely 4,048.20 euros.
It is important to understand that the exempt amount is not automatically reserved for the severance payment. If you already have other savings, the severance payment is offset against the exempt amount. Thus, if you already had 10,000 euros saved before receiving the severance, you must use the entire severance payment for the litigation costs.
Why the increase in exempt assets does not allow a doubling
Until the end of 2022, the exempt amount for single persons was 5,000 euros. With the increase to 10,000 euros on 1 January 2023, many employees hoped for double protection – but this hope is misleading. The Lower Saxony State Labor Court explicitly stated in its decision that doubling the exempt amount to mitigate the typical costs of job loss is no longer considered.
The reason: raising the exempt amount from 5,000 to 10,000 euros was a deliberate decision by the legislator to compensate for increased living costs. However, it was not intended to grant employees additional allowances for applications, training or relocation. These expenses must be covered from the exempt amount itself – the court rejected any further increase.
For employees this means: if you receive a severance payment, you should not rely on being able to keep the full amount. You should plan on having to use part of it for litigation costs or other liabilities.
What does this mean for employees negotiating a severance payment?
If you are considering whether to accept a severance offer, you must take into account the impact on your legal aid. A higher severance payment does not automatically result in a higher net amount in your pocket – because the surplus may have to be repaid to the state treasury.
Our recommendation: seek advice from an employment lawyer before signing a settlement. A specialist lawyer for labor law can assess the size of your exempt assets and whether you may have to repay legal aid. Moreover, they can help you negotiate the severance so that you retain as much as possible – for example, by obtaining a higher compensation for unused vacation or Christmas bonus, which does not count as assets.
Also note that the severance payment in the context of protection against dismissals for operational reasons often depends on bargaining power. If you receive a severance after a summary dismissal, special rules apply – here too, a thorough examination of your financial situation can be decisive.
Legal aid or litigation funding: your options at a glance
If you do not wish to apply for legal aid or cannot do so, there are alternatives: litigation funding through an external provider. The financier covers the costs of the lawsuit and receives a share of the severance in case of success. Unlike legal aid, you do not have to pay installments or disclose your assets – but the provider participates in the proceeds.
RechtStark is such a litigation funder that assumes the costs of a dismissal protection lawsuit. If you receive a severance payment, we check whether we can finance your lawsuit – without you having to touch your exempt assets. Please note, however, that we are not lawyers and do not offer legal advice. For the legal assessment of your case, we always recommend consulting an independent specialist lawyer for labor law.
- Legal aid: State support, depending on income and assets. Severance payments are offset, the exempt amount of 10,000 euros remains protected.
- Litigation funding: Private financing by a provider that receives a share in case of success. No offset of assets, but cost sharing.
- Self‑financing: You pay the attorney fees yourself. Advantage: full control, but high financial risk.
Conclusion: How to plan your finances correctly after a termination
The decision of the Lower Saxony State Labor Court shows: a severance payment and legal aid are not mutually exclusive, but they influence each other. Anyone who receives legal aid and a severance payment must expect that part of it will be used for litigation costs. The exempt amount of 10,000 euros offers some protection, but there is no guarantee that you can keep the entire severance payment.
To avoid unpleasant surprises, you should have your financial situation reviewed by a lawyer before signing a settlement. A lawyer can help you realistically assess the size of the severance and calculate the impact on your legal aid. If you do not wish to apply for legal aid, litigation funding is a sensible alternative – provided you fully understand the terms.
Also remember that a severance payment affects not only your legal aid, but also your unemployment benefits and tax liability. Plan long‑term and set aside part of the severance for tax back‑payments or a transitional period. With proper preparation you can face the period after a termination financially relaxed.
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.