Accept or reject severance – this question faces almost every employee who receives a dismissal and is offered a severance payment by the employer. The decision is far-reaching and depends on many factors: from legal certainty, your personal financial situation, the chances before the labor court, and not least the tax consequences. This guide helps you understand the key aspects and make an informed decision.
Accept or Reject Severance? The Core Question
A severance payment is a one‑time payment from the employer to compensate for the loss of a job. It is not a statutory entitlement but usually the result of an agreement – for example in a termination agreement, a social plan, or a settlement before the labor court. Only in certain cases, such as an operational dismissal with social selection, can the employer offer a severance under § 1a of the Dismissal Protection Act (KSchG) if the dismissal is explicitly based on that provision. Even then, accepting the payment remains voluntary.
The core question is: do you accept the offer or continue fighting in court? Both options have pros and cons. Accepting severance gives quick planning certainty and avoids a lengthy legal battle. Rejecting it means you gamble on having the dismissal declared invalid and either keeping your job or obtaining a higher severance – but there is a real risk of walking away with nothing.
When Accepting Makes Sense – and When It Doesn’t
Accept or reject severance depends heavily on your personal circumstances. Accepting makes sense especially when:
- You already have a new job in prospect and want quick clarity.
- The dismissal is hardly contestable legally, e.g., because you have committed serious breaches of duty.
- You want to avoid the risk of a lengthy court process and the severance is existentially securing.
- The company is in financial difficulties and insolvency threatens – then a later payment could be uncertain.
You should consider rejecting the offer if you have good prospects of overturning the dismissal in court and keeping your position. This is the case, for example, when the dismissal is socially unjustified, the social selection was flawed, or the works council was not properly consulted.
If you are entitled to continued employment and the job is existentially important for you – for instance, because you are close to retirement – it may be worthwhile to file a lawsuit.
Another important aspect: a severance payment is often linked to the termination of the employment relationship. By accepting it, you lose your dismissal protection and may no longer be entitled to unemployment benefits if you do not register the payment in time. The Federal Employment Agency can impose a waiting period if you cause your own unemployment by accepting the severance. Inform yourself beforehand about the consequences for your social benefits.
The Role of the Dismissal Protection Lawsuit in the Decision
If you reject the severance, the usual route is to file a dismissal protection lawsuit. This must be filed within three weeks after receipt of the dismissal. Missing this deadline means the dismissal is considered valid – even if it would otherwise be contestable. The lawsuit is therefore the only way to have the dismissal’s legality examined.
A dismissal protection lawsuit does not automatically lead to a higher severance. The court first checks whether the dismissal was socially justified. If it is not, the employment relationship continues. In many cases the parties settle, agreeing on a severance whose amount reflects the lawsuit’s prospects of success and the individual circumstances. Someone with strong prospects can often obtain a considerably higher severance than the original offer.
However, a lawsuit costs time and money. You must advance attorney fees and court costs, even if you recover part of them if you win. Moreover, a protracted legal dispute can permanently damage the relationship with the employer. If you decide to sue, you should consult a lawyer specializing in employment law. He or she can realistically assess your chances of success and develop the appropriate strategy. A litigation funder such as RechtStark can cover the costs in such cases when the prospects of success are good – this relieves your budget.
An important note: even if you initially accept the severance, you may still be able to sue under certain circumstances – for example, if you accept the offer with a reservation or challenge the dismissal. Seek legal advice on this point, because the deadlines are short and mistakes can be costly.
Tax Consequences: What Remains of the Severance Amount
Severance payments are taxable. They count as extraordinary income and are subject to your personal income tax rate. However, the so‑called fifth‑rule can alleviate the tax burden. Under this rule the severance is spread over five years for tax purposes, which lowers the effective tax rate. The rule is applied automatically when you receive the severance as a lump sum and meet the conditions. Whether you benefit depends on your income level and the size of the severance.
In addition, you must watch social security contributions. On the portion of the severance that exceeds the contribution assessment ceiling, no contributions to unemployment and pension insurance are levied. However, the severance can affect your unemployment benefit, as it may be counted as income. Consult a tax adviser or the Federal Employment Agency to avoid nasty surprises.
Another point: receiving the severance in installments can be tax‑advantageous compared with a lump sum, depending on your personal tax rate. An individual calculation is therefore essential. Use online calculators or consult a tax adviser to determine the net amount that will actually be at your disposal.
Negotiation Strategies: How to Increase Your Severance
Accept or reject severance is not just about the initial offer; skilled negotiation can increase the amount significantly.
The first offer is rarely the maximum. Employers often calculate with a negotiation margin. Whoever negotiates skillfully can raise the severance considerably. It is crucial to know your bargaining position. This includes a realistic assessment of the chances of success of a dismissal protection lawsuit. The better your prospects, the higher you can demand.
A proven tactic is to threaten a dismissal protection lawsuit while simultaneously presenting a settlement offer. Many employers prefer a quick settlement to a protracted court case because it saves costs and uncertainty. Use this leverage. Also, length of service, age, and qualifications play a role. Older employees with long tenure often have better prospects, as they find a new job less easily.
Further negotiation points can be: a longer paid leave of absence, a good reference, a severance paid in installments, or the assumption of further‑training costs. Often these additional benefits are cheaper for the employer than a higher lump‑sum payment, yet just as valuable for you. Do not let yourself be rushed into a quick decision; take your time for the negotiation. An employment‑law lawyer can support you and even lead the talks.
Deadlines and Pitfalls: What You Need to Know Before Signing
Before signing a severance agreement, you should know the deadlines. The dismissal protection lawsuit must be filed within three weeks after receipt of the dismissal. If you accept the severance, you usually waive the right to sue. This waiver should not be signed lightly. Check that the agreement contains all points important to you – for example, the severance amount, the termination date, any leave of absence, and the reference.
A common mistake is to accept the severance without knowing the tax and social‑security implications. The effects on unemployment benefit are also often underestimated. Seek comprehensive advice before signing – both from an employment‑law lawyer and a tax adviser. A lawyer specializing in employment law can review the contract and make sure you do not suffer disadvantages.
Another pitfall: if you accept the severance, you will usually have to accept a waiting period for unemployment benefit if you have brought about your own unemployment. This applies in particular to a termination agreement. There are exceptions, for example, when the employer has issued the dismissal and you merely accept the severance. Clarify this beforehand with the Federal Employment Agency.
Finally, keep in mind that a severance payment does not automatically mean that the employment relationship ends by mutual agreement. In some cases the employer can pay the severance and still issue the dismissal. Then the dismissal remains in force and you have no claim to continued employment. Legal advice is indispensable here as well.
Whether you choose to take or decline the severance, never rush the decision. Take your time, weigh your options, and obtain professional support. A well‑negotiated settlement can save you a lot of trouble – but only if you understand the consequences. With proper preparation you will make a choice that fits your personal situation.
For further information on related topics, read our article on the application for dissolution after dismissal protection lawsuit or on how to proceed with severance in case of breach of duty of care.
This guide does not replace individual legal advice. If in doubt, consult an employment‑law lawyer to discuss your specific situation.
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.