Settlement agreement after dismissal in Germany: What employees should know

A settlement agreement after dismissal is an agreement concluded after a dismissal has already been issued. The dismissal is already on the table. The agreement itself does not terminate the employment relationship; instead, it regulates the consequences of the dismissal.

Typical topics include:

• termination date

• severance payment

• release from work

• remaining vacation

• remuneration until the end of employment

• reference letter

• return of work equipment

• settlement of mutual claims

• waiver of a dismissal protection claim

The key point is: by signing such an agreement, the employee often accepts the dismissal or agrees not to challenge it in court.

The difference from a termination agreement is important. A termination agreement ends the employment relationship itself by mutual agreement between employer and employee. No prior dismissal is required.

A settlement agreement after dismissal is different. In that case, the employer has usually already issued a dismissal. The employment relationship is intended to end because of that dismissal. The agreement only regulates how the dismissal and its consequences are handled.

Put simply: with a termination agreement, employment ends by agreement. With a settlement agreement after dismissal, employment is intended to end because of the dismissal — the agreement regulates the consequences.

Employers often use settlement agreements after dismissal to obtain legal certainty. The employee is expected to accept the dismissal and not file a dismissal protection claim.

In return, severance pay may be offered. Other issues may also be regulated, such as release from work, reference letter, remaining vacation or return of work equipment.

For employees, such an agreement can be useful. But it can also be disadvantageous if important rights are waived too quickly.

The claim deadline is crucial. After receiving a dismissal, a dismissal protection claim must generally be filed with the labour court within three weeks. This deadline continues to run even if the parties are still discussing a settlement agreement.

Employees who sign too quickly or wait too long may lose the opportunity to have the dismissal reviewed by a court.

Before the three-week deadline expires, employees should know whether a dismissal protection claim will be filed, whether a settlement agreement will be signed, whether the severance offer is appropriate and whether there are risks regarding unemployment benefits.

Check dismissal

Many settlement agreements after dismissal contain a clause stating that the employee will not file a dismissal protection claim or will withdraw a claim that has already been filed.

This is a very important point. It usually means that the dismissal will no longer be reviewed by a court. Such a waiver should not be declared too quickly. Employees should first understand how strong their legal position is and what they receive in return.

A waiver may be particularly problematic if no real compensation is offered.

Many settlement agreements after dismissal include severance pay. The amount is a matter of negotiation. A common rough orientation is: 0.5 gross monthly salaries per year of employment. However, this is not a fixed statutory rule for all cases.

Depending on dismissal risks, litigation risks, special dismissal protection, length of service and negotiation situation, severance may be lower or higher. It is also important to check when the severance payment becomes due and whether it is only paid if no claim is filed.

More on the taxation of severance payments

Social law issues may also become relevant in connection with a separation agreement after dismissal.

A blocking period may be examined in particular if the employee waives the right to file an unfair dismissal claim in exchange for severance pay or actively contributes to an earlier termination of the employment relationship.

In addition, unemployment benefits may be suspended because of severance pay if the employment relationship ends earlier than it would have ended if the applicable notice period had been observed.

Before signing, employees should therefore not look only at the severance amount. The notice period, termination date, waiver of claims, unused vacation, outstanding remuneration and possible consequences for unemployment benefits should also be checked.

Employees should check in particular whether the dismissal is legally valid, whether the three-week deadline is still running, whether they are waiving a dismissal protection claim, whether the severance amount is appropriate and when it becomes due.

Other important points include the termination date, notice period, release from work and vacation, deduction of other income, salary and variable pay, sprinter clause, qualified reference letter, settlement clause, return of work equipment and risks regarding unemployment benefits.

The key point is that important claims should not be lost accidentally through a broad settlement clause.

A common topic in settlement agreements after dismissal is release from work until the end of the employment relationship. Employees should check carefully whether the release is revocable or irrevocable, whether remaining vacation is credited, whether they may start a new job early, whether income from other work is deducted and whether there is a non-compete issue.

If a new job is already in sight, a sprinter clause can be important. It allows the employee to leave earlier and may provide for an additional payment.

More on the sprinter clause

Many settlement agreements contain a settlement clause. It often states that, once the agreement has been fulfilled, all mutual claims are settled.

This can be risky if there are still open claims, such as salary, overtime, bonus, commission, vacation, expenses, reference letter, variable remuneration or occupational pension. Before signing, it should be clear which claims are settled and which are expressly excluded.

Not too quickly. A settlement agreement after dismissal can be useful if the employee accepts the dismissal and the conditions are fair. But it can also have significant disadvantages if the employee waives strong legal arguments or valuable claims.

Employees should be particularly careful if the three-week deadline is close, the severance offer is low, special dismissal protection may apply, the dismissal appears questionable, the notice period was not observed, the agreement contains a broad settlement clause, unemployment benefits may be affected or the employer is putting pressure on them.

A settlement agreement after dismissal is more than a formality. It can usefully regulate severance pay, reference letter, release from work and other issues. At the same time, it may also mean that the employee waives the right to file a dismissal protection claim and gives up further claims.

Before signing, employees should check whether the dismissal can be challenged, whether the severance offer is appropriate and whether the agreement contains social security or financial risks.