Settlement Clause in German Employment Law: What Employees Should Know

A settlement clause is a provision in which employer and employee declare that, after fulfilment of an agreement, no further claims shall remain.

It is intended to draw a line under the employment relationship. Both sides often want to avoid further claims after the employment relationship has ended.

This can be useful because both sides want legal certainty. For employees, however, it is important to understand that such a clause can go further than it may appear at first glance. Depending on its wording, it may cover not only known claims, but also claims the employee did not think about when concluding the agreement.

In practice, different terms are used:

• settlement clause

• release clause

• waiver clause

• acknowledgement of settlement

They often refer to a provision stating that certain or all claims arising from the employment relationship shall be settled.

The German term “Ausgleichsquittung” is a more traditional term for a declaration that no further claims exist. In modern settlement agreements, separation agreements and court settlements, the wording is often better described as a settlement clause, release clause or waiver clause.

For employees, the decisive point is not the label, but the actual wording.

Settlement clauses are especially common in:

• settlement agreements

• separation agreements after dismissal

• court settlements in dismissal protection proceedings

• out-of-court settlements

• final agreements after the end of employment

In court settlements, such clauses are particularly common in practice. Their purpose is to finally settle the employment relationship and avoid further disputes.

This does not mean, however, that every wording is harmless for the employee. Especially where the clause is broadly drafted, employees should check which claims are actually being settled.

Not every settlement clause has the same scope.

A narrow settlement clause only refers to specific, expressly named claims. For example, the agreement may state that certain salary claims, overtime claims or vacation compensation are settled. Other claims remain unaffected if they are not mentioned.

A broad settlement clause goes further. It is generally intended to cover all mutual claims arising from the employment relationship and its termination. Often, it also includes known and unknown claims.

A typical broad settlement clause may read in substance:

“Upon fulfilment of this agreement, all mutual claims arising from the employment relationship and its termination, regardless of legal basis, whether known or unknown, are settled and compensated.”

For employees, the key question with such clauses is whether it is really clear which claims are being settled and which claims should expressly remain unaffected.

A settlement clause can be risky because employees may waive claims without realizing it.

This may include, for example:

• outstanding salary

• overtime pay

• bonus

• commission

• variable remuneration

• vacation compensation

• expenses

• travel costs

• reference letter claims

• company car claims

• employer loans

• occupational pension claims

• stock options or long-term incentives

• compensation under a post-contractual non-compete clause

This is particularly problematic if the employee agrees to a settlement before all claims have been checked or calculated.

Not every settlement clause automatically means that all claims are lost.

The decisive factor is always how the clause is worded and how it had to be understood under the circumstances. The wording, the context and the recognisable purpose of the agreement all matter.

A declaration at the end of employment stating that “no claims remain” may, in an individual case, only mean that previous payroll statements are confirmed as correct.

A comprehensive waiver of rights is usually assumed only if this is clearly expressed. Nevertheless, employees should not rely on this. The broader the wording, the more important careful review becomes.

Settlement clauses are common at the end of settlement agreements.

For example, the agreement may provide that, upon payment of the severance and fulfilment of the agreement, all mutual claims arising from the employment relationship are settled.

For employees, this can be risky if it is not yet clear whether further claims exist. Before signing, employees should therefore check in particular salary, overtime, bonus, commission, vacation, reference letter, occupational pension, participation programmes and non-compete obligations.

If such issues are still open, they should be expressly regulated or excluded from the settlement clause.

Read more: What employees should know before signing a settlement agreement

Settlement clauses are also common in separation agreements after dismissal.

A separation agreement after dismissal typically regulates the consequences of a dismissal that has already been issued. It often deals with severance pay, release from work, reference letter, vacation and waiver of a dismissal protection claim.

If the employee signs a broad settlement clause in this context, this may mean not only accepting the dismissal, but also waiving further claims.

It is especially important to keep the three-week deadline for bringing a dismissal protection claim in mind. Negotiations about a separation agreement do not automatically stop this deadline.

Read more: Separation agreement after dismissal

Settlement clauses are also frequently included in court settlements before the labour court.

A court settlement is usually recorded by the labour court. It is therefore not simply signed like a private settlement agreement or separation agreement. Nevertheless, it can have far-reaching consequences for employees.

Such a court settlement may regulate, for example:

• termination of the employment relationship

• severance pay

• release from work

• reference letter

• remaining vacation

• return of work equipment

• settlement of all mutual claims

A court settlement is legally particularly important because it usually constitutes an enforceable title. Its content should therefore be clear and unambiguous.

For employees, this means: even if an agreement is reached quickly during a court hearing, it should be clear before agreeing to the settlement which claims are covered by the settlement clause.

If certain claims should remain unaffected, they should be expressly excluded.

Before concluding an agreement with a settlement clause, employees should check whether the following points are still open:

• salary or wages

• variable remuneration

• bonus

• commissions

• overtime

• vacation and vacation compensation

• expenses

• travel costs

• company car

• work equipment

• loans

• stock options or participation programmes

• occupational pension

• post-contractual non-compete clause

• reference letter

• employment certificate

Depending on the case, these claims should be expressly regulated in the agreement or court settlement.

A clear provision can state, for example, that certain claims are not covered by the settlement clause.

Not all claims can be validly waived through a settlement clause.

Certain statutory, collective bargaining or works agreement rights cannot simply be excluded. These may include mandatory collective bargaining claims, claims under works agreements or certain statutory minimum rights.

Statutory minimum rights such as minimum wage, continued remuneration during sickness or statutory minimum vacation also cannot simply be settled by a general settlement clause.

Nevertheless, caution is required. Even if a clause may later be partially invalid, this often first creates uncertainty and dispute.

For employees, it is therefore better to regulate important claims clearly from the beginning rather than relying on a clause being invalid later.

Reference letter claims and occupational pension claims are not always automatically covered by a general settlement clause.

Nevertheless, employees should not leave these points open.

Regarding the reference letter, the agreement should regulate whether a qualified reference letter will be issued and what rating has been agreed.

Regarding occupational pension, employees should check whether vested rights exist and whether further documents or information are required.

Especially in longer employment relationships, this point may be economically important.

A post-contractual non-compete clause may also be important in connection with a settlement clause.

If a post-contractual non-compete exists, the employee may be entitled to compensation during the restricted period. A broadly worded settlement clause can be problematic if it is unclear whether claims under the non-compete should remain in force or be settled.

If a non-compete exists, the agreement should expressly state whether rights and obligations under it continue or are cancelled.

Particular care is required if the agreement is concluded but the employment relationship continues for a transition period.

This is common in settlement agreements. For example, the agreement may be signed in March, while the employment relationship is intended to end only at the end of June.

In the meantime, claims may still arise between signing and the termination date, such as salary, variable remuneration, vacation or other benefits.

If these issues are not clearly regulated, a general settlement clause may later lead to disputes. In such cases, claims for the remaining duration of employment should be regulated as specifically as possible.

Employees should not accept a settlement clause too quickly.

For settlement agreements, separation agreements or out-of-court settlements, the rule is: do not sign without reading. Anyone who signs a declaration generally bears the risk of having to accept its content.

For court settlements, the same applies in substance: do not agree too quickly if it is unclear which claims are being settled by the settlement clause.

A later challenge or withdrawal from the agreement is only possible in special cases, for example in the case of deceit, unlawful threat or a relevant mistake. The fact that a provision was not properly read or understood is usually not enough.

Particular caution is also required if the employee does not fully understand the language of the agreement or court settlement. In that case, a translation or legal review should be obtained before signing or agreeing.

A settlement clause, settlement agreement, separation agreement or court settlement can also have social security consequences.

This is especially relevant if the employee waives a dismissal protection claim, agrees to an earlier termination date or receives severance pay.

Questions about a blocking period or suspension of unemployment benefits may then become relevant.

These questions should be clarified before the agreement is concluded, not afterwards.

Read more: Settlement agreement and blocking period

Read more: Severance pay and unemployment benefits

Before concluding an agreement with a settlement clause, employees should in particular check:

1. Which claims have already been fulfilled?

2. Which claims are still open?

3. Are salary, vacation, overtime, bonus and commission fully regulated?

4. Are there occupational pension claims or participation programmes?

5. Is there a post-contractual non-compete clause?

6. Is the reference letter regulated?

7. Is a dismissal protection claim being waived?

8. Is severance pay provided in return?

9. Are social security consequences possible?

10. Should certain claims be expressly excluded?

11. Does the employment relationship continue for a period of time?

12. Can new claims still arise before the termination date?

If these questions are not clear, employees should not sign too quickly or agree to a court settlement too quickly.

Read more: Why severance pay is not the only issue

A settlement clause is common in German employment law, but it is not just a harmless closing formula.

It can mean that employees can no longer assert claims arising from the employment relationship later. Careful review is particularly important in settlement agreements, separation agreements and court settlements.

Before concluding an agreement, employees should know exactly which claims are intended to be settled and which claims should expressly remain unaffected.

If in doubt, employees should have the agreement reviewed before signing or agreeing to it.