Economic Downturn in Germany: Employer Obligations in Termination and Severance Payments

The current economic situation in Germany is challenging. With the downturn in the economy during Autumn 2024, many companies are facing reduced revenues and are compelled to lay off employees to remain viable. For employers, navigating the legal and financial requirements during this period is critical, particularly in relation to the payment of severance packages and compliance with termination regulations. Below, we provide an overview of the key aspects employers must consider.

1. Termination of Employment: Legal Framework

In Germany, employment terminations are governed by the „German Civil Code (Bürgerliches Gesetzbuch, BGB)“ and the „Protection Against Dismissal Act (Kündigungsschutzgesetz, KSchG)“, depending on the size of the company and the tenure of the employee.

  • Notice Periods: Under § 622 BGB, the statutory notice period depends on the employee’s length of service, ranging from 4 weeks for employees with less than 2 years of service to up to 7 months for those with more than 20 years of service.
  • Social Selection (“Soziale Auswahl”): Employers must conduct a social selection process under § 1 KSchG, considering criteria such as age, length of service, maintenance obligations, and severe disabilities to determine which employees are dismissed.
  • Special Protection Groups: Special rules apply to certain employee groups, including pregnant employees, employees on parental leave, and severely disabled persons. Termination for these groups typically requires approval from relevant authorities.
  • Works Council Consultation: Companies with a works council (“Betriebsrat”) must consult with the council before terminating employees under §102 of the Works Constitution Act (Betriebsverfassungsgesetz, BetrVG).

2. Severance Payments: Legal and Practical Aspects

Severance payments in Germany are not automatically granted unless:

  • Contractual Obligation: A collective agreement, employment contract, or termination agreement specifies severance entitlement.
  • Court Settlement: Under §11 KSchG, a court may offer severance as part of a settlement in unfair dismissal proceedings.
  • Operational Dismissals: Employees dismissed for operational reasons may claim severance under §1a KSchG if the employer explicitly offers it in the termination notice. The amount is typically half a month’s gross salary per year of service.

3. Tax and Social Security Considerations for Severance Payments

  • Taxation: Severance payments are considered taxable income under §19 Einkommensteuergesetz (EStG). However, under the „Fünftelregelung” (Section 34 EStG), the payment can be taxed more favorably by spreading the tax burden over five years.
  • Social Security Contributions: Severance payments are generally exempt from social security contributions, provided they do not replace wages for the notice period. However, if severance is paid during the notice period or in lieu of notice, it may become subject to contributions.

4. Key Considerations for Employers

  • Documentation: Maintain accurate records of all decisions and communications related to terminations and severance to ensure compliance and to defend against potential legal claims.
  • Transparent Communication: Inform employees clearly about the reasons for termination, the calculation of severance payments, and their tax implications.
  • Seek Legal Advice: Given the complexity of German labor law and the potential for disputes, consulting with legal experts is highly recommended when planning workforce reductions.

Conclusion

The economic pressures in Germany during Autumn 2024 are leading many companies to make difficult decisions about their workforce. Employers must carefully adhere to legal and tax regulations when terminating employment and paying severance to avoid further financial and reputational risks.

For further assistance or inquiries, please contact WW+KN, a Baker Tilly Company, at info@payrollgermany.de.

 

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