Severance Payment

A one-time monetary payment by the employer to the employee on the occasion of ending the employment relationship.

A severance payment is not guaranteed by German statute: it is typically agreed in a termination agreement, a court-approved settlement, or via § 1a of the Dismissal Protection Act (Kündigungsschutzgesetz). The customary benchmark is half a gross monthly salary per year of service – in practice, the negotiation outcome is often significantly more favourable.

For tax purposes, the so-called "Fünftelregelung" can apply when the payment compensates for lost income and is received within a single tax year. Reviewing the termination agreement, unemployment insurance implications and tax treatment together generally yields the best outcome.