Signing a termination agreement – why the payment of severance should be enforced

Signing a termination agreement – that is, an agreement to end the employment relationship by mutual consent – often comes into play when the employer wants to end the cooperation quickly. To many, such a proposal sounds like a mere formality that simply needs to be signed in order to close a certain chapter of their professional life. In reality, however, this decision can have considerable financial and legal consequences, especially with regard to severance pay or entitlement to unemployment benefits in Germany. It is therefore important to know when such an agreement can be signed, whether there is any obligation to do so, and why in many cases it is worthwhile to negotiate the conditions under which the employment relationship will end.

What is a termination agreement (Aufhebungsvertrag)?

A termination agreement is an agreement between employee and employer on ending the employment relationship by mutual consent rather than through unilateral termination. This means that the employment contract ends at the time specified in the document without the need to observe the usual notice periods or to argue over the lawfulness of a dismissal. To many, this sounds like a simple solution – the employer proposes to end the cooperation and the employee signs the document. In reality, however, such a step has far-reaching legal and financial consequences, which is why the conditions should always be carefully reviewed before signing.

In practice, a termination agreement frequently arises in German companies in connection with restructuring, staff reductions, or conflicts in the workplace. Employers also propose it when they want to avoid legal proceedings related to a dismissal. For this reason, a key element of such agreements is very often a severance payment, i.e. financial compensation for the loss of the job. Its purpose is to compensate for the loss of income as well as the associated economic and social consequences.

It is also important to know that German employment law does not provide for an automatic right to severance pay when an employment relationship ends. This means that in many cases the amount of severance – or even whether it is paid at all – is the result of negotiations. A common rule of thumb is roughly half a month’s salary per year of employment, although this is not a rule that directly follows from the law, and the final amount of severance pay depends on the parties’ negotiations. Signing a termination agreement should therefore not be a hasty decision. Rather, this is the moment when the conditions of leaving the company can be negotiated – including the amount of severance, the termination date, or additional benefits. If the employer proposes such a solution, this usually means that they have an interest in ending the cooperation quickly – and this opens up real room for negotiation for better terms for the employee.

When can a termination agreement be signed?

An agreement to end the employment relationship can in principle be signed at any time during an ongoing employment relationship, provided both parties agree. Under German law, there is no fixed point in time when such an agreement must be concluded – this can happen during normal employment as well as when the employer is already considering dismissal. As a result, the termination agreement is often treated as an alternative to the classic termination of employment by notice.

Most often, such an agreement is signed when the company is planning organisational changes, staff cuts, or the elimination of a position. Employers then propose an amicable termination of the employment relationship to their employees and frequently offer severance pay or additional transitional benefits in return. From the company’s point of view, this is a convenient solution, as it helps to avoid legal disputes in connection with protection against dismissal.

From the employee’s perspective, such a proposal should always be carefully analysed. Signing a termination agreement means voluntarily agreeing to end the employment relationship, which can affect later social benefits or the situation with the Employment Agency (Agentur für Arbeit). Nevertheless, you should be aware that employers generally offer such a solution when they are keen on a quick end to the cooperation. This often opens up room for negotiation – both regarding the amount of severance and the termination date or additional financial benefits.

What deadline applies for signing a termination agreement?

A common situation in everyday working life is that the employer presents a document and expects a quick decision. However, it is important to know that there is no statutory deadline for signing a termination agreement. This means that you have the right to review the contents at your leisure, discuss the document with an advisory centre or a lawyer, and only then make a decision. This is particularly important because such an agreement is binding and, as a rule, once it is signed you cannot unilaterally withdraw from its terms or rely on an automatic right of revocation.

Employers often try to exert time pressure by suggesting that the severance offer is only valid for a short period. However, such a situation should not tempt you into a rash decision. Before signing, it is worth carefully reviewing all provisions – in particular regarding the amount of severance, the termination date, any financial compensation payments, or release from the obligation to work. Only once the consequences of signing are fully clear can you make an informed decision as to whether this solution is truly advantageous.

Do you have to sign a termination agreement?

This question arises very often – especially when the employer presents a finished document and implies that the signature is a mere formality. In fact, there is no obligation whatsoever to sign a termination agreement. If you do not agree with the proposed conditions, you have every right to refuse to conclude such an agreement. It should be borne in mind that signing an agreement to end the employment relationship means voluntarily consenting to its termination, which can affect not only your further professional career but also future benefits, e.g. from the Employment Agency.

It does happen that employers try to convince employees that failing to sign will lead to immediate dismissal. In practice, however, the procedure for ending an employment relationship in Germany is subject to certain statutory regulations, and its lawfulness can be challenged before the labour court by means of what is known as an unfair dismissal claim (Kündigungsschutzklage). Therefore, signing such a document is always the employee’s decision. If the proposed conditions are not favourable, they can be renegotiated or the agreement can simply be rejected.

The employer does not want to sign a termination agreement – what then?

Even though in many cases it is the employer who proposes a termination agreement, it also happens the other way around – the employee wants to end the employment relationship by mutual consent, but the company refuses. In such a case, it must be borne in mind that a termination agreement can only be concluded if both parties agree to this solution. If the employer does not want to sign the document, the employment relationship continues under the previous conditions, and in most cases the only alternative is an ordinary resignation by giving notice in accordance with the applicable notice period.

For many, this can be disappointing, especially when they are seeking a quick end to their employment. However, it must be remembered that the employer is not obliged to agree to such a solution if they do not see any organisational or financial benefit in it. In practice, much depends on the discussions – sometimes setting out concrete arguments, such as proposing an earlier exit or an orderly handover of duties, can persuade the employer to change their position and sign the agreement after all.

Signing a termination agreement digitally?

In the digital age, many formalities can be completed online, but when it comes to ending an employment relationship, German law remains very strict. Both the termination of an employment contract and a termination agreement must be in writing. This means that a simple email, a document scan, or an electronic signature generally does not meet the formal requirements, as German employment law requires compliance with the so-called written form pursuant to section 623 of the German Civil Code (BGB). For a document to be legally effective, it must be personally signed in handwriting by both parties.

This means that an electronic message cannot be equated with the termination of an employment relationship. Companies often send the draft agreement by email for review only, so that the employee can examine its contents. It is only the signature on the paper document that makes the agreement to end the employment relationship legally binding.

Is there an entitlement to unemployment benefits after concluding a termination agreement?

One of the most important aspects of signing a termination agreement is the effect this decision may have on entitlement to unemployment benefits. In many cases, the Employment Agency may conclude that the employee contributed to the termination of the employment relationship because they agreed to end the contract by mutual consent. In such a situation, a waiting period (Sperrzeit) for the payment of benefits can be imposed, which may last up to 12 weeks.

However, this does not mean that these consequences will always occur. If the circumstances indicate that the employer had planned to dismiss the employee anyway, or if there were serious organisational reasons within the company, the Employment Agency may consider the conclusion of the agreement to be understandable. It should also be noted that a severance payment made upon termination of the employment relationship is regarded as compensation for the loss of the job. It is therefore advisable to check before signing what impact the agreement may have on future benefits from the Employment Agency and whether its conditions are indeed advantageous.

It is important to remember that receiving severance pay after leaving employment in Germany can also have tax implications. Such a payment is considered income and in many cases must be declared in the annual tax return. Therefore, after the end of the employment relationship, it is advisable to check whether a online tax return for Germany is required – particularly if you earned additional employment income in the same year. In practice, a carefully prepared tax return helps avoid formal errors and often also to recover part of the tax overpaid due to the taxation of total annual income.