Everything you need to know about termination agreements - A comprehensive guide

A termination agreement is an amicable agreement between the employer and employee to terminate an employment relationship. Unlike a notice of termination, a termination agreement allows for flexibility in the terms of separation. However, this form of termination involves both opportunities and risks for both parties. In this guide, you will learn everything you need to know about termination agreements - from legal requirements and advantages and disadvantages to specific tips for successful implementation.

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Differences between a termination agreement and notice of termination

A termination agreement is fundamentally different from a notice of termination:

• Notice periods: Statutory or contractual notice periods must be observed in the event of termination. A termination agreement, on the other hand, allows the employment relationship to be terminated immediately.
• Protection against dismissal: Employees lose their statutory protection against dismissal as a result of a termination agreement, including special protective rights such as pregnancy or severe disability.
• Works council: Unlike in the case of termination, the works council does not have to be consulted in the case of a termination agreement.

Example:

An employee on parental leave can terminate their employment relationship by means of a termination agreement without the employer having to observe the consent of the works council or social selection criteria. This facilitates the separation, but entails considerable risks for the employee.

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Requirements for the effectiveness of a termination agreement

For a termination agreement to be legally effective, certain formal requirements must be met. First of all, the law requires the written form (Section 623 BGB). This means that the agreement must be on paper and signed by both parties in person. Electronic signatures, transmissions by fax or e-mail are not sufficient.

Another requirement is that the contract is concluded voluntarily and without being taken by surprise. If an employee is pressured into signing the contract immediately without sufficient time to think it over, the contract may be invalid. However, this depends on the individual circumstances. In exceptional cases, such as in the event of particularly serious misconduct on the part of the employee, a termination agreement can also be effectively concluded under time pressure (e.g. BAG, 24.02.2022, Ref. 6 AZR 333/21).

There are also restrictions in the event of a transfer of business: A new owner may not give notice of termination based solely on the takeover of the business (Section 613a (4) BGB). If an employer tries to circumvent this by offering a termination agreement, this could be legally invalid. In such cases, legal advice is strongly recommended in order to examine the individual risks.

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Advantages and disadvantages of a termination agreement

Advantages for employees

• Flexibility: Employees can terminate an employment relationship more quickly, e.g. to accept a new job offer.
• Co-determination: Employees can negotiate separation modalities such as severance pay, leave of absence or references.
• Avoidance of conflicts: A termination agreement avoids potential disputes in court.

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Disadvantages for employees

• Loss of protection against dismissal: Employees waive the provisions of the Dismissal Protection Act.‍
• Tax burden: Severance payments can increase income and trigger a higher tax burden.

• No special protection against dismissal
  Employees with special protection against dismissal, such as pregnant women or severely disabled persons, lose this protection as a result of a termination agreement.
• Financial losses in company pension schemes
  If the employment relationship is terminated before the minimum period (e.g. 5 years) has expired, entitlements to employer-financed pension schemes or supplementary benefits may be forfeited. Employers must provide information about these risks, otherwise there is a risk of claims for damages.

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Risk of a blocking period for unemployment benefit‍

If an employee signs a termination agreement, the Federal Employment Agency may regard this as "voluntarily causing unemployment" (Section 159 SGB III). In this case, a suspension period of up to 12 weeks will be imposed during which no unemployment benefit will be paid. This applies regardless of which party took the initiative for the termination agreement.

Avoiding a blocking period
A blocking period can be avoided if certain conditions are met. Firstly, the employee may only demonstrably sign a termination agreement if they would have been dismissed for operational or personal reasons anyway, but not in the case of dismissal for conduct-related reasons. In addition, the termination agreement must ensure that the statutory or contractual notice period is observed. The amount of the severance payment also plays a role: as a rule, this should not exceed half a month's gross salary per year of employment in order to avoid the imposition of a blocking period.

Review by the employment agency
Employees should have the termination agreement reviewed by the employment agency - ideally before signing it. This way, it can be clarified in advance whether the contract triggers a blocking period or not. Legal advice from experts in employment law is also advisable in order to avoid financial disadvantages.

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Advantages for employers

• Faster termination of the employment relationship
  Compared to termination, a termination agreement can be concluded flexibly and without adhering to the statutory deadlines.
• Avoidance of dismissal protection regulations
  No justification or compliance with dismissal protection is necessary, even for special protection groups such as severely disabled persons.
• No works council consultation
  Unlike a dismissal, there is no need to consult the works council, which saves time and effort.
• Discretion and predictability
  The termination agreement can be handled discreetly and gives the employer planning security.

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Disadvantages for employers

• Higher costs: A severance payment is often necessary to make the termination agreement attractive for the employee.
• Time required: Negotiations can be resource-intensive.
• Possible precedent
  A generous termination agreement could encourage other employees to make similar demands.

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Components of a legally compliant termination agreement

A legally compliant termination agreement should carefully regulate all relevant points in order to avoid possible misunderstandings or legal conflicts. The central components include

1. Contracting parties and termination date
   The contract must contain the full details of the employer and employee as well as the exact date on which the employment relationship ends. Example: "The employment relationship between the sample company GmbH and Mr. Max Mustermann ends by mutual agreement on 31.12.2024."
2. Severance payment regulation
   The amount and modalities of the severance payment should be clearly defined. Employers often follow the rule of thumb of half a month's gross salary per year of employment (Section 1a (2) KSchG). Example: "The employee receives a severance payment of EUR 15,000 gross, payable with the last salary."
3. Time off and vacation entitlements
   Regulations on paid time off and the handling of remaining vacation should be included. An irrevocable leave of absence can be used to offset vacation days. Example: "The employee is irrevocably released from the obligation to work from 01.11.2024 with continued payment of remuneration."
4. Continued payment of remuneration
   Clarify whether the employee will continue to receive their contractual remuneration, bonuses or premiums until the end of the employment relationship. The due date and payment modalities should also be regulated in the contract. Example: "The employee will receive their monthly gross remuneration of EUR 5,000 until December 31, 2024."
5. Employment reference
   Agree on the issue of a qualified and favorable employment reference, including the evaluation grade. Example: "The employer undertakes to issue a qualified and favorable reference with the grade 'very good' by 15.12.2024."
6. Return of company property
   The contract should contain a precise list of the items to be returned, e.g. company car, laptop or cell phone. Example: "The employee undertakes to return all work equipment provided to him/her by the last working day."
7. Confidentiality clause and additional agreements
   Regulate the handling of confidential information and any additional agreements such as non-competition clauses. A comprehensive compensation clause can ensure that all mutual claims are settled with the termination agreement.

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Tips for successfully negotiating a termination agreement

1. Preparation: Clarify internal goals and boundaries.
2. Transparency: Communicate openly and honestly.
3. Fairness: Offer attractive conditions.
4. Legal advice: Consult specialist lawyers.
5. Consideration time: Allow sufficient time for consideration.
6. Documentation: Record all agreements in writing.

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Conclusion

A termination agreement offers considerable advantages for both employers and employees, provided the conditions are clearly regulated. For employers, the main advantage is legal certainty and flexibility, while employees can benefit from the individual design. However, both parties should carefully examine the legal framework and potential risks. Professional advice is recommended in any case in order to draw up a fair and legally secure contract.

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