Severance Pay and Unemployment Benefits in Germany: When Can Benefits Be Suspended?

No. Severance pay alone does not automatically suspend unemployment benefits.

The key question is whether the applicable notice period is observed.

If the employment relationship ends on the same date on which it would also have ended in the event of an ordinary employer dismissal, severance pay usually does not lead to a suspension of unemployment benefits.

It becomes problematic when two things come together:

1. The employee receives severance pay or a similar payment because of the end of the employment relationship.

2. The employment relationship ends earlier than it would have ended if the employer's applicable notice period had been observed.

This assessment may be relevant not only in connection with a settlement agreement. It can also matter in a separation agreement after dismissal or in a court settlement if severance pay is granted and the employment relationship ends earlier than it would have ended if the applicable notice period had been observed.

In that case, unemployment benefits may be suspended for a certain period.

An employee would have a notice period of three months in the event of an employer dismissal.

However, the employee signs a settlement agreement. Under that agreement, the employment relationship ends after only one month. At the same time, the employee receives severance pay.

In this case, the employment relationship ends two months earlier than it would have ended if the notice period had been observed.

The Federal Employment Agency may then examine whether unemployment benefits are suspended for that period. The idea behind this is that part of the severance payment may be treated as replacing salary that the employer would otherwise have paid until the end of the notice period.

Suspension does not automatically mean that the entitlement to unemployment benefits is lost permanently.

If benefits are suspended because of severance pay, payment is generally shifted to a later date. The entitlement exists in principle, but it is not paid out for a certain period.

An employee is generally entitled to twelve months of unemployment benefits.

Because of severance pay and a shortened notice period, the entitlement is suspended for two months.

This means that payment of unemployment benefits starts only after those two months. The benefit period is generally shifted to a later date.

However, during the suspension period, the employee must be able to bridge the financial gap. Health insurance coverage may also be affected.

The suspension generally begins when the employment relationship ends.

It can last at most until the date on which the employment relationship would have ended if the applicable notice period had been observed.

There is also a statutory limit. The suspension cannot last longer than one year.

The Federal Employment Agency does not simply offset the entire severance payment against unemployment benefits.

Only a certain part of the severance payment is taken into account for the calculation. This share may be reduced in the employee's favor if the employment relationship lasted for a long time or if the employee is older.

In simple terms:

The older the employee is and the longer they worked for the employer, the lower the part of the severance payment may be that is taken into account for the suspension calculation.

The Federal Employment Agency also examines how many calendar days the employee would have needed to earn the relevant part of the severance payment as salary. This can determine the duration of the suspension.

The exact period therefore cannot be determined from the severance amount alone. Several factors matter, especially:

• the amount of severance pay,

• the previous gross salary,

• the length of the shortened notice period,

• the employee's age,

• the length of service.

An employee receives severance pay of EUR 20,000. The employment relationship ends two months earlier than it would have ended if the notice period had been observed.

Whether unemployment benefits are actually suspended for the full two months does not depend only on the severance amount. The previous gross salary, age and length of service also matter.

For a younger employee with short service, a larger part of the severance payment may be taken into account. For an older employee with long service, the relevant share may be lower.

In addition, the calculation looks at how long the employee would have needed to earn the relevant part of the severance payment as gross salary. The exact duration should therefore be checked in the individual case.

If the applicable notice period is observed, severance pay usually does not lead to a suspension of unemployment benefits due to severance compensation.

This generally also applies if the severance payment is high.

The amount of severance pay alone is therefore not the decisive point. The decisive question is whether the employment relationship ends before the applicable notice period has expired.

A separate question is whether a settlement agreement may trigger a blocking period. That is not about suspension because of severance pay, but about suspension because of a blocking period.

More on settlement agreements and blocking periods

In some cases, the applicable notice period is not immediately obvious.

This may be relevant, for example, if ordinary termination is excluded or only possible under special conditions. In such cases, special statutory periods may become relevant.

It is therefore not enough to check only the notice period stated in the employment contract. The decisive question is which notice period applies for the social law assessment.

Payment for unused vacation can also affect unemployment benefits.

If the employee still has outstanding vacation at the end of the employment relationship and receives or is entitled to receive payment for it, unemployment benefits may also be suspended for the period corresponding to the compensated vacation days.

If there is already a suspension because of severance pay, this period may be extended by the period of compensated vacation.

An employee still has ten vacation days left when the employment relationship ends. The employer pays out these vacation days.

Unemployment benefits may then also be suspended for the period corresponding to those compensated vacation days.

For this reason, a settlement agreement or court settlement should always be checked for outstanding vacation and whether vacation is taken or paid out.

A suspension of unemployment benefits can also affect health insurance coverage.

If the Federal Employment Agency does not pay unemployment benefits during the suspension period, it generally also does not pay health insurance contributions during that time.

In some cases, statutory health insurance coverage from the previous employment may continue for one month. After that, it may be necessary to secure coverage in another way, for example through family insurance or voluntary statutory health insurance.

This point should be clarified early, especially if a longer suspension period is possible.

A genuine severance payment for the loss of employment is generally not subject to social security contributions.

The fact that severance pay is taxable does not automatically mean that it is subject to social security contributions.

However, this may be different if the payment actually contains hidden salary components. This may include salary, vacation compensation, a bonus, a commission or remuneration for a period during which the employment relationship legally still existed.

An employee is still entitled to a bonus of EUR 2,000. The settlement agreement only states that the employee receives "severance pay" of EUR 10,000.

If this payment is also intended to settle the outstanding bonus, that part may be treated as salary. In that case, not the entire EUR 10,000 would be genuine severance pay. The part that actually replaces bonus or salary may be subject to social security contributions.

In practice, this means: outstanding remuneration claims and genuine severance pay should be separated as clearly as possible in a settlement agreement or court settlement.

More on the taxation of severance payments

Before signing a settlement agreement or court settlement, employees should have the following points checked in particular:

1. Is the applicable notice period observed?

2. Does the employment relationship end earlier than it would in the event of an employer dismissal?

3. Is severance pay being granted?

4. Are there any unused vacation days?

5. Is vacation taken or paid out?

6. Does the severance payment possibly contain hidden salary components?

7. Is health insurance coverage secured during any possible suspension period?

8. Is there an additional risk of a blocking period because of a settlement agreement?

Severance pay is not automatically harmful for unemployment benefits.

Suspension because of severance pay is mainly a risk if the employment relationship ends earlier than it would have ended if the applicable notice period had been observed.

If the notice period is observed, severance pay generally does not lead to a suspension of unemployment benefits. The exact structure of the termination still matters.

Employees should therefore not look only at the severance amount. The termination date, notice period, unused vacation, possible hidden salary components and health insurance coverage are also important.