Termination Agreements: 5 Tips on Works Councils, Thinking Time & One-Fifth Rule

Here are five important tips that you should definitely observe now when concluding a termination agreement (Aufhebungsvertrag), for example with Bosch, Mercedes-Benz, ZF, or other automotive manufacturers or suppliers:

1. Termination Agreement and Works Council: Check Reconciliation of Interests and Social Plan

If your employer wants to cut many jobs, there is regularly a reconciliation of interests (Interessenausgleich) with a social plan (Sozialplan), or at least a social plan, in businesses with a German Works Council (Betriebsrat). Before you sign a termination agreement, you should definitely contact the Works Council. Find out whether there is a reconciliation of interests and social plan in your operation. The Works Council will inform you about the operational conditions and can give you important pointers.

A reconciliation of interests concerns whether, when, and in what form the intended entrepreneurial measure should be carried out. Disadvantages for the employees should be avoided as far as possible.

A social plan is about creating compensation or mitigation of the economic disadvantages for the employees affected by a measure. For example, through severance programs. A social plan can secure you significantly better conditions than an individually negotiated termination agreement.

2. Termination Agreement after Thinking Time: Clarify Your Action Options

If the employer approaches you with a termination offer, concluding it is often not the only option for you. Do not conclude the termination agreement overhastily – take sufficient thinking time (Bedenkzeit). Check your options carefully. Once a termination agreement is concluded, it generally cannot be unilaterally undone.

The thinking time before concluding a termination agreement is your right. Do not let yourself be put under time pressure, even if the employer suggests it. Undoing a termination agreement is only possible in rare exceptional cases after signature – such as malicious deceit or unlawful threat. This is why thinking time is so important.

There may be continued employment options elsewhere with the employer, or the employer may offer you a transition to an associated group company or a transfer company. You should also keep an eye on your external application chances for a new job with a new employer at an early stage.

3. Check the Legal Consequences and Obtain Legal Advice

Do not sign the termination agreement without sufficient thinking time and obtain legal advice before concluding the termination agreement. Check for further claims from your employment relationship that must be regulated, especially if a general waiver clause (Abgeltungsklausel) is provided in the termination agreement.

Important points are often:

• Variable remuneration components
• Company car provision
• Company pension schemes
• Remaining leave and time credits
• Regulation regarding remaining work and handover of the work area

Compare the offered severance amount with the statutory standard severance – you can calculate this with our severance calculator.

Non-Compete in Termination Agreement: Definitely clarify whether a (post-contractual) non-compete clause exists. A non-compete in a termination agreement can significantly restrict your professional opportunities after leaving. Check whether the non-compete is adequately compensated and whether you can possibly lift it.

Observe possible blocking periods and suspension periods for unemployment benefits. Consider your application chances for a new job.

4. Ensure Precise Regulations in the Termination Agreement

In particular, the important key data of the termination agreement, such as the termination date in compliance with the notice period at the end of the month, the statement of the reason for termination, the agreements made regarding remuneration including proper payroll and payment, as well as the amount and maturity of a severance payment, and the duration and scope of a release from work should be carefully regulated.

Remaining leave and time credits should also be clearly regulated, as should your claim to a qualified job reference.

5. Consider Tax Aspects

Severance payments must regularly be taxed in the year in which they are paid out by the employer. Because it is a high one-time payment and the employee often earns other income in the year of payment, a significant tax burden can occur. Through exceptional regulations and clever designs, the tax burden can be minimized in individual cases.

Apply the One-Fifth Rule

An important possibility for tax reduction is the application of the so-called one-fifth rule (Fünftelregelung) according to Sections 34 para. 1, para. 2 no. 2, 24 no. 1 of the German Income Tax Act (EStG). According to this, the taxation of the severance payment by the tax office is calculated as if the severance had been paid out in installments over a period of five years. In most cases, this mitigates the progression, thereby reducing the tax burden.

However, the one-fifth rule can only be applied if its requirements are met. This must be observed when concluding the termination agreement:

• The severance must count as extraordinary income, for example being paid as compensation for the dissolution of the employment relationship. It must not contain earned remuneration for work already performed. This must be observed during phrasing.
• The severance must be paid in a single sum. Multiple partial payments in different years are generally harmful (exception for minor ancillary benefits).
• The one-fifth rule must not be excluded by other tax regulations.
• The lower the other income in the year of payout, the stronger the effect of the one-fifth rule; this is to be considered when choosing the payout date.

The one-fifth rule can in individual cases even be applied to outstanding overtime compensation if the follow-up payment periods span at least two years and cover a period of more than twelve months. Then it is a matter of extraordinary income within the meaning of Section 34 para. 2 no. 4 EStG. The German Federal Finance Court confirmed this in its judgment of Dec 2, 2021 (Ref. VI R 23/19).

Also due to the complexity of the tax regulations and the possible pitfalls, it is advisable to consult a lawyer and/or tax advisor. The application of the one-fifth rule must be declared to the tax office starting from the 2025 tax year via a tax return.

Have You Received a Termination Agreement?

Do not let yourself be put under pressure and use your thinking time. Use our free severance calculator for an initial assessment of your possible severance amount.

For a professional review and negotiation, you can have your termination agreement reviewed by our specialist lawyers. Especially with automotive manufacturers and suppliers, legal advice can quickly pay for itself through significantly higher severance payments.