Termination agreement update (2): Avoiding pitfalls with amicable separation?

 12 do’s and don’ts which employers need to know.

Dr. Markus Dreyer

Update Aufhebungsvertrag (2): Wie lassen sich Tücken der gütlichen Trennung umgehen?

Amicable separation can offer both employees and companies an attractive alternative to termination. In Part 2 of our update, we describe best practices and pitfalls which employers need to consider when drafting termination agreements.

As we have already reported, companies often need to handle a number of hurdles prior to effective termination. A termination agreement offers greater flexibility for both parties: Neither protection against dismissal nor notice periods or even the co-determination rights of the works council or staff council have to be observed. However, employers need to bear in mind the following twelve do’s and don’ts:

1. Fair negotiation is a must
Even the path towards concluding a termination agreement conceals pitfalls. That is why HR managers need to bear in mind the fair negotiation requirement concerning the circumstances and the negotiation situation. We examined the approach that the Federal Labor Court takes in negotiation situations in Part 1 of our update on termination agreements.

2. No entitlement to severance pay
As a rule, employees are not entitled to severance pay. It is also important to note that the severance pay amount is also a matter of negotiation. As rule of thumb, the severance pay is often half of a gross monthly salary per year of employment. However, a severance payment may also be significantly lower or higher. The following factors often play a decisive role: The chances of legal success if the company issues notice of termination, the financial ability of the company to pay a severance payment and the pressure to part with an employee.

3. Agree on release from work
It often does not make sense to keep an employee fully employed until the termination date after completing a termination agreement with them. A (partial) release from work is an effective solution in this case. As with severance pay, release from work is entirely a matter of negotiation. In view of this, offering a lower severance payment in return for a longer release phase is one option. It is important to remember that the release agreement needs to state that the release will be offset against any outstanding vacation or overtime. With longer release phases, it is also essential to stipulate that wages that the employee earns elsewhere are also offset.

4. Turbo clause
If the termination agreement states that the remuneration payment will continue over a longer period of time, including a “turbo clause” can be advisable. After that, the employee will receive a higher severance payment if they find a new job and terminate the employment relationship at an earlier date.

5. Agreement on vacation compensation
If the employee can no longer take vacation as planned due to the termination of the employment relationship and offsetting has not been agreed as part of the release from work, the lost vacation must be compensated as stipulated in Section 7 (4) of the Federal Leave Act. In view of this, regulating the payment of outstanding leave in the termination agreement is also important. The parties may also agree that the leave is deemed to have been taken.

6. Agree on references
To prevent subsequent disputes, formulating the reference in advance and attaching it to the termination agreement is advisable. Alternatively, the parties can agree that the final reference corresponds to the last interim reference and will only be updated with these termination date as well as a thank you and best wishes paragraph.

7. Specify the date of the end of the contract and terminate all employment relationships within the Group
Companies need to take care with long-term employees in corporate groups if they have old employment contracts with a sister company or subsidiary. These contracts will not always have been terminated when the employee transferred to their current employer but are only dormant. The safe approach is to include a clause that clearly states that all employment relationships established with the current employer and affiliated companies will be terminated on a specific day.

8. Regulate the return of work equipment, documents and data
Adding a provision regulating the return of work equipment such as mobile phones, company vehicles, laptops documents and customer lists is recommended. The provision should also specify the transfer date.

9. No right of revocation or rescission
Unlike termination, employees can only legally review the legal consequences of the termination agreement in exceptional cases unless the employer grants a right of revocation or rescission in the agreement. However, this should be the absolute exception.

10. Minimizing the risk of a blocking period
If employees conclude a termination agreement, they may not be entitled to unemployment benefits for up to twelve weeks. The business instructions from the Federal Employment Agency provide information on how to avoid this situation. Employers need to take this issue into consideration as it has a major influence on an employee’s decision-making process. Yet ultimately, the employee is responsible for and bears the risk of addressing this issue.

11. The severability clause
The absolute rule is that a severability clause concludes a termination agreement. It clearly states that apart from the claims established by the termination agreement, the employee and the employer no longer have any claims towards each other. Specific items can be included in the severability clause. One example is when a sales commission can only be calculated at a later date.

12. Comply with the written form
Section 623 of the German Civil Code (BGB) stipulates that the termination agreement must be in writing. According to Section 126 of the German Civil Code (BGB), a handwritten signature is also mandatory. The world is becoming increasingly digital and will remain so despite the Law of Proof of Substantial Conditions Applicable from August 1. The electronic text form is not permitted for termination agreements and notices of termination. Instead, the paper form is mandatory. An agreement by e-mail or even by fax is also inadequate.

Avoiding any pitfalls during the separation of employer and employee requires a carefully formulated termination agreement. A proper termination agreement reconciles the various interests in such a way that both companies and employees benefit.