Offer Severance or Litigate? Employer Decisions in Germany

Informational guide for employers and in-house counsel deciding whether to offer a severance package now or litigate later in Germany, including a practical checklist, an exposure estimate model, settlement drafting guidance and litigation tactics.

Whether to offer severance now or litigate later is one of the most consequential strategic calls an international employer faces after terminating an employee in Germany. German dismissal law is protective, procedurally strict and unforgiving of poorly documented terminations, and once an employee receives notice, a short filing window begins to run. With many German employers currently restructuring and running voluntary severance programmes, the question has become an everyday one for boards and HR teams. For C-level leaders, HR directors and in-house counsel managing cross-border teams, it is rarely purely legal: it blends statutory exposure under the Dismissal Protection Act (Kündigungsschutzgesetz, KSchG), back-pay risk, operational disruption, precedent and reputation. This guide sets out a practical, law-anchored framework to quantify that exposure, weigh the commercial variables and choose confidently between settling early and defending a claim.

Framing the decision

Consider a common scenario: a multinational dismisses a sales executive with four years’ service in its Munich subsidiary for underperformance, but the performance file is thin and no formal warnings were documented. Within days, the executive’s lawyer signals a challenge. The employer now faces the classic fork: open negotiations and offer a severance package now, or hold firm and defend the claim before the labour court.

The aim of this article is to replace instinct with a repeatable process. Where the KSchG applies, the employer bears the burden of proving that the dismissal is socially justified. That burden, combined with a three-week filing deadline and labour courts that actively steer parties toward settlement, means the decision must be made quickly and with eyes open.

Key deadlines and immediate steps after termination

The single most important date in any German dismissal is the three-week filing deadline. Under §4 KSchG, an employee who wishes to contest a termination must file a dismissal protection claim (Kündigungsschutzklage) with the competent labour court within three weeks of receiving the written notice. If no claim is filed in time, the dismissal is generally deemed valid under §7 KSchG; late admission is possible only in narrow exceptions (§5 KSchG). If a claim is filed, the employer must be ready to defend the substance of the dismissal.

Note also that the notice itself must be in strict written form with a handwritten signature (§623 BGB). A termination sent by email, scan or e-signature platform is void, regardless of its merits.

Immediate steps once notice has been served:

• Preserve evidence. Secure performance records, emails, warnings, attendance data and any documentation supporting the stated grounds before access lapses or memories fade.
• Build a witness list. Identify managers and colleagues who can speak to the facts and record their recollections while fresh.
• Verify works council involvement. Where a works council (Betriebsrat) exists, confirm that it was properly heard under §102 of the Works Constitution Act (BetrVG) before notice was given; a defective hearing renders the dismissal invalid. For senior executives who qualify as leitende Angestellte, the works council need only be informed (§105 BetrVG), but a spokespersons’ committee (Sprecherausschuss), where one exists, must be heard (§31(2) SprAuG).
• Diarise the filing window. Track the three-week period precisely so you know whether and when litigation risk crystallises.
• Preserve confidentiality. Limit internal discussion to those who need to know, protecting both privilege and the employee’s data under the GDPR and the Federal Data Protection Act (BDSG).

Estimating legal exposure under the KSchG

A credible decision begins with a disciplined exposure estimate, built in stages.

Step one: is the employee covered by the KSchG?

General dismissal protection applies where the employment relationship has lasted more than six months (§1 KSchG) and the establishment ordinarily employs more than ten employees, counted under §23 KSchG (part-time staff are weighted). If both conditions are met, the employer must justify the dismissal on grounds relating to the person, conduct or urgent operational requirements. A performance- or conduct-based dismissal will normally fail without a prior written warning (Abmahnung).

Members of the board or managing directors of a company (e.g. a GmbH Geschäftsführer) are generally excluded from the KSchG (§14(1) KSchG); their exit is governed primarily by their service agreement. Outside KSchG coverage, protection against discriminatory dismissal under the General Equal Treatment Act (AGG) and against dismissals contrary to good faith still applies.

Step two: understand the real financial risk – back pay

German law does not treat severance as the automatic outcome of an unfair dismissal. If the court finds the dismissal invalid, the employment relationship is deemed to have continued. The employee is then entitled to reinstatement and, critically, to full remuneration for the entire period since the notice expired (Annahmeverzugslohn, §615 BGB). Earnings from new employment, unemployment benefits and income the employee wilfully failed to earn are offset (§11 KSchG), but the employer carries this risk for as long as proceedings last, potentially through an appeal.

This back-pay exposure, not the severance figure itself, is what usually drives settlements. Neither party typically wants reinstatement, so most cases end in a monetary settlement, but the price of that settlement rises with every month of open litigation.

Step three: the court-ordered dissolution option

Where continued employment is unreasonable, either party may ask the court to dissolve the employment relationship against payment of severance (§§9, 10 KSchG). The statutory cap is twelve months’ earnings, rising to fifteen months (age 50 and 15 years’ service) or eighteen months (age 55 and 20 years’ service). For senior executives who can independently hire or dismiss staff, the employer’s dissolution request requires no justification (§14(2) KSchG). For this group, the employer can therefore cap the outcome even if the dismissal itself fails, a significant lever in negotiations with international executives.

Step four: apply the market severance heuristic

There is no general statutory severance formula. As a widely used market heuristic, not a binding rule, practitioners and labour courts frequently reference 0.5 months’ gross salary per year of service as a baseline (Regelabfindung), with multiples of up to 1.5 or more where the employer’s case is weak. A separate statutory entitlement of 0.5 months’ salary per year of service exists under §1a KSchG, but only for dismissals on operational grounds where the employer expressly offers it in the notice and the employee lets the filing deadline pass.

Worked example: a four-year international executive

Assume an executive earning EUR 10,000 gross per month with four years’ service, dismissed for underperformance with weak documentation:

• Baseline (Regelabfindung): 0.5 x 10,000 x 4 = EUR 20,000
• Weak case, 1.0 to 1.5 multiple: 1.0 x 10,000 x 4 = EUR 40,000 up to 1.5 x 10,000 x 4 = EUR 60,000
• Realistic negotiating mid-point: around EUR 50,000

Now compare the litigation scenario. If proceedings run twelve months beyond the end of the notice period and the employer loses, the back-pay exposure is up to 12 x 10,000 = EUR 120,000 gross, less any offsets, plus continued social security contributions, before any settlement is even discussed.

The exposure estimate must also capture non-wage elements:

• Notice pay. Statutory or contractual notice periods through the termination date (§622 BGB).
• Accrued but untaken leave. Payment in lieu under the Federal Leave Act (BUrlG).
• Bonus and variable pay. Pro-rated or earned but unpaid incentives, frequently contested, as are equity and virtual share plans.
• Benefits continuity. Pension contributions, company car and other contractual benefits running to the termination date.

Severance paid as genuine compensation for the loss of employment is generally free of social security contributions but subject to income tax. Since 2025, the reduced “one-fifth” taxation under §34 EStG is no longer applied through payroll; the employee must claim it in the annual tax return. For the precise tax and social security treatment of a package, involve payroll and tax specialists.

Quantifying indirect costs and business risks

Legal exposure is only half the picture. The indirect costs of a contested dismissal often rival the settlement figure and rarely appear in a lawyer’s exposure memo.

• Management distraction. Estimate senior hours for witness preparation, strategy sessions and document review, multiplied by a blended senior hourly cost.
• Operational continuity and recruitment. If the role is critical, prolonged uncertainty impairs team performance; factor in recruitment and onboarding costs.
• Precedent risk. Assign a probability to a visible settlement or defeat encouraging other employees to challenge future terminations, particularly during a wider restructuring.
• Brand and reputation. Public labour disputes involving senior international hires can damage employer brand and recruitment.
• Client relationships. Where the employee holds client-facing relationships, a contentious exit may jeopardise revenue.

A simple scoring matrix helps integrate these factors. Rate each Low, Medium or High and combine the composite score with the legal exposure estimate:

• Management distraction: Low = minimal senior time; Medium = moderate involvement; High = sustained leadership drain
• Operational impact: Low = non-critical role; Medium = replaceable with delay; High = business-critical role
• Precedent risk: Low = isolated case; Medium = some comparable staff; High = large exposed workforce
• Reputation: Low = low visibility; Medium = internal visibility; High = public or market visibility

Checklist: when to offer severance now

Score each item; a predominance of “yes” answers in the legal and commercial sections points toward an early offer.

Legal factors

• Is the dismissal documentation weak or incomplete?
• Were required warnings absent before a conduct- or performance-based dismissal?
• Is the employee clearly covered by the KSchG?
• Was the works council or spokespersons’ committee hearing defective or incomplete?
• Was the notice defective in form (e.g. not signed by hand or by an authorised signatory)?
• Does the employee belong to a specially protected category (e.g. pregnancy, parental leave, severe disability, works council membership)?
• Has a challenge been signalled while the three-week window is still open?

Commercial factors

• Does the back-pay exposure over a realistic litigation period exceed the cost of a negotiated settlement?
• Is confidentiality a priority to prevent copycat claims or market signalling?
• Would legal costs and management time outweigh the settlement premium?

Operational factors

• Is the role business-critical and in need of a fast, clean separation?
• Does the employee hold sensitive client or operational relationships?

Strategic factors

• Is avoiding an adverse precedent across the workforce a priority?
• Would a public dispute damage employer brand or recruitment?

Decision thresholds

Use a traffic-light rule:

• Green – settle now: several legal weaknesses combined with high indirect costs. Make a well-pitched offer before or immediately after the claim is filed.
• Amber – defend and negotiate in parallel: a reasonably strong case with manageable indirect costs. File a robust defence and use the conciliation hearing to settle on better terms.
• Red – litigate to judgment: a strong, well-documented case where a settlement would set an unwanted precedent, for example in a wider restructuring.

A short internal note might read: “Given weak performance documentation, clear KSchG coverage and the business-critical nature of the role, I recommend authorising a without-prejudice settlement offer around the mid-point of our exposure estimate, with confidentiality and an agreed reference as priorities. Please confirm budget authority so we can approach the employee before the filing deadline.”

Drafting settlement agreements that close all claims

A settlement only delivers value if it genuinely closes the matter. Whether an out-of-court termination agreement (Aufhebungsvertrag) or a court settlement (gerichtlicher Vergleich), it must be drafted precisely and, for international employees, often bilingually. An agreement ending the employment relationship requires strict written form with handwritten signatures (§623 BGB); electronic form is excluded. A settlement recorded by the court, including one concluded in writing under §278(6) ZPO, satisfies this requirement.

• Full release language. Confirm that all mutual claims arising from the employment and its termination are settled. In a bilingual German/English agreement, the German text should generally govern. Certain statutory entitlements, such as minimum statutory leave or claims under collective agreements, cannot be waived, so the release must be drafted to capture what can lawfully be released.
• Termination date and payment structure. Respect the applicable notice period. If the agreed termination date shortens it, the employee’s unemployment benefit may be suspended (§158 SGB III), and an agreed termination may also trigger a blocking period (Sperrzeit, §159 SGB III). Employees know this, and it affects their willingness to sign. Specify severance amount, payment date, leave, bonus and notice entitlements, and state clearly whether amounts are gross or net.
• Confidentiality and non-disparagement. Define scope and make the obligations mutual. Such clauses bind the parties’ conduct but cannot override statutory rights or protected disclosures.
• Employment reference (Arbeitszeugnis). Agree the wording of the qualified reference (§109 GewO) in advance. German references use coded evaluative language, so fixing grade and phrasing avoids a later dispute.
• Garden leave and release from duties. Clarify whether the employee is released from work until the termination date and whether remaining leave is offset against that period.
• Data protection. Address return and deletion of data and devices consistent with the GDPR and BDSG.
• Post-termination restrictions. A post-contractual non-compete is enforceable only if the employer pays compensation of at least half the most recent contractual remuneration for up to two years (§§74 et seq. HGB). Address it expressly, either confirming it or waiving it, keeping in mind the statutory waiting period for the employer’s waiver (§75a HGB).

Illustrative release wording (not a template): “Upon performance of this agreement, all mutual claims arising from the employment relationship and its termination, whether known or unknown, are finally settled, save for claims that cannot be waived by law.” Labour courts interpret release wording strictly; an imprecise clause can leave open exactly the claims the settlement was meant to close.

Litigation strategies to strengthen your bargaining position

In Germany, litigating does not mean abandoning settlement; the two run in parallel.

• Use the conciliation hearing. Proceedings begin with a conciliation hearing (Güteverhandlung), which should take place within two weeks of filing (§61a ArbGG). The judge actively explores settlement. Treat it as a structured negotiation, not a formality.
• Respond decisively to the claim. A robust, well-evidenced defence signals that the employer will not simply pay to make the case go away and disciplines the employee’s expectations.
• Manage the back-pay clock. Offering a fair interim position and documenting suitable job opportunities can reduce back-pay exposure, since income the employee wilfully fails to earn is offset under §11 KSchG.
• Consider the dissolution request. For qualifying senior executives, a request under §§9, 10 and 14(2) KSchG caps the outcome and shifts negotiating leverage.
• Anchor with staged offers. Budget for the realistic exposure and deploy staged offers rather than opening at your ceiling.
• Factor in the costs regime. In first-instance labour court proceedings, each party bears its own lawyer’s fees regardless of outcome (§12a ArbGG). Unlike in ordinary civil litigation, winning does not recover your legal costs.

Where the employer’s case is weak, an early, well-pitched offer typically closes the matter in weeks, whereas litigation through two instances can run a year or longer while back pay accumulates. Where the case is strong, credible readiness to litigate usually secures a lower settlement at the conciliation hearing.

Cross-border and international considerations

For international employers, jurisdiction and enforceability add another layer. An employee who habitually works in Germany will generally be able to sue before the German labour courts and rely on German mandatory employment protections, even where the contract specifies foreign law or a foreign forum. Under Article 8 of the Rome I Regulation, a choice of law cannot deprive the employee of the protection of mandatory rules of the country of habitual work. Under Articles 21 and 23 of the recast Brussels I Regulation, the employee may sue at the place of habitual work, and forum clauses bind the employee only if concluded after the dispute arose or if they widen the employee’s options.

For seconded and globally mobile staff, establish which jurisdiction’s protections apply before terminating, as the analysis is fact-specific. Where a settlement is signed with an internationally mobile employee, consider how the release and any restrictive covenants will be recognised abroad and take local advice. Immigration and payroll consequences of a cross-border exit should be handled by specialist counsel outside the settlement itself.

Comparison: offer severance now vs litigate later

• Direct cost: Severance now: settlement premium, certain and paid up front. Litigate later: own legal fees (not recoverable at first instance), accruing back-pay risk, likely settlement at a later stage.
• Time to close: Severance now: days to weeks. Litigate later: several months; a year or more with appeal.
• Confidentiality: Severance now: high, negotiated confidentiality clause. Litigate later: lower, public hearings.
• Precedent risk: Severance now: contained if confidential. Litigate later: higher if the case becomes visible.
• Management distraction: Severance now: Litigate later: potentially significant.
• Certainty for employer: Severance now: high, matter definitively closed. Litigate later: low until judgment or settlement.
• Reinstatement risk: Severance now: none, relationship ends by agreement. Litigate later: possible if dismissal found invalid.

Conclusion and recommended next steps

The decision to offer severance now or litigate later should never rest on instinct. The disciplined process is straightforward:

1. Triage the case within the three-week window.
2. Secure the evidence file.
3. Run the KSchG exposure model, including back pay and non-wage components.
4. Score the indirect costs.
5. Apply the traffic-light thresholds.

Where the signal is green, make a carefully drafted, without-prejudice offer anchored to the mid-point of your exposure estimate. Where it is amber, defend robustly while using the conciliation hearing to settle. Where it is red, prepare to litigate to judgment. Approached this way, the choice becomes a repeatable, defensible commercial judgement rather than a gamble.

Need Legal Advice?

This article was produced by Global Law Experts. For specialist advice on this topic, contact Benjamin Kreiner at MainLegalTax Kubik Schaffner PartG mbB, a member of the Global Law Experts network.