Regional Labour Court Cologne, judgement of 28.05.2020, Ref. 6 Sa 717/19
Severance payments are a key issue in labour law - whether in the case of dismissals, termination agreements, restructuring or in connection with partial retirement. In legal practice, it has been shown time and again that it is not so much the „whether“ of a Severance payment is in dispute, but the specific severance payment calculation. It becomes particularly complex if the severance payment is not agreed individually but is regulated by a works agreement.
It is precisely then that it is crucial how individual terms are understood and interpreted. A recent case law decision illustrates the significance this can have for the calculation of severance pay.
Basics of the severance payment calculation
German labour law does not recognise a general statutory entitlement to severance pay. Severance payments regularly arise on the basis of contractual or collective agreements. Typical constellations are termination agreements, court settlements in dismissal protection proceedings, social plans or works agreements as well as special collective agreements, for example in the context of partial retirement.
In practice, the well-known rule of thumb is often used, according to which half a month's gross salary per year of employment is recognised as severance pay. However, this formula is only a rough guide. It has no legally binding effect and does not apply in particular if a works agreement or social compensation plan specifies its own calculation logic.
As soon as such a collective regulation exists, the severance payment calculation is based exclusively on its content.
The role of the works agreement in severance pay
Company agreements have a special legal quality. They apply directly and mandatorily to employment relationships and cannot be interpreted freely like individual contracts. Their provisions must be interpreted objectively, similar to statutory regulations.
In practice, disputes often arise over questions such as:
Which periods of employment count towards severance pay?
What is the reference date for the calculation?
Are future periods to be taken into account, for example in the case of partial retirement?
What is meant by terms such as year of employment or completed year?
These issues can have a considerable financial impact, particularly when calculating severance payments in connection with partial retirement.
Calculation of severance pay for partial retirement and works agreement
It is precisely this problem that the Regional Labour Court Cologne dealt with. In the case in question, a works agreement stipulated that employees who decide to enter into a partial retirement agreement early would receive an additional severance payment. Among other things, this was to be based on a fixed amount „per completed year of employment“.
The employee was of the opinion that the years of partial retirement and the subsequent release phase should also be taken into account when calculating the severance payment. The employer, on the other hand, focused on the years of employment that had already expired by the time of the decision in favour of partial retirement.
The court followed the employer's opinion and clarified that the severance payment is not to be calculated on the basis of the entire duration of the employment relationship.
What does „completed year of employment“ mean for severance pay?
According to the court's decision, only those years of employment that have already been completed at the relevant point in time are completed. Years that lie in the future cannot be conceptually considered completed. This also applies if the employment relationship legally continues for many years, for example due to a partial retirement model.
The calculation of severance pay is therefore based on the date of the decision or application. Periods of employment after this date are not taken into account.
This interpretation results not only from the wording of the provision, but also from its purpose. The additional severance payment was intended to promote a quick decision by the employee and provide the employer with planning security. It was not intended as compensation for the subsequent loss of the job or for disadvantages under pension law.
Practical consequences for employees and employers
For employees, this case law means that higher severance payments cannot be demanded solely on the basis of a long remaining contract term. The decisive factor is what the works agreement actually regulates and which cut-off date is provided for the severance payment calculation.
The decision creates clarity and legal certainty for employers. It is permissible and practicable to calculate the severance payment as at the reporting date, provided that this results from the regulatory context of the works agreement.
Conclusion on the calculation of severance pay from works agreements
The calculation of severance pay in works agreements requires a precise analysis of the wording, the purpose of the provision and the overall context. Generalised assumptions or general rules of thumb are often misleading.
Particularly in the case of partial retirement arrangements, it is clear that terms such as „completed years of employment“ regularly only cover past periods. Anyone wishing to calculate, enforce or defend against severance payments should therefore have the actual basis of calculation checked at an early stage. In many cases, this can lead to considerable financial differences.
Source: Regional Labour Court Cologne
Important Note: The content of this article has been prepared to the best of our knowledge and belief. However, due to the complexity and constant evolution of the subject matter, we must exclude liability and warranty. Important Notice: The content of this article has been created to the best of our knowledge and understanding. However, due to the complexity and constant changes in the subject matter, we must exclude any liability and warranty.
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