Terminating an Employee in Germany: The Steps and How Severance Is Calculated

The surprising thing about ending an employment relationship in Germany is that the country has some of the strongest dismissal protection in Europe and, at the same time, no automatic right to severance. Those two facts sound contradictory, but together they explain how German terminations actually work. Because a dismissal is hard to impose and easy for the employee to challenge in court, most exits are settled rather than litigated, and the severance amount comes out of that negotiation, not a statutory formula. So the practical question in Germany is rarely what statutory severance applies, but what the case will settle for and how fast. The sections below work through the grounds for dismissal, the procedure, and the money.

When dismissal protection applies: more than 10 employees and 6 months' service

The core statute is the Dismissal Protection Act (Kündigungsschutzgesetz, KSchG). It applies once an employer has more than ten employees and the worker has been there more than six months. Below either threshold, an employer can dismiss with the correct notice and without giving a reason. Above both, a dismissal has to be "socially justified," which means it fits one of three grounds and follows the right process.

The three grounds are conduct (misconduct, or poor performance after warnings), person-related (for example long-term illness or the loss of a qualification the job requires), and operational (redundancy from restructuring or a closure). Each has its own requirements. A conduct dismissal almost always needs a prior written warning (Abmahnung) for the same kind of behavior, so the employee had a chance to correct it first. An operational dismissal requires social selection (Sozialauswahl): among comparable employees, the employer must choose who to let go using four social criteria (length of service, age, dependents, and disability), not simply who it would prefer to keep.

There is also the immediate dismissal (fristlose Kündigung) for gross misconduct, which ends the contract without notice. This route has a strict deadline: the employer must act within two weeks of learning of the cause, after which immediate dismissal is no longer available.

Two steps that void a dismissal if skipped: works-council consultation and a signed paper notice

Two procedural rules void a dismissal outright if either is missed, no matter how strong the reason, so they are the first things to get right.

If the company has a works council (Betriebsrat), the employer must consult it before issuing any dismissal, giving the reasons and waiting for its response. A dismissal delivered without consulting the works council is simply void, no matter how good the underlying reason.

And every dismissal must be in writing, on paper, with a handwritten signature. Germany specifically excludes email, PDF, and electronic signatures here, so a notice sent by email is not a valid dismissal.

Notice periods that lengthen with tenure

For an ordinary dismissal, the statutory notice begins at four weeks (to the 15th or the end of a calendar month) and lengthens with the employee's tenure: one month after two years of service, two months after five, three after eight, and so on up to seven months after twenty years. During the probationary period, notice is two weeks. A contract or collective agreement can set longer notice, but never shorter.

Why most dismissals settle, and the half-month-per-year benchmark

Here is the mechanism that drives German terminations. When an employee is dismissed, they have exactly three weeks to file a dismissal-protection claim (Kündigungsschutzklage) in the labor court. Miss the three weeks and the dismissal stands. File in time, and the employer faces a case in which it must prove the dismissal was socially justified, with the risk that the court orders reinstatement plus back pay for the entire time the case took.

Neither side usually wants that outcome, so most claims settle, and the settlement is a severance payment in exchange for the employee dropping the case. The rule of thumb that German labor courts use, and that negotiations anchor to, is half a month's gross salary per year of service. For an employee of ten years on €5,000 a month, that is 0.5 × €5,000 × 10 = €25,000. The half-month multiplier is only a starting point: a weak dismissal can raise the settlement toward a full month's salary per year of service, a strong one toward a quarter of a month, and senior roles negotiate their own figures.

There is also a statutory shortcut. Under KSchG §1a, an employer dismissing for operational reasons can offer severance of half a month per year of service in the dismissal letter, on the condition that the employee does not sue. If the employee lets the three weeks pass, they keep the money and the matter is closed. In a collective redundancy, the severance terms are negotiated with the works council in a social plan (Sozialplan).

Mutual termination and the unemployment-benefit blocking period

An employer can also end the relationship by mutual agreement (Aufhebungsvertrag), which is often faster and skips the works-council step. The agreement has to be in writing with a handwritten signature, like any termination. One consequence falls on the employee and shapes the negotiation: signing a mutual-termination agreement usually triggers a twelve-week blocking period (Sperrzeit) on unemployment benefit. Employees know about that blocking period, so avoiding it tends to raise the severance an employer has to offer for a clean, agreed exit.

Final pay and accrued holiday

Whatever the route, the employer owes the final pay on exit: salary to the last day, any overtime balance, and a payout for accrued but untaken annual leave (Bundesurlaubsgesetz §7(4)), pro-rated for a partial year. A fixed-term contract simply ends at its term with no severance, unless the contract allowed earlier ordinary termination.

How severance is taxed: income tax yes, social contributions no

A severance payment (Abfindung) is fully subject to income tax as employment income. It is not subject to social security contributions, because it compensates for the loss of the job rather than for work performed, which saves both the employer and the employee the contributions they would otherwise owe on a large payment. German tax law softens the income-tax hit with the "one-fifth rule" (Fünftelregelung), which calculates the tax as if the payment were spread over five years, reducing the top rate applied to it. One change to note: since 2025 the employer no longer applies the one-fifth rule in payroll; the employee claims it on their annual tax return instead, so the payslip shows the full withholding and the employee recovers the relief later.

What decides the amount, and what decides legality

Put the pieces together and the logic is consistent. There is no automatic severance, but strong dismissal protection, a works-council veto over the process, a strict written-form rule, and a three-week litigation clock together mean most dismissals end in a negotiated payment anchored to half a month per year of service. The figures that decide the final amount are the employee's tenure and salary; the things that decide whether the dismissal is lawful at all are the grounds, the warning or the social selection, the works-council consultation, and the signed paper notice.

Day to day, the payroll work here is calculation: the notice period for a given tenure, the payout for accrued holiday, and the income tax on any severance under the one-fifth rule, with the severance kept out of the social-contribution base so a large payment is not over-deducted. Flux does that arithmetic correctly, every time.