If an employer wishes to end an employment relationship, it can do so either by terminating the employee and trying to conclude a so-called settlement agreement or by trying to conclude a mutually acceptable severance agreement with the employee. An employee will generally only come to terms with an employer on a severance agreement or settlement agreement if the employer agrees to pay an acceptable termination payment. Please note the difference between a "severance agreement" (Aufhebungsvertrag) and a "settlement agreement" (Abwicklungsvertrag). A severance agreement is an agreement concluded between the employee and the employer whereby they mutually agree that the employment relationship will end and, as a result, the employer will not need to issue a notice of termination. A settlement agreement is also concluded between the employee and the employer, but only after the employer has already issued a notice of termination. The settlement agreement generally sets forth that the employee accepts the termination and also any compensation the employer will pay to the terminated employee.
In the past, the termination and settlement agreement combination was often preferred by the employee since the labor agencies always interpreted the other alternative, i.e., the conclusion of a severance agreement, as a situation where the employee voluntarily quit his job and, therefore, the employee was subject to an initial suspension of unemployment benefits for 12 weeks, such initial suspension to be credited toward an overall 25 percent reduction of the period during which the employee could receive unemployment benefits. A settlement agreement with an employer would typically not lead to the initial suspension of unemployment benefits for the employee.
However, the Federal Court for Social Matters recently opined that concluding a settlement agreement also generally constitutes quitting a job. By signing a settlement agreement, according to the court’s reasoning, the employee is actively participating in ending the employment relationship. The time period for this active participation — whether by arrangement with the employer before the employer issues a notice of termination, by concluding a severance agreement or by concluding a settlement agreement after the employer issues a notice of termination — is not the determinative factor.
Nevertheless, the court also insinuated that an employee may not have quit a job (and thus is not subject to the initial suspension of unemployment benefits) if, without a prior arrangement between the parties, the parties conclude a settlement agreement after the expiration of the statutory three-week period to challenge a termination or during the proceedings before a labor court. Employers should be aware that as a consequence of this decision by the Federal Court for Social Matters, well-informed employees will always challenge their terminations before court and reject any proposed settlement by the employer made prior to the expiration of the three-week period or outside of court proceedings unless the employer is prepared to compensate the employee for the fact that the employee’s unemployment benefits may be suspended. Of course, employers will continue to terminate employees just like in the past. However, employers should not assume that an employee is not willing to resolve the termination just because the employee filed an action challenging the termination. The employee’s challenge may be nothing more than an effort not to jeopardize his full unemployment benefits.
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