Mutual Termination Agreements and Unemployment Benefits:
What You Need to Know

When Employment Relationships End

Not every employment relationship ends through a unilateral termination. Often, employers and employees opt for a consensual approach: the mutual termination agreement. What may seem like a good solution at first glance can have significant implications for unemployment benefits. Many employees sign such agreements without fully understanding the social security consequences.

In this comprehensive article from our Employment Law Firm, you will learn everything important about mutual termination agreements in connection with unemployment benefits: under what circumstances a blocking period is imposed, what exceptions exist, and how you can protect your rights.

Legal Foundations of Mutual Termination Agreements

Definition and Nature of Mutual Termination Agreements

A mutual termination agreement (also called a cancellation agreement or settlement agreement) is an arrangement between employer and employee through which the employment relationship is terminated by mutual consent. Unlike a termination notice, it is a bilateral contractual agreement. The mutual termination agreement is generally subject to freedom of contract according to § 311 of the German Civil Code (BGB) and is not bound to statutory notice periods or special termination protection.

Formal Requirements and Content

According to § 623 BGB, the mutual termination agreement must be in written form. This means it must be written down and signed by both parties in their own hand. An electronic form is not sufficient.

A mutual termination agreement typically contains the following provisions:

• The exact date of termination of the employment relationship
• The amount and due date of any severance payment
• The release of the employee for the remaining term
• The regulation of remaining vacation and overtime
• Issuance of employment references
• Return of company property
• Non-compete clauses and confidentiality obligations
• Settlement clause (mutual waiver of further claims)

Unemployment Benefits: Legal Basis and Eligibility Requirements

Unemployment benefit (ALG I) is an insurance benefit paid during unemployment. The legal foundations can be found in the Third Book of the German Social Code (SGB III).

General Requirements for Receiving Unemployment Benefits

To be entitled to unemployment benefits, the following requirements must be met:

1. Unemployment according to § 137 SGB III (employed less than 15 hours per week)
2. Registration as job-seeking and unemployed with the Employment Agency
3. Fulfillment of the qualifying period (at least 12 months of employment subject to social insurance contributions within the last 30 months)
4. Availability for the labor market (§ 138 SGB III)

The Blocking Period for Unemployment Benefits

A blocking period is a temporary exclusion from receiving unemployment benefits. The legal basis for this is § 159 SGB III. In the case of a mutual termination agreement, the blocking period due to job abandonment is particularly relevant.

According to § 159 Abs. 1 Nr. 1 SGB III, a blocking period occurs when the employee has dissolved the employment relationship or has given cause for the dissolution of the employment relationship through behavior contrary to the employment contract, thereby intentionally or through gross negligence causing unemployment.

The regular duration of this blocking period is 12 weeks (§ 159 Abs. 3 SGB III). During this time, there is no entitlement to unemployment benefits. In addition, the total duration of the entitlement is reduced by at least one quarter.

Mutual Termination Agreements and Blocking Periods: The Critical Connection

Fundamental Issue

A mutual termination agreement is generally viewed by the Employment Agency as a termination of the employment relationship by the employee, since the employee voluntarily agrees to the termination. This typically results in a blocking period for unemployment benefits.

Exceptions: When No Blocking Period Applies Despite a Mutual Termination Agreement

In certain cases, a blocking period can be avoided despite a mutual termination agreement. For this, an „important reason“ must exist:

1. Imminent Operational Termination

If the employer would otherwise have terminated the employment relationship through an operational termination, a blocking period can be avoided. The following requirements must be met:

• The employer must have concretely threatened an operational termination
• The termination would have been legally valid (not just an empty threat)
• Observance of the notice period in the mutual termination agreement

2. Compliance with the Notice Period

An important requirement to avoid a blocking period is compliance with the statutory or collective bargaining notice period. The employment relationship must not end earlier through the mutual termination agreement than it would have in the case of an ordinary termination by the employer.

If the employee agrees to an earlier termination, a blocking period usually applies for the period between the actual end and the fictitious end when observing the notice period.

3. Health Reasons

If there is a significant health impairment that makes continuation of employment impossible or considerably more difficult, this can be recognized as an important reason for concluding a mutual termination agreement. This usually needs to be documented through medical certificates.

4. Other Recognized Important Reasons

• Workplace bullying (if provable)
• Care for close relatives
• Relocation due to the need to care for close relatives
• Demonstrably unreasonable working conditions

Severance Pay and Its Implications

Legal Basis for Severance Pay

Severance pay is a one-time payment from the employer to the employee on the occasion of the termination of the employment relationship. A statutory entitlement to severance pay exists only in exceptional cases, such as under § 1a of the Protection Against Dismissal Act (KSchG) for operational terminations or in court settlements under § 9 KSchG.

In mutual termination agreements, severance payments are often freely negotiated to incentivize the employee to sign.

Severance Amount and Rule of Thumb

A common rule of thumb for calculating severance pay is: 0.5 monthly salaries per year of employment. However, this formula is not legally established and can vary depending on the industry, company, and individual negotiating position.

Tax Treatment of Severance Payments

Severance payments are generally subject to income tax but can be treated preferentially as extraordinary income under § 34 of the Income Tax Act (EStG) (the so-called one-fifth rule). This can lead to significant tax savings.

Severance Pay and Unemployment Benefits

A severance payment does not automatically lead to a blocking period for unemployment benefits. What matters is the reason for concluding the mutual termination agreement.

However, a severance payment can, under certain circumstances, trigger a suspension period for unemployment benefits. This is the case if the severance payment does not account for the statutory notice period and is paid to the employee for a period after the end of the employment relationship.

Practical Tips for Employees

Before Concluding a Mutual Termination Agreement

1. Don’t sign under pressure: Take time to review and don’t let yourself be pushed into an immediate signature.
2. Seek legal advice: Consult an employment law specialist to discuss the consequences and alternatives.
3. Check alternatives: Is an ordinary termination by the employee with subsequent shortening of the notice period possibly the better option?
4. Observe notice periods: Insist on observing the notice period in the mutual termination agreement.
5. Document important reasons: Collect evidence for an important reason (e.g., announcement of an operational termination, health problems).

After Concluding the Mutual Termination Agreement

1. Early registration with the Employment Agency: Register as job-seeking no later than three months before the end of the employment relationship (§ 38 Abs. 1 SGB III).
2. Anticipate blocking period: Plan financially for the case of a blocking period.
3. Appeal against blocking period notice: If you receive an unjustified blocking period notice, file an appeal within the deadline.
4. Secure evidence: Keep all relevant documents that can prove an important reason.

Checklist: Mutual Termination Agreement Without Blocking Period

✓ Is there an important reason (imminent operational termination, health reasons)?
✓ Is the important reason documented or stated in the agreement?
✓ Is the statutory or collective bargaining notice period observed?
✓ Is the termination date identical to the date in case of ordinary termination?
✓ Has an appropriate severance payment been agreed upon?
✓ Have tax aspects been considered for the severance payment?
✓ Was legal advice sought before signing?
✓ Have all aspects of the mutual termination agreement (vacation, overtime, reference) been regulated?
✓ Is timely registration with the Employment Agency planned?

Opportunities and Risks of Mutual Termination Agreements

The mutual termination agreement can be advantageous for both sides: It provides planning security, avoids lengthy legal disputes, and enables an amicable separation. For employees, severance pay can represent financial compensation for the loss of employment.

At the same time, the mutual termination agreement poses significant risks for the receipt of unemployment benefits. A potential blocking period of up to twelve weeks can considerably strain the financial situation. Additionally, the total duration of unemployment benefit entitlement is reduced.

The decision for or against a mutual termination agreement should therefore be well-considered and accompanied by expert legal advice. With careful planning and knowledge of the legal framework, the advantages of the mutual termination agreement can be utilized while minimizing the disadvantages.