New Rules for Releasing Employees From Work in Germany

The Federal Social Court (Bundessozialgericht) clarified the impact of a release on social security in a decision made on 24 September 2008. This ruling addresses uncertainty created by an earlier decision of the court.

Prior to the September ruling, employees were reluctant to agree to be released from work duties during the notice period—fearing such an agreement might have a negative impact on their social security status.

It has now been clarified by the Federal Social Court that:

• An irrevocable release may indeed have a negative impact on unemployment insurance
• Coverage by the other social security insurances, including health and old-age pension will not be affected

In a 2002 ruling, the court held that employees were deemed to be unemployed once they agreed to be definitely and irrevocably released. The consequence of this ruling was that the time period for receiving unemployment benefits (generally, up to 12 months) began with the release rather than the end date of the contract. During release, however, employees continued to receive their salary from the employer. Therefore, the time period was in fact reduced by the time of the release.

Uncertainty arose because the court did not allude to the ruling's impact of a release on the other parts of the statutory social security insurances. The central organizations of the social security providers met to address this uncertainty—and determined the ruling did indeed extended to the other social security insurances.

As a result, membership (and coverage) in the health insurance, nursing care and old-age pension insurance ended if an employee agreed to be irrevocably released from work during the notice period.

The Federal Social Court did not agree with these views in its recent decision. It held that employees remain covered by the statutory health, nursing care and old-age pension insurance.

How does this ruling affect termination agreements? It removes one of the hurdles for employees to sign a termination agreement providing for an irrevocable release. It does not remove the negative impact of a release on the unemployment benefits situation, however.

While this may not be an issue for employees who are confident in finding new employment quickly, other employees may insist on a revocable release. Such a revocable release is less favorable for the employer since it does not allow outstanding holidays to be offset against the release period.

An employer who does not take care that all outstanding holidays are taken before the end of the employment might therefore have to pay twice—the salary during release and compensation for untaken holidays.