The cancellation agreement

Regardless of whether employers want to give notice or whether employees are looking for a way to get out of an employment contract quickly: If the end of an employment relationship is imminent, a termination agreement can make sense.

So what exactly is a cancellation agreement and what do you need to bear in mind when signing one?

With a cancellation agreement, the employer and employee mutually agree to terminate the existing employment contract. In contrast to a notice of termination, this is not a unilateral declaration but a joint agreement. 

Good to know for employees

1.It's all about numbers - the severance payment

The core of the cancellation agreement is usually the agreement on a severance payment. 

A claim to a severance payment only exists in a few exceptional cases, so that the severance payment remains a question of negotiation

When negotiating the amount, it is particularly relevant what position the employee holds at the time. If all parties are aware that an unjustified dismissal would otherwise result, whose validity would be contested in court, the employer may be willing to increase the amount in order to avoid a lawsuit.

The “rule of thumb” of 0.5 gross monthly salaries x years of service is often used to determine the amount of severance pay. However, practice shows that many other factors play a role in negotiating the amount of severance pay, which must be taken into account.

Good negotiation pays off here.

2. Will you subsequently receive unemployment benefit?

It is worth knowing that a termination agreement could have a negative impact on your entitlement to unemployment benefit. Unemployment benefits may be blocked if the employment agency assumes that your unemployment was caused by you. This can be avoided by clarifying that the employer would have threatened to end the employment relationship even if a cancellation agreement had not been concluded. A clearly worded clause should be included in the termination agreement to avoid any subsequent problems.

Also, when agreeing a termination date, the effects with regard to claims at the employment agency must be kept in mind.

If the notice period applicable to the existing employment relationship is shortened as part of the cancellation agreement, this can also lead to a suspension of unemployment benefit. There is a risk of such a suspension if, for example, a notice period of six months applies, but the cancellation agreement specifies termination after three months.

At this point, you are advised to ask yourself whether there is a smooth transition to a new job or whether there will be a transitional period during which you can claim unemployment benefit.

3. Leave of absence

It is advisable to clarify whether you will be released from work until the termination date with continued payment of your salary. This is a common arrangement if there are still a few weeks to go before the termination date. In this context, it must be defined whether the leave of absence is revocable or irrevocable.

4. Remaining vacation

What arrangement should be made regarding your remaining vacation? Has this point already played a role in the severance payment?
The options range from payout of the remaining vacation days to compensation “in kind” in the event of irrevocable leave of absence.

5. Reference

Ensure in the contract that you receive a qualified reference and, if applicable, an interim reference, so that there is no room for disputes afterwards. However, a reference is of little use to you if it does not contain a good grade. It is therefore advisable to agree a good grade in the contract.

6. Extra payments

Are you entitled to special payments that could be lost as part of the termination? This should also be negotiated and included in the termination agreement.

7. Handing over tasks

It should be determined clearly which tasks still have to be performed until the termination date or, if applicable, until the release. It is also helpful to clarify which items are in your possession and should be returned in order to avoid unpleasant surprises afterwards.

The points listed are not exhaustive and may vary from case to case.

Have you been presented with a cancellation agreement? You are very welcome to contact me. I will advise you on the individual modalities and negotiate a termination agreement for you if you wish.