SALN #42: Keep these 6 things in mind if you get a severance offer

Reading time: 7 minutes 

Sales of cars, especially electric vehicles, are crumbling worldwide. High interest rates, energy costs, wage settlements and inflation in Germany are putting pressure on the results of manufacturers, suppliers and retailers. 

Jobs in the automotive industry will be reduced. This time, these are significant changes in structure and capacity adjustments. Therefore, it could affect you as well. 

In the financial crisis of 2008/2009 was affected by a dismissal for operational reasons. I was able to avert them. As an irony of fate, as a consultant, I successfully carried out staff reductions on the part of the company during this time. 

That’s why I would like to dedicate this issue of the newsletter to this topic and share my experiences.  

Because there is also something important to learn here. 

Important context for all non-European readers: For historical context, I recommend this article about the Rhine Capitalism, a specific German adoption of labor relations. Otherwise, the following might be confusing to you. 

In all cases, severance payments and dismissals come as a surprise to the affected parties. They’re like thunderstorms—they’re coming, but we try to ignore them. We hope they don’t hit us, that they pass by. But when thunderstorms, layoffs, and severance payments come, you are better prepared for them. 

Accept the situation. 

When costs rise, sales decline, and return expectations are firmly cemented, something must give way.  

Companies have little influence on interest rates, inflation, or energy costs.  

Entrepreneurs have a great deal of influence on their personnel costs. 

The capacities in the German automotive industry are too high.  

In 2017, car sales in Germany reached 3.6 million (in Europe 16 million). In 2022, it was 2.3 million (13.7 million). 2.2 million (13 million) are planned for 2024. The export surplus to China is already negative, i.e. the Chinese sell more cars in Europe than we do in China. 

Even if the press is still puzzling over the situation, the supertanker “German car industry” is clearly in trouble. The facts are clear. 

The industry needs to become smaller and reduce excess capacity. Every company in the automotive industry with a downsizing program is acting in a commercially responsible manner. 

These are the hard facts. “Hope for the best and be prepared for the worst” is currently the best maxim for anyone in the industry. It’s time to put on life jackets.   

It’s not personal. 

The offer to terminate the contract comes as a surprise to anyone attached to their job. It hits the good and the not so good. It affects beginners as well as old hands. 

You’re wondering: Why me? What did I do wrong? 

The answer is: nothing.  

But the environment has changed. The ship has turned over and needs to be righted again. In this situation, you are, first and foremost, a personnel file.  

Let me briefly explain how a mining program is created. 

“Profit and loss simulations” are created for mining programs. Depending on the assumptions, a distinction is made between “best case,”  “worst case,” and “realistic case.” 

At the beginning, a minimum threshold for profit is set. In an Excel spreadsheet or similar, the sales forecast is entered for at least three years. Subsequently, all current costs and investments are entered, with cost increase rates and depreciation.  

The Excel calculates how many costs need to be saved to achieve the profit target. This is the “tension”. 

Then the list of employees is taken, along with the personnel number, gross salary with all allowances, the number of years of service, social status or maintenance obligations (married, number of children, etc.) and age. In some companies, it is still noted how critical the employees are for continued operation. Names, for example, are unimportant. 

The content of this Excel list is brutal in its fact-orientation and deliberately impersonal. 

Whether you repeatedly pulled the potatoes out of the fire, inspired the team and delighted the customers in recent years is difficult to enter such an Excel. There is a good chance that many things that are important to us as human beings and who we are as people will fall by the wayside. 

It’s frustrating. But logical. 

This data can be used to calculate scenarios for saving on personnel costs.  

First, the severance pay is calculated (more on this in a moment). Then you can calculate how much personnel costs can be saved with a fixed severance budget. Employees with a long period of service and many children often have a high salary, but also must be compensated more expensively. Employees with a short tenure are often easier to get rid of, but they have fewer high salaries. 

The selection is based on criteria. It’s about righting the ship. 

Be prepared to act quickly. 

Employment law in Germany is (like most MADE IN GERMANY) very complex. That’s why you need the best employment lawyers to be able to enforce your interests in labor disputes. 

Labour judges know this. They tend to strike a balance of interests and tend to rule in favor of the economically weaker party, the employee. 

This is because employers hire the best large law firms, which are very intimidating. In addition, the programs are prepared for a long time and give the employer a time advantage. 

Good employment lawyers often work for large companies because their invoices are much larger than for an individual client. 

Due to the long-term preparation of the severance program and the commitment of the best lawyers, an information imbalance is created in favor of the employer. As an employee, you’re on the short end of the stick. 

But anyone can look for a lawyer who can win a lawsuit. The labor judges view the commitment to their own interests with benevolence. That is why the biggest bottleneck is to get high-quality employment law advice. 

A good employment lawyer significantly improves the negotiating position. Statements by the HR department such as: “This offer is only valid if you sign immediately and refrain from litigation” appear unfair and call for competent legal review. From a game-theoretic point of view , they are never the best offer for the employee, because the employer clearly plays the card of information asymmetries.  

This is because in the case of large severance programs, the HR department has an enormous complexity to manage (see the simulations above, plus the negotiations with the works council, etc.). In my experience, a good lawyer always finds points of contact and counterarguments and changes the information imbalance from a game-theoretic perspective.  

Avoiding the delay and a costly legal dispute is worth hard cash to the employer. He can recalculate this in the simulations. 

The rule applies: As soon as the thunderstorm approaches, and at the latest when the ship gets tilted, you should look for the life raft (= competent legal counsel, tax consultant and coach).  

By the time the offer is on the table, it’s too late.  

After all, when it comes to staff reductions in Germany, everyone who has an employment contract needs legal advice, a tax advisor and, ideally, a coach. 

A good deal is > factor 2. 

What the lawyer communicates is something like this (Attention: be sure to verify with a lawyer. This text is not legal advice): The law provides for a severance payment of half a month’s gross per year of service in the event of an operational dismissal.

This factor applies to everyone: small businesses with 80 employees, medium-sized companies with several thousand employees. But also, for the large corporation with over a hundred thousand employees. 

A monthly gross is calculated from all income plus benefits and allowances for one year and then divided by 12. 

Staff reductions are subject to approval.  

This means that the employer negotiates a “package” with the work council. The package’s most important parameter is the “factor” by which this monthly gross is multiplied to obtain the agreement of the works council and the employees to reduce the workforce.  

In the negotiation, the parties pursue different interests: 

• The employer wants to save as much as possible on personnel costs as quickly as possible while using the least amount of funds (severance payments). 
• The works council wants to represent the staff (especially the remaining ones) as well as possible and win many votes in the upcoming works council elections. 
• The employee either wants to keep their job or receive the best possible severance package. 

The factor depends on the size and economic power of the company. Usually, the factor is between 1.0 and 3.5 for large companies. This is difficult to verify, as this factor is kept secret. It depends on what the employer can currently afford, how strong the position of the workers council is and who negotiates better. 

The last resort, if an agreement is not reached, is mass labour court proceedings that drag on for several years.  

Against this background, any employee can also renegotiate his package if there is no agreement or if he or she does not agree with the result of the negotiations.  

Good legal counsel, including tax advisors, restores the balance of information. A clear personal goal makes it easier to identify risks and opportunities and leads to a superior negotiation strategy. 

Severance payments can be taxed over 5 years. 

An extraordinary payment entails a higher tax burden. The tax advisor can help you find a suitable strategy according to your professional plans and your personal situation. 

Suffice it to say that there is the possibility of “fifths“. To avoid the unfairly high tax burden, the legislator provides for taxation over five years. This is especially attractive if you don’t switch to a similar job. 

And here’s the catch—the real consideration that you should put a lot of time into. 

Take the chance to invest in your future.  

The severance pay is intended to compensate you appropriately for foregoing income that you thought was secure. You can use this money to reshape your professional career. 

This makes sense, especially if 

• If the changes in the automotive industry reduce your chances in your current profession in the medium and long term. 
• If you are sceptical about the economic future of your employer,. 
• If you draw a little joy and optimism from your current job,. 
• If you want to change or improve professionally, locally, in your health, in your family, or financially,. 
• If you feel too young for a passive retirement,. 
• If you want to fulfil a dream. 

The basic rule of investing is to only invest in something you understand. If you want to invest in your professional future, then it does not make sense to start a qualification. 

The best way to learn is through dialogue. That is why a coach can help you bring clarity to your professional and private plans. 

Or just reply to this email if you have any more questions.