For the employer, it is much easier to terminate the employment relationship by settlement agreement than by dismissal, because almost all provisions protecting employees in case of a dismissal are not applicable in case of a settlement agreement.

However, in most cases, the employer pays for this advantage with a severance payment, since no severance payment is due in case of dismissal.

For the employee, a settlement agreement can be an advantage, if he is able to negotiate a severance payment. In case he wants to leave for a new job, he is not forced to observe the notice period. However, the employee can suffer disadvantages concerning tax, pensions and unemployment benefits. Examples:

If the termination date of the settlement agreement does not comply with the notice period of the employer and the employee is entitled to a severance payment, unemployment benefits commence not until the notice period of the employer expires. In the meantime (between termination date of the settlement agreement and expiring date of the notice period), the employee is not protected by the health insurance unless he becomes a voluntary member on his own costs.

If the employee receives a payoff for the holidays he could not take before termination date, he will not receive unemployment benefits for the same number of days following termination date, i.e. the unemployment benefits start later.

In case of a settlement agreement, unemployment benefits are blocked for 12 weeks (basically), unless the employee had a good cause to quit his job by signing the agreement. He’s only allowed to get unemployment benefits, if it was not reasonable to stay in his old job. Examples:
•    He suffered harassment at work.
•    He wants to move to his spouse who lives in another town.
•    The employer would have dismissed him anyway.
Due to the blocking period of 12 weeks, the duration of unemployment benefits is shortened, i.e. the employee loses money. In exceptional cases, the blocking period can be reduced to three or six weeks with the effect that the duration of the unemployment benefits is not shortened.

A short blocking period is also possible, if the employee did not notify the unemployment agency of the termination in due time.