Germany: Payment for reduction in working hours similar to redundancy payment

January 3, 2010

A payment by an employer to an employee as compensation for a
reduction in the employee’s weekly working hours, for an indefinite
period, is classed as a redundancy payment and therefore afforded
favourable tax treatment

A change of weekly working hours for an indefinite period is
treated by the courts as a dismissal with the option of an amendment to
the conditions of employment, provided the change is imposed by the
employer.  For any such payment from the employer to the employee to
qualify as a redundancy type payment, it must be higher than the
pre-existing salary entitlement, such that it has a compensatory element
to it.


A special calculation is undertaken for redundancy payments called
“Fünftelregelung” to determine the applicable tax rate. In many
situations, the result is that such a payment is charged to tax at a
lower rate than if it were normal salary.

Employers should be aware of the beneficial tax treatment afforded
to such payments when they are considering the restructuring of
employment relationships in these circumstances.


German Federal Finance Court: Decision dated 25.08.2009 (IX R 3/09)

For further information or to discuss any of the issues raised,
please contact Joachim Menz (
on +49 89 24 22 30 0.

This article was produced by, and re-produced with kind permission
of, our correspondent firm in Germany, Keller Menz Rechtsanwälte.

Keller Menz


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