Before 2003 an employer had to pay severance to employees whose employment contracts have been terminated (depending on the reason of termination). For employment relationships which commenced from 1 January 2003 or thereafter, the new system applies. The employer is no longer obliged to pay severance; he has to transfer 1.53 % of the monthly salary to an employee provision fund (Mitarbeitervorsorgekasse) instead.

The benefit of this system for the employees is that even in cases where they receive no payment (for instance termination by the employee) the amounts paid remain in the fund, and are paid out at a later stage – upon retirement the latest.

Employees, who have been employed prior to 2003, can sign a written agreement with their employers to change to the new system. This can be done by a so called “full transfer” or “partial transfer”.

In case of a partial transfer all entitlements until the day of transfer will be “frozen” and the old system still applies for these entitlements. As from that day onwards however, contributions are paid to the employee provision fund and the new system applies.

In case of a full transfer, employer and employee agree on a transfer amount, which is then transferred to the employee provision fund. This amount should however not be less than at least 60% of the actual entitlement for severance according to the old system at that date.

No taxes, social insurance contributions or other ancillary labour costs become due in this regard (if the amount paid does not exceed the actual entitlement for severance according to the old system at that date).

For the agreement on a partial transfer the law does not stipulate a term; with regard to the full transfer however, an agreement will only be possible until the end of December 2012.