HR warning after German court ruling over excessive severance sum

The German Federal Court of Justice’s Criminal Senate (7-page / 151KB PDF, ruling in German) sentenced an HR manager to 10 months in prison after awarding a former employee with a tenure of 11 years a €264,800 severance payment, which was deemed excessive compared to their former salary of €45,100.

The court ruled it as a case of embezzlement, with the recipient of the payout also being found guilty of aiding and abetting and being fined by the court alongside being told to repay the severance sum.

Andreas Schöberle, an employment law expert with Pinsent Masons in Munich, said organisations should review and update their compliance policies for approving severance payments to establish clear lines of responsibility and analyse what is an acceptable amount.

“The recent verdict by the German Federal Court of Justice demonstrates that HR professionals and employees can be held criminally liable for approving or accepting excessive severance payments,” he said.

“The risk of granting excessively high severance payments arises particularly in the context of mass layoffs, so that in these cases criminal liability risks are especially present. To prevent criminal prosecution of responsible individuals and financial harm to the organization, compliance procedures must be implemented for the approval of severance agreements.”

“This is particularly relevant in complex corporations and groups, where the employer has powerful legal instruments at its disposal once such misconduct is uncovered. Employees with financial authority are not permitted to ‘gift’ public or company funds at their own discretion.”

“Severance payments must be legally and economically justified within the framework of labour law,” he said.

The ruling puts a spotlight on HR professionals in both public and private sectors, who may be held criminally liable for failing to provide appropriate justification for a disproportional severance payment.

Areas where exceptional severance payments could be made include exiting a strategically vital role in the organisation, an immediate economic need to terminate the role, or preventing reputational damage.

“The court’s decision is in line with an increased tendency of German courts to penalise the behavior of responsible HR managers and managing directors,” added Schöberle

“Besides the criminal conviction for an extensive severance payment, criminal charges can especially be relevant in case of the calculation of the remuneration of works council members, if the employer omits to claw back an unjustified remuneration payment to an employee or if the requirements for the engagement of external personnel such as independent contractors are not met.”