This article explains the legal basis for terminating an employment relationship, the associated reporting requirements, and how to handle payments after termination Personio Payroll.
What is the termination of an employment relationship?
An employment relationship doesn't just end with a dismissal. Other reasons for termination may include:
- the death of an employee
- the expiry of a fixed-term employment contract
- a termination agreement
- a challenge to the employment contract
- a court settlement in the dismissal protection process
The relevant regulations for terminating an employment contract are primarily found in the Civil Code (BGB) and the Dismissal Protection Act (KSchG).
Employment relationship and employment relationship under social security law
The employment relationship in the sense of employment law and the employment relationship in the sense of social security law do not necessarily have to coincide in terms of time. The employment relationship generally ends when the willingness to work ceases to work and the expiry of the right to issue instructions in accordance with Section 7 SGB IV.
An irrevocable exemption from work generally does not result in an early termination of the insurance obligation. In this case, the employment and employment relationship end at the same time. If an employment relationship is extended retrospectively as a result of a court settlement, the insurance obligation also remains in place provided that remuneration is paid up to the agreed termination and the willingness to work has been signaled to the employer.
Reporting requirements upon termination
When an employment relationship is terminated, there are both payroll tax and social security reporting requirements.
Income tax (Lohnsteuer)
In the case of payroll tax, in accordance with Section 39e (4) sentence 5 EStG, the date of termination must be transmitted electronically and immediately to the ELSTAM database at the Federal Central Tax Office by the employer. In addition, after termination of the employment relationship in accordance with Section 41b EStG, an income tax certificate must be submitted electronically to the relevant tax office.
Social insurance
In social security, deregistration from the responsible health insurance company is made with the next payslip, but no later than six weeks after termination of employment.
A table with common reporting reasons can be found in our article on the topic.
manage termination of an employment contract in Personio Payroll
End employment
If the employment relationship has ended, the corresponding date must be stored in the employee profile. This applies regardless of the type of employment relationship. Without this date, the employment relationship remains marked as active even though an contract expired has been defined.
For more information on how to end an employment relationship, read our article on the topic.
The termination date has a direct effect on payslip. If it is within a billing month, Personio Payroll automatically calculates the fee and some recurring payments on a pro-rated rata basis based on the saved settings. For more information on the pro rata salary calculation, see our article on the topic.
Checklist for payslip upon termination
For a correct payslip for the last month of employment, you should check the following points for each employee whose employment contract is ending:
- Is the termination date correctly stored so that remuneration and compensation components are automatically calculated on a pro-rated rata basis?
- Has the type of termination been correctly recorded, as this information may have to be submitted to the Employment Agency?
- Has the entitlement to remaining vacation been checked and, if necessary, recorded as vacation compensation via a one-off payment?
- Have outstanding bonuses, commissions and other compensation components been fully recorded for the last billing month?
- Have all automatically triggered reports, such as the ELSTAM deregistration, DEÜV reports or the payroll tax certificate, been created in the compliance?
Payments after termination
When are payments made after termination?
Payments after termination are made when an employee who has already left is entitled to salary retrospectively. Typical examples include:
- subsequent salary adjustments
- Bonus
- commissions
- Compensation for remaining vacation
- Severance payments
Effects on income tax and social security
Tax treatment: current wages and other benefits
For payroll tax, there are two types of payments after termination:
- Current pay (such as the adjustment of a salary payment for a previous month): The ELSTAM features that were valid at the end of the previous respective billing period apply here. It is not necessary for the employee to register again, as the tax data for this time period is already available.
- Other payments/one-off payments (e.g. severance payments or subsequent bonuses): The ELSTAM data that is valid at the end of the inflow calendar month apply here.
As soon as the ELSTAM deregistration for the departed employee has been processed successfully, Personio Payroll automatically applies tax class VI to other payments from the day following the termination date. If a payment has already been calculated with a lower tax bracket after the expiration termination date, Personio Payroll automatically recalculates it using tax class VI. You can manually customise the tax bracket at any time, which may trigger a new calculation.
The basis for allocating wages over time is the inflow principle in accordance with Section 11 (1) EStG. In principle, income is taxed for the calendar month or year in which it actually accrues to the employee.
For current wages, there is generally a legal exception under Section 38a (1) sentence 2 in conjunction with Section 11 (1) sentence 4 EStG. It is valid at the time, based on the end of the respective payroll period for which it is paid. This also applies to back payments of current wages.
There is no such exception for other remuneration. Since these payments are not attributable to a fixed payroll period, the inflow principle continues to apply. The point in time at which the payment actually flows in is therefore decisive, even if the employment relationship has already ended.
Social insurance-related treatment
In the case of payments after termination, it should be borne in mind that the contributory portion may differ depending on the month of allocation and type of insurance. We recommend that you carefully review the pro rata contribution assessment limits in the allocation month, in particular in the event of a change of employer or a change in insurance status.
In the case of one-off payments such as bonuses or severance payments, it must also be checked whether the so-called March clause applies. It determines which calendar year the social security contributions of a one-off payment paid in the first quarter are to be attributed: If the pro rata annual contribution assessment limit has already been exhausted in the current year, the allocation is made instead to the last contributory time period of the previous year.
If the March clause applies, Personio Payroll marks the relevant billing month with a “V” note on the payslip to make the retroactive allocation transparent. DEÜV notifications to social security institutions are updated accordingly.
manage payments with Personio Payroll
Handling in Personio Payroll
In Personio Payroll, the following principle applies to these payments:
- The effective date of a payment must reflect the time period in which the payment would originally have been due, not when it was processed.
- This allocation determines how the payment is treated under social security and tax law and which regulatory reports are triggered as a result.
- Back payments for hours already worked are not considered a one-off payment and are therefore not subject to the so-called March clause.
We recommend that you carefully check the effective date for every payment made after termination, as incorrect allocation can affect the calculation of social security contributions and payroll tax.
For more information on how to enter a payment in Personio Payroll, see our articles on the topic.
Retroactive changes
Retrospective changes concern any update of payroll-relevant employee data for a time period of time that has already been processed and approved, including amendments during the year and across the year. A detailed explanation, specific examples and the effects on reports can be found in our article on the topic.
Personio Payroll then automatically updates the affected reports, including payslip, payroll tax certificate, and DEÜV reports.
Critical restrictions on retrospective payments
For payments made after termination that only arise significantly later, for example after the conclusion of a legal dispute, we recommend that you review the following restrictions at an early stage:
- According to previous experience, retrospective amendments in Personio Payroll are only possible up to a certain period of time in the past, usually up to January of the previous year or around 24 months retroactively. For older periods, we recommend that you contact Payroll Support early on.
- According to Section 26 SGB IV, unjustly collected social security contributions that are older than three months can no longer be claimed by the employee in certain cases, in particular if the employer is responsible for the delay.
- Interest on arrears or compensation components from a legal dispute is not a standard wage type in Personio Payroll and must be entered as a manual one-off payment. Whether they are subject to social security and tax depends on the legal nature of the payment. If in doubt, we recommend that you clarify this with a wage expert.
FAQ
What happens if no termination date is entered?
The employment relationship remains marked as active in Personio Payroll even though the contract has ended. Salary and absence timeline are then not automatically prorationalized.
Do I have to re-register a former employee for a payment after termination?
This depends on the individual case, primarily on whether there is already a new employment relationship with another employer. We recommend that you clarify this with your tax advisor.
Does the March clause also apply to vacation compensation?
Vacation compensation counts as a one-off payment and may therefore be subject to the March clause.