Severance agreement: payment and garden leave

What is a severance agreement?

A severance agreement (fratrædelsesaftale) is a written agreement between an employer and an employee to end an employment relationship on special terms. Unlike a unilateral dismissal, the severance agreement is a negotiated compromise that typically involves a severance payment, garden leave and an agreement that the employee will not challenge the dismissal.

Severance agreements are especially relevant when:

• The employer wants a quick and smooth ending
• The employee has strong cards in hand (for example the ability to claim unfair dismissal)
• The parties want to avoid a potentially lengthy dispute

When is a severance agreement used?

Severance agreements are typically used in the following situations:

• Dismissals: when the employer wants to dismiss without the risk of a subsequent claim for compensation for unfair dismissal
• Restructurings: on cutbacks and organisational changes, where the aim is to preserve a good reputation as an employer
• Cooperation problems: when the relationship has broken down and both parties want a quick ending
• Management changes: on the departure of directors, managers and key people

Severance payment: what can you expect?

A severance payment is the compensation the employee receives for accepting the severance agreement. There is no statutory minimum payment on a negotiated departure, the amount is freely agreed.

In practice the payment is based on:

• Seniority: the longer the employment, the higher the payment
• Salary level: typically calculated as a number of months' salary
• The strength of the case: if the dismissal is weakly justified, the employee's bargaining power rises
• Industry custom: certain industries have informal norms for payment levels

Special severance pay under the Salaried Employees Act

Salaried employees with long seniority are entitled to a special severance payment under section 2a of the Salaried Employees Act (funktionærloven), when the employer dismisses them:

Seniority at dismissal	Payment
12 years	1 month's salary
17 years	3 months' salary

Note that the former middle rate (2 months' salary after 15 years) was repealed by a legislative amendment in 2015. The right to a payment under section 2a does not lapse automatically on a severance agreement, unless it is expressly included in or waived as part of the overall agreement.

Garden leave vs. suspension

Two concepts that are often confused:

Garden leave (fritstilling)

Under garden leave, the employee is released from the duty to attend and work during the notice period but continues to receive pay. The employee can take up a new job during the period, but under the Salaried Employees Act the employer can set off part of the new salary against the pay during the garden-leave period (under the more detailed rules of section 3 of the Salaried Employees Act).

Suspension

Under suspension, the employee is temporarily released from performing work but still has their obligations under the employment relationship, including the duty of loyalty, and may not take other work. Suspension is typically used during the investigation of serious matters.

Confidentiality and non-compete clauses

Severance agreements often contain:

• A confidentiality clause: the parties agree to keep the content of the agreement and the circumstances of the dismissal secret
• A non-disparagement clause: the employee (and possibly the employer) undertakes not to speak negatively about the other
• A non-compete clause: if one has not already been agreed, it can be incorporated into the severance agreement. If the employee is an employee (lønmodtager), the rules of the Employment Clauses Act apply (including a requirement of compensation and a maximum duration)

A confidentiality agreement can be attached as an appendix.

What must a severance agreement contain?

A complete severance agreement should contain:

1. The parties' names and job title
2. The departure date, precisely stated
3. The garden-leave period, if relevant
4. The severance payment, amount and payment
5. Holiday and holiday pay, accrued and planned holiday
6. Return of equipment, laptop, mobile phone, keys
7. Confidentiality, the terms of secrecy
8. Final settlement, the full and final conclusion of the parties' claims
9. A reference letter, any agreement on the content
10. Signature by both parties with a date

Tax matters

Severance payments are as a rule taxable. However, the first DKK 8,000 is tax-free under section 7 U of the Tax Assessment Act (ligningsloven), if it is a payment in connection with departure and the conditions of the provision are otherwise met.

A special severance payment under section 2a of the Salaried Employees Act is taxable as personal income.

What are the consequences for unemployment benefit?

If an employee enters into a severance agreement, the unemployment fund (a-kasse) may, depending on the circumstances, assess that there is self-inflicted unemployment, which can have consequences for the right to unemployment benefit:

• Self-inflicted unemployment: can lead to a 3-week quarantine (and, on repetition, stricter consequences)
• Dismissal by the employer: as a rule no quarantine, but benefit can only be paid once the notice period and any paid garden-leave period have expired

Always contact your unemployment fund before you enter into a severance agreement, so you know the consequences for your benefit.

Create severance documents with LegalDock

With LegalDock you can easily create legally correct employment and severance documents, so that all terms are correctly documented and both parties are protected from day one.

Frequently asked questions

Can the employee withdraw from a severance agreement?

No, a severance agreement is binding once it is signed by both parties. There is no statutory right of withdrawal for agreements in employment relationships. For the same reason, you should always seek advice, for example from your union, before signing.

What is the difference between a severance agreement and a dismissal?

A dismissal is unilateral and can be challenged. A severance agreement is bilateral and typically involves the employee waiving the right to bring a claim for unfair dismissal. In return, the employee normally receives a payment.

Can you agree more than 3 months' severance pay?

Yes, the parties can freely agree a higher payment than the Salaried Employees Act prescribes. There is no upper limit for the agreed severance payment.