In case an employer terminates business activities and does not pay the remaining due wages to workers, workers are entitled to receive financial insolvency compensation (Insolvenzgeld). The insolvency compensation is restricted: Compensation will only be paid for the three month prior to the opening of insolvency proceedings or the rejection of insolvency proceedings. In case the employment relationship between a worker and a company ended before that decision, workers are eligible to receive insolvency compensation for the three months before the termination of the employment contract. Redundant workers already receiving unemployment benefits are not entitled to receive insolvency compensation. An employer is considered insolvent if the company is definitely closed down, if there is a high probability that payment obligations cannot be settled at the due date, or if the assets are not sufficient to cover the company's debts. In this process, different actors have a duty to inform the affected workers: Workers must be informed by the works council (as stipulated by the Works Constitution Act in case of insolvency) and the employer or the responsible insolvency manager. 

The insolvency compensation comprises net wages including holiday remuneration, payment in case of illness, remuneration for overtime, travel costs, subsidies for maternity benefit, subsidies for voluntary health insurance, and capital-forming benefits, with certain maximum limits; income from a new employment contract or from self-employment during the 'insolvency income period' will be deducted. 

The compensation is covered by a centralised contribution system ('Insolvenzumlage') set up for potential claims of workers in the case of insolvency. The fund rests on monthly contributions by private employers (0.06% of the pay roll in 2020, 0.12% in 2021, 0,09% in 2022) which are paid alongside with social security contributions to the statutory health insurers. The insurers transfer the contributions to the Federal Employment Agency (Bundesagentur für Arbeit) that governs the funds. Private households, public employers, and public agencies/bodies exempt from the risk of insolvency do not have to contribute to this fund. For 2022, the insolvency compensation is capped at a wage level of €6,900 in Western Germany and €6,450 in Eastern Germany (for 2021:€7,100 in Western Germany and €6,700 in Eastern Germany).

All workers employed with private employers are entitled to this provision, including trainees, apprentices and home workers. The compensation is paid by the Federal Employment Agency.

Application for insolvency income has to be filed with the Federal Employment Agency within two months after the agency has attested the termination of business or the insolvency, otherwise the employee loses the entitlement.