Background: Employment is of great importance as it is associated with various positive effects. Individuals with severe mental illness (SMI) are often excluded from competitive employment. Current data on employment of individuals with mental illness are rare, and influencing factors are under-researched. The present study examines possible predictors of competitive employment among individuals with SMI. Methods: This was a cross-sectional and multicentered study of 300 individuals with SMI aged 18 to 65 years. The following inclusion criteria were used: (I) diagnosis of schizophrenia, schizotypal and delusional disorders (ICD-10 F2x), or affective disorders (ICD-10 F3x), (II) duration of psychiatric illness ≥ 2 years, and (III) substantial impact of illness on social functioning. Participants were interviewed by trained staff using standardised instruments. The relationship between potential predictors (age, sex, education, marital status, living situation, migration background, psychosocial functioning, age at first mental problem, physical illness, work ability) and employment was analysed using a hierarchic binary logistic regression model. Results: Only one-third (34%) of participants were competitively employed. Almost one-third were unemployed (30%), and 28% reported early retirement due to mental illness. Psychosocial functioning was positively associated with competitive employment (OR = 1.09, 95% CI: 1.05 – 1.13, p < 0.001); concurrent chronic physical illness was negatively associated with competitive employment (OR = 0.38, 95% CI: 0.21 – 0.71, p = 0.002). Conclusions: Findings confirm a high risk of exclusion from competitive employment among individuals with SMI. Nonetheless, a substantial proportion of individuals are employed. Findings call for efforts to maintain or enhance workforce participation among individuals with SMI. A special focus should be placed on improving physical health and strengthening psychosocial functioning. Trial registration: The study was registered in the German Clinical Trials Register (DRKS) under the registration number DRKS00015801 before the start of recruitment (Registration date: 21.02.2019).