Easier termination of high earners
Perhaps the most eye-catching proposal is the planned introduction of a new termination mechanism for high-earning employees. From 1 January 2027, the government intends to extend a concept currently found only in the financial services sector to the wider labour market. Employees earning more than 1.75 times the annual contribution assessment ceiling for statutory pension insurance could become subject to a new mechanism allowing employers to terminate the employment relationship by paying severance.
If implemented, this would represent a fundamental change to German employment law. Under the current legal framework, employees who have completed six months’ service in an establishment employing more than ten employees generally benefit from protection under the German Dismissal Protection Act. This means that an employer may only terminate employment if it can establish a legally recognised reason for dismissal, such as conduct, capability or genuine operational requirements.
Unlike in some other jurisdictions, German law does not generally allow employers to terminate employment simply by paying compensation. Outside the existing rules for certain “risk takers” in the financial services sector, an employment relationship can currently only be ended by agreement if no valid ground for dismissal exists. Where an employer unsuccessfully defends a dismissal before the labour courts, the consequence is generally that the employment relationship continues and the employee must be reinstated rather than receiving compensation instead. The proposed reform would therefore create, for the first time, a statutory mechanism enabling employers to unilaterally terminate certain employment relationships without relying on one of the traditional dismissal grounds, provided that the statutory severance requirements are met. The precise design of this mechanism will be closely watched.
Greater flexibility for fixed-term employment
The coalition also proposes a substantial relaxation of Germany’s rules on fixed-term employment. Under the current legal framework, fixed-term contracts without objective justification are generally limited to two years and may only be extended three times during that period. In addition, they are generally not permitted where the employee has previously been employed by the same employer.
The reform would significantly expand this flexibility. For employees hired until 31 December 2030, fixed-term contracts without objective justification would be permitted for up to 48 months, with up to six extensions. The proposal would also allow a renewed “first-time” employment relationship with the same employer, thereby relaxing the current prohibition on previous employment.
In addition, as already announced in the coalition agreement, the statutory written-form requirement for fixed-term employment contracts is expected to be abolished from 1 January 2027. For many employers—particularly international organisations accustomed to digital onboarding processes—this would remove one of the last significant formal hurdles in German employment law.
Stricter rules on sickness absence
The reform package also addresses one of the most widely discussed employment topics in Germany: persistently high sickness absence levels. The coalition intends to abolish telephone sick notes and require employees to submit a medical certificate from the first day of sickness absence. It also plans to increase criminal sanctions for the incorrect issuing of medical certificates.
If implemented, these measures would tighten the current sickness certification regime and respond to the ongoing debate among employers about rising sickness absence rates and potential misuse of the existing system. Employers may therefore welcome the proposals as providing greater certainty in the management of short-term absences.
Other employer-relevant proposals
The package also contains a number of additional measures that may be of interest to employers. These include preferential tax treatment for severance payments where employees move quickly into new employment, higher tax thresholds for Sunday and public holiday supplements, strengthened support for job-to-job transitions through the Federal Employment Agency, and a planned dialogue with the social partners on allowing collective bargaining agreements greater flexibility to deviate from statutory employment law in certain areas, including fixed-term employment and occupational health and safety. The coalition has also announced broader plans to reduce bureaucracy, simplify data protection requirements and facilitate the introduction of new technologies in the workplace while respecting German works council co-determination rights.
What happens next?
At this stage, none of these proposals is yet law. They form part of the coalition’s political reform programme and must now be translated into draft legislation by the responsible ministries. The resulting bills will need to pass through the ordinary legislative process.
Given the potential significance of these reforms, businesses with operations in Germany should monitor the legislative process closely and begin considering how the proposed changes could affect recruitment, workforce planning, restructurings and absence management if they are ultimately enacted.
