Germany: Planned Significant Changes to German Employment Law

In brief

Compared to many other countries, Germany has rather strict labor and employment laws. The current government has just announced plans to make employment law more flexible through comprehensive changes. Among other things, these plans include:

• Allowing fixed-term employment contracts more frequently and for longer periods
• Enabling employers to terminate the employment of "high earners" in exchange for a severance payment, even without a specific reason
• Tightening the requirements for employees to take sick leave
• Making it easier to implement and update software in companies with a works council.

Against this background, employers should already assess how they can best benefit from the new regulations, for example with regard to employment contracts and proceedings in case of terminations. However, it should be noted that the plans still need to be approved by parliament and implemented into law. Changes to the plans are therefore possible.

Key takeaways

• For employees hired until 31 December 2030, it is planned that fixed-term employment contracts without objective grounds will be permitted for a maximum duration of up to four years and may be extended up to six times. This would provide additional flexibility for employers and is particularly helpful for companies that rely on such flexibility, such as start-ups.
• For high earners, it is planned to introduce a regulation effective 1 January 2027 that allows termination of the employment relationship in exchange for a severance payment. Even if a court does not consider the termination to be socially justified, this instrument would still allow the employment relationship to be terminated. This creates a promising tool in termination proceedings involving employees with high income.
• Other planned changes, such as stricter rules for employees taking sick leave, tax advantages for severance payments also appear attractive for businesses in Germany.
• Even though the resolutions of the coalition committee must still be approved by parliament, the plans are already quite tangible. The likelihood of approval is increased given that the proposals are the result of negotiations between the coalition parties.
    

In more detail

More flexibility for fixed-term contracts:

• For employees hired until 31 December 2030, it is planned that fixed-term employment contracts without objective grounds will be permitted for a maximum duration of up to four years – rather than the previous two years – and may be extended up to six times, instead of the previous limit of three extensions. In this context, it will also be possible to rehire an employee by the same employer for the first time.
• The current written form requirement for fixed-term employment contracts will be abolished as of 1 January 2027.

New termination option for high earners:

• For high earners, it is planned to introduce a regulation effective 1 January 2027, which allows for the termination of the employment relationship in exchange for a severance payment.
• The regulation is intended to be modeled on the risk-bearing rules in the financial sector. Under these rules, when terminating risk-bearers at major financial institutions, the employer may file a petition to dissolve the employment relationship if a court deems the termination unlawful. Unlike with regular employees, the employer is not required to provide justification for this petition. The labor court then terminates the employment relationship at the employer's request, and the employee loses their job but receives a severance payment determined by the court.
• It is planned that employees with annual income exceeding 1.75 times the basic pension threshold will be covered. This threshold currently amounts to EUR 101,400 gross per year. Applying a factor of 1.75 would, for example, mean that employees with annual income exceeding EUR 177,450 would be covered. However, as the basic pension threshold is expected to increase by several thousand euros by 2027, the threshold for the new termination option can be expected to exceed EUR 180,000.

Stricter rules for cases of employees who call in sick:

• The submission of a medical certificate from the first day of illness will be required. Previously, this was only required by law if the illness lasted longer than three calendar days. However, provisions more favorable to the employee may be agreed in the employment contract, a works agreement, or a collective bargaining agreement.
• Sick leave certificates issued by telephone, which were previously permitted, will no longer be allowed.
• It is planned that the improper issuance of a certificate of incapacity for work will be subject to stricter penalties.

Measures against unemployment:

• To encourage a swift transition from one job to the next, severance payments will receive tax benefits if the individual promptly takes up new employment. The tax benefit increases the sooner new employment is secured.
• Through the use of tools such as labor market hubs, the Federal Employment Agency will help prevent unemployment and support the transition from one job to another. With new instruments – such as trial employment opportunities and enhanced support for further vocational training in transfer companies – the Federal Employment Agency will be better equipped to facilitate structural transformation and provide targeted support to affected employees.

Plans for easier software implementation and updates in companies with a works council:

• Currently, IT- and AI-related processes are often subject to co-determination, which can lead to time-consuming and costly negotiations with the works council.
• To support companies in implementing AI in their day-to-day operations, the coalition intends to ensure that software and its updates, as well as upgrades to technical equipment, can be introduced more easily and quickly, while respecting the co-determination rights of the works council.
• The social partners will be asked to develop proposals on how cooperation in this area can be facilitated and accelerated through appropriate regulations, for example under works constitution law.