German Employment Law in Transition: Coalition Committee Agrees on Noteworthy Reforms

The German Federal Government, formed by the CDU/CSU (conservative political party union) and SPD (social democratic political party), has agreed in the Coalition Committee on a comprehensive “Program for Growth and Employment.” The package of measures includes a number of employment-law initiatives that employers should monitor closely over the coming months. Of particular relevance are new options for terminating employment relationships with high earners, the planned expansion of fixed-term employment without objective grounds, and changes relating to the certificate of incapacity for work.

Below is an initial overview of the key employment-law proposals and assessment of their practical significance for companies, should the program be enacted in this form:

1. Easier Separation from Top Earners: From Protection against Dismissal to Protection by Severance

The planned introduction of a “dissolution of the employment relationship with a severance option” for top earners would be of considerable practical relevance. The provision is intended to apply from January 1, 2027, to employees whose annual income exceeds 1.75 times the contribution assessment ceiling for the German statutory pension insurance (currently approximately EUR 178,000).

In this respect, the coalition expressly draws on the rules familiar from the financial sector for so-called risk takers. Although details of the specific legislative design are not yet available, adopting the risk-taker regime from the financial sector (Section 25a(5a) of the German Banking Act (KWG)) would mean that employers would no longer face a reinstatement risk. In practical terms, employees falling within the scope of the provision could be dismissed even where the dismissal is ultimately held to be invalid, with the separation then being enforced by way of a request for judicial dissolution against payment of severance. Because the amount of severance to be determined by the court is capped (currently, under Section 10 of the German Dismissal Protection Act (KSchG), at a maximum of 18 gross monthly salaries where the employee is 55 years old and has 20 years of service), the separation risk for employers would finally become calculable.

If this proposal is adopted, it will materially change the dynamics of separation processes involving highly compensated employees.

2. Fixed-Term Employment without Objective Grounds: A Return to Greater Flexibility

The announcements regarding fixed-term employment law are equally noteworthy. For employees hired on or before December 31, 2030, fixed-term employment without objective grounds—i.e., where the employer does not need to provide a reason for the limited contract—is to be permitted for up to 48 months, with up to six extensions. Particularly far-reaching is the announcement that renewed fixed-term employment without objective grounds with the same employer is also to be made possible.

This would go well beyond the current legal framework and would significantly expand flexibility in workforce planning. To date, Section 14(2) of the German Part-Time and Fixed-Term Employment Act (TzBfG) generally permits fixed-term employment without objective grounds only for up to 24 months and with no more than three extensions.

In addition, the strict written-form requirement for fixed-term agreements is to be abolished as of January 1, 2027; in the future, text form is to suffice in this context as well.

3. Preferential Tax Treatment of Severance Payments

As a complementary measure, the coalition plans to introduce preferential tax treatment for severance payments where the individuals concerned promptly take up new employment or other gainful work. The tax benefit is intended to increase the faster the individual is reintegrated into the labor market. Specific legislative details are not yet available. However, the proposal is clearly aimed at facilitating job transitions and reducing the costs of unemployment benefits.

4. Telephone Sick Notes Set to Be Abolished; Certificate of Incapacity for Work Required from Day One

The coalition intends to abolish sick notes issued by telephone. In addition, employees are to be required to provide a certificate of incapacity for work from the first day of illness. The stated objective is to reduce absenteeism, although it remains open to question whether, in the case of very short illnesses, employees will be certified as unfit for work for several days rather than just one.

The added value for employers is not apparent, as employers have already been able to require a medical certificate from the first day of illness. In any event, employment contracts and internal processes will need to be reviewed and adjusted. It remains unclear whether it will still be possible in the future to agree that a certificate need only be submitted from the third day. In any case, it is doubtful whether the new rule will be adopted in view of the criticism likely to come from an already overburdened medical profession.

5. No Changes to Working Time

By contrast, no consensus was reached on changes to the existing working-time rules. The only agreement reached was to extend Sunday opening hours for bakeries, confectioneries, and libraries.

A possible new Working Time Act will, however, be “discussed later this summer,” according to German Chancellor Merz.

Employees are also expected to take home more net pay from tax-privileged bonuses for work on Sundays and public holidays: the thresholds under Section 3b of the German Income Tax Act (EStG) are to be increased as of January 1, 2027, up to an hourly wage of EUR 75; at the same time, the tax-exempt bonus within the scope of a collective bargaining agreement will be made fully exempt from social security contributions.

6. Further Employment-Law-Relevant Initiatives

In addition to the reforms already widely discussed, the package of measures contains further changes with an employment-law nexus:

• The flat-rate tax for mini-jobs is to be increased from two to five percent.
• Employee participation at board level in an SE (Societas Europaea or European Company) is to be strengthened by abolishing the current possibility of using a “shelf SE” with no employees.
• Potential opening clauses in favor of the collective bargaining parties are to be discussed, particularly in the areas of employment law and occupational health and safety.
• An amendment to the German Works Constitution Act (BetrVG) is also to be discussed, with the aim of facilitating and accelerating the introduction of AI systems and technical equipment. The social partners are to develop proposals.

For the time being, these remain political resolutions only. The specific legislative implementation remains to be seen. In particular, the planned changes to fixed-term employment law and the obligation to submit certificates of incapacity for work are likely to give rise to intensive political debate.

Littler will closely monitor the legislative process and report on significant developments.