Separating from High Earners: Why the Planned Reform in Germany Could Reduce Severance Payments

What Is the German Federal Government Planning?

The starting point is the reform package titled, “Program for Growth and Employment,” adopted on July 2, 2026 by the German Coalition Committee of the CDU/CSU (conservative political party union) and SPD (social democratic political party). The package contains 34 measures. One of them concerns so-called high earners:

“For high earners, we will introduce a provision on January 1, 2027 – similar to the risk-bearer provision in the financial sector – that allows for the dissolution of the employment relationship with an option for severance pay for annual incomes above 1.75 times the contribution assessment ceiling for the statutory pension insurance system.”

Based on the 2026 contribution assessment ceiling for the statutory pension insurance system of EUR 101,400, the current threshold for high earners would be EUR 177,450 gross per year, or approximately EUR 14,788 gross per month. This would affect only a very small group of employees, well below one percent of of employees.

A key practical point: the threshold is tied to the contribution assessment ceiling, which is adjusted annually. Companies will therefore need to reassess the rule’s applicability each year.

What Is the Current Situation – and What Would Change?

Under current German law, the guiding principle is continued employment. If a termination is invalid, the employment relationship continues. Only in exceptional cases may a court dissolve the employment relationship in exchange for severance, for example where the basis for future cooperation necessary for business purposes has been irreparably destroyed (Section 9(1), sentence 2, German Dismissal Protection Act); in the case of executive employees (Section 14(2), German Dismissal Protection Act); or for certain risk-bearers (Section 25a(5a), German Banking Act). For executive employees and risk-bearers, employers may already file a dissolution request without having to provide a specific justification. In practice, however, the scope of application remains relatively limited.

The proposed reform would expand these exceptions: going forward, high remuneration alone would be sufficient to allow an employer to file a dissolution request without stating reasons. The group of potentially affected employees would increase, although it would remain limited due to the high salary threshold. The validity of the termination itself would continue to be subject to full judicial review.

Importantly, dissolution in exchange for severance is expected to be available only where the termination is invalid solely because it lacks social justification. If the termination is void for other reasons – such as failure to properly consult the works council, failure to submit a required mass dismissal notification, or lack of approval from the Integration Office in cases involving severely disabled employees – judicial dissolution remains unavailable (Section 13(3), German Dismissal Protection Act).

Why Severance Payments Could Decrease

Section 10 of the German Dismissal Protection Act generally caps court-awarded severance following a dissolution request at 12 months’ earnings, or, for older employees with long service, at a maximum of 18 months’ earnings. At first glance, court-awarded severance may sound expensive. In practice, however, the reform could reduce separation costs for employers. This is because these statutory limits often play little role today. If there is no valid termination ground and the litigation risk is correspondingly high, severance payments to long-serving employees are often significantly higher.

For high earners, the reform would prevent that outcome. If the court dissolves the employment relationship, the termination takes effect retroactively as of the expiration of the applicable notice period. As a result, no wages for default of acceptance are owed for the period after the notice period ends, and no back pay for other claims that require an ongoing employment relationship (e.g. bonuses) would be due.

For employers, this would significantly reduce litigation risk in high-earner cases and create a more predictable separation mechanism. The focus of disputes would shift away from continued employment as a threatening tactic against the employer and toward the amount of severance. The court does not automatically award the statutory maximum; rather, it considers factors such as length of service, age, and labor market prospects.

There is also a positive side effect for employers: if the expected litigation risk decreases, severance demands in out-of-court separation negotiations are likely to decrease as well.

What Remains Unclear?

As no draft legislation has yet been presented, several questions remain:

• Which income counts? The coalition resolution refers to “annual income,” which suggests that variable compensation would also be included. By contrast, the risk-bearer provision under the German Banking Act, on which the new rule is intended to be based, focuses solely on fixed compensation. Otherwise, in cases with highly variable compensation, the applicability of the rule could change from year to year. It remains to be seen which approach the legislature will adopt.
• Will the rule apply to existing contracts? The coalition text contains neither a transitional provision nor a restriction to new contracts. The Banking Act model also covered existing employment relationships and merely provided for an eight-month lead-in period. We therefore assume that, as of early 2027, the new rule will apply to all employment relationships that exceed the salary threshold, potentially subject to a lead-in period.
• Would the rule withstand constitutional scrutiny? Whether income alone is a permissible distinguishing criterion is likely to be questioned in light of the general principle of equal treatment, occupational freedom, and the protection of legitimate expectations (Articles 3, 12, and 20 of the German Basic Law).

Practical Takeaway: Prepare, but Do Not Get Ahead of the Law

• Monitor the legislative process. For planned separations, timing before or after January 1, 2027 may be critical.
• Identify positions above the threshold, including borderline cases in which the threshold could be reached through a salary increase.
• Track the ratio of fixed to variable compensation. It may determine whether the rule applies.
• Continue to observe all other requirements for a valid termination. This applies in particular to proper works council consultation under Section 102 of the German Works Constitution Act. Only where a termination lacks social justification may the employment relationship be dissolved by court order in exchange for severance.