Germany’s 2026 Labor Law Reforms: A Program for Growth and Employment?

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Quick Hits

• The German government’s governing coalition issued a reform package that includes labor and employment law proposals that would relax dismissal protections for top earners, provide tax benefits on severance payments for individuals who quickly take up new employment, and eliminate telephone-based sick leave certifications.
• The reform package would also allow fixed-term employment contracts without objective grounds for up to forty-eight months and to be extended up to six times.

Relaxation of Dismissal Protection for Top Earners

Under the proposal, starting January 1, 2027, employers would be permitted to dissolve employment relationships with employees whose annual income exceeds 1.75 times the contribution assessment ceiling for statutory pension insurance (Beitragsbemessungsgrenze (BBG)) in exchange for a severance payment. The regulation is to be structured analogously to the “risk-taker rule in the financial sector.” For the aforementioned risk-bearers, the German Banking Act (Kreditwesengesetz (KWG)) stipulates that a motion for dissolution of the employment pursuant to Section 9 (1) sentence 2 of the German Dismissal Protection Act (KSchG) does not require justification (Section 25a (1), No. 5a KWG).

‘Top-Earners’ Defined

Although the published proposal does not specify exactly how annual income is defined, the reference to the regulations for risk-bearers in the financial sector suggests that annual fixed compensation will be the basis for determination. Based on the currently applicable BBG (2026: EUR 101,400), this would mean that the relaxation of dismissal protection would apply to employees with an annual fixed compensation exceeding EUR 177,450.

Proposed Dismissal Protection Rule Provisions

Employers would still be permitted to terminate the employment relationship with top earners without paying severance pay. If the termination is valid, there would still be no entitlement to severance pay unless such a right is provided for by contract or under a collective arrangement (e.g., in a social plan). The proposal provides that if employees file an unfair dismissal claim, the labor court will decide whether to dissolve the employment relationship in exchange for a severance payment only if the dismissal is invalid and one of the parties has filed a so-called application for dissolution.

An application for dissolution allows the labor court to dissolve an employment relationship by judgment despite an invalid dismissal and to order the employer to pay an appropriate severance payment (Section 9 KSchG).

Under current law, an employer’s motion for dissolution is successful only if there are grounds that make it unlikely that continued cooperation would serve the company’s business purposes. Only in the case of executive employees (Section 14 (2), sentence 2 KSchG)—a situation that rarely arises in practice— no grounds for dissolution are required.

Under the proposed regulation, no grounds for dissolution would be required even for top earners who are not executive employees. Rather, the labor court would declare the employment relationship dissolved as of the date on which it would have ended in the event of a socially justified dismissal. At the same time, the court would order the employer to pay an appropriate severance payment. The amount would be determined in accordance with Section 10 KSchG and would generally not exceed twelve months’ earnings.

For older employees with longer periods of service, the current law provides for higher maximum limits: Upon reaching the age of fifty and having at least fifteen years of service, the severance pay may amount to up to fifteen months’ earnings; upon reaching the age of fifty-five and having at least twenty years of service, it may amount to up to eighteen months’ earnings. This increase does not apply if the employee has already reached the standard retirement age at the relevant dissolution date.

The specific amount of the severance pay would be at the court’s discretion and would be based in particular on the duration of the employment relationship, age, earnings, prospects on the job market, and the circumstances of the dismissal.

Effective Date of Relaxation of Dismissal Protection for Top Earners Rule

The proposed regulation would take effect on January 1, 2027. It is currently unclear whether it would apply only to employment contracts concluded on or after that date or to dismissals issued on or after that date.

Tax Benefits for Severance Pay

The reform package would provide tax benefits for severance payments for individuals who promptly take a new gainful activity. The tax benefit is intended to be greater the sooner the employee takes up new employment. Further details are not yet known.

Fixed-Term Employment Contracts of Up to Four Years

Under current law, fixed-term contracts without objective grounds are generally permitted only for up to two years; within this period, they may be extended no more than three times. Under the reform package, this framework would be significantly expanded for employees hired by the end of 2030: fixed-term employment contracts without objective grounds would be permitted for up to forty-eight months and would be permitted to be extended up to six times.

Elimination of the Written Form Requirement for Fixed-Term Contracts

As of January 1, 2027, the written form requirement for fixed-term contracts would be abolished.

Certificates of Incapacity for Work

In the future, employees would be required to submit a certificate of incapacity for work starting on the first day of illness. Currently, this is only required if the incapacity for work lasts longer than three calendar days. However, employers can already require submission earlier than that.

The proposed regulation would not provide any real relief for employers, as in practice, such certificates of incapacity for work are not issued sparingly. With the planned elimination of sick leave certificates issued by telephone, employees would need to make greater efforts to obtain a certificate of incapacity for work, and misuse would likely be reduced.

Takeaways

The reform package shows that progress is being made on key labor law issues. Further measures—such as simplifying national data protection regulations, utilizing leeway within the European Union’s General Data Protection Regulation (GDPR), reducing the number of in-house data protection officers in small and medium-sized enterprises, and facilitating the simplified and faster implementation of software along with updates and upgrades in accordance with the works council’s co-determination rights—are also to be initiated. The legislative process will therefore be worth watching for employers.

Ogletree Deakins’ Berlin and Munich offices will continue to monitor developments and will post updates on the Cross-Border, Employment Tax, Germany, and Leaves of Absence blogs as additional information becomes available.

Dr. Ulrike Conradi is the managing partner of Ogletree Deakins’ Berlin and Munich offices.

Lela Salman, a law clerk in Ogletree Deakins’ Berlin office, contributed to this article.

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