Employer action code: Monitor
The federal government has agreed on several proposed measures that would significantly ease certain employment-related requirements. Legislation is yet to be developed.
Key details
- Dismissing high-earning employees would be eased as of January 1, 2027. Employees earning more than 1.75 times the annual earnings limit for social security contributions (i.e., more than 177,450 euros in 2026) could be terminated by their employer without justification with severance pay. The severance amount would align with current legislation — the Employment Protection Act (EPA) — equaling half a month's base pay times years of service, up to a maximum of 12 months of salary for employees under age 50, 15 months if age 50 or older, and 18 months if age 55 or older. Currently, the EPA requires that termination of personnel with six or more months of service be “socially justified,” even with severance pay, in companies with 10 or more employees (except for specific types of employees in the financial sector). The exact details of the eased termination terms are still under development
- The tax treatment of severance pay, usually considered taxable income, would be made more advantageous the quicker the terminated employee finds re-employment. The exact details of this tax advantage are yet to be released
- The tax-advantaged pay premium amount for working on Sunday or a public holiday would be increased to €75 per hour (currently €50)
- A doctor’s certificate would be required for sick leave from the first day of an employee’s absence. This would end the practice of being able to call in sick, introduced during the COVID-19 pandemic
- Fixed-term contracts without objective justification would be allowed for up to four years in total, including up to six extensions, for employees hired through December 31, 2030. The current maximum duration is two years, including up to three extensions. Employers would also be allowed to offer fixed-term employment without objective justification to employees who previously worked for the employer. In addition, the current requirement for fixed-term employment contracts to be in written format would be abolished as of January 1, 2027
Employer and employee organizations are invited to submit proposals by mid-October 2026 on:
- Areas where collective bargaining agreements could potentially differ from statutory provisions to provide more flexibility in setting employment terms and conditions for different industry sectors
- Ways in which companies could be supported in introducing new technologies quickly, especially AI, to business operations (currently, works councils have co-determination rights on the introduction of new technologies)
Employer implications
Companies should closely monitor the legislative progress of these measures, given their significance to certain aspects of employment terms and the government’s ambitious timeline. The labor market reforms are part of a comprehensive reform package, the Program for Economic Recovery and Employment. The program contains 34 measures and aims to revitalize economic growth and preserve the welfare state. According to Eurostat data, Germany’s GDP real growth rate (estimated at 0.2%) was the lowest among European Union states in 2025 and nearly the lowest in 2024 and 2023 (Germany’s real GDP growth was negative in both of these years).
