Extensive employment law reforms planned in Germany

The coalition committee of the CDU/CSU and SPD agreed the package during the early hours of 2 July 2026, with the overarching aims of making Germany a more attractive country to set up and operate a business and promoting economic growth. The package (12-page / 152KB PDF) is designed, among other things, to reduce bureaucracy and make the labour market more flexible. For employers, some of the main changes proposed concern the way employment relationships are established and terminated, as well as the handling of sickness-related absences.

“At this stage, these are still only political decisions, which must now be translated into specific draft legislation. Nevertheless, the announcements already provide a clear indication of the direction employment law could take in the coming years,” said employment law expert Sarah Klachin of Pinsent Masons.

More scope for fixed-term contracts

For employers, the planned changes to the law on fixed-term contracts could give them more flexibility. Under the package agreed, fixed-term employment without objective grounds is to be permitted for up to 48 months in future, with the possibility of extending it up to six times within that period. This would be a substantial expansion compared with the current legal position, under which fixed-term employment without objective grounds is generally permitted only for up to two years with scope to extend no more than three times within that period.

In addition, re-hiring under the same fixed-term employment contract without objective grounds will also become possible if the proposals make it into law.

The proposed new rules would be time-limited, applicable only to recruitment undertaken before the end of 2030.

A further change proposed is the abolishment of the requirement for fixed-term agreements to be in written form. This change is proposed to take effect from 1 January 2027 and is designed to make digital recruitment processes easier and reduce administrative burdens.

The measures would give employers “noticeably more room for manoeuvre in workforce planning and recruitment”, according to Manfred Schmid, who specialises in employment law at Pinsent Masons.

Easier termination of high earners

Restrictions on terminating the contracts of high earners would also be eased, under the coalition’s plans. In future, employees with incomes totalling more than 1.75 times the contribution assessment ceiling for the statutory pension insurance scheme could have their employment contracts terminated more easily in return for payment of severance. Precise details of how this change would work have not yet been published.

Tax relief for severance payments

A further change proposed concerns the tax treatment of severance payments: severance payments would receive preferential tax treatment in future if employees take up new employment soon after the employment relationship ends. The tax relief is intended to be greater the faster the individual gets a new job. The coalition’s aim with this change is to promote employment transitions and avoid longer periods of unemployment. How the preferential treatment is to be structured in detail is currently still unclear.

Stricter requirements in cases of incapacity for work

Further changes concern sickness-related absences of employees. Under the current legal position, a certificate of incapacity for work generally only has to be submitted if the incapacity lasts for more than three calendar days. Under the coalition’s plans, employees would be required to provide this certification from the first day of sickness.

Klachin said: “Employers can already require earlier submission today; this would now become the standard. At the same time, the scope for employees to provide telephone sick notes – something that was introduced during the Covid-19 pandemic – is to be removed again. The aim is to strengthen the evidential basis for incapacity for work and restrict opportunities for misuse.”

Our view

Schmid said: “For employers, the coalition’s reform proposals reveal a clear labour-market policy direction: more flexibility, fewer formal hurdles and a stronger alignment of employment law with what businesses want to see in the geographic markets they operate in.”

“In particular, the planned changes to fixed-term employment law and the new severance option for high earners could give employers additional room for manoeuvre and noticeably change employment law practice. It remains to be seen, however, which of these proposals will ultimately pass through the legislative process unchanged. What is already clear is that employment law is one of the central areas of reform in the new coalition agenda,” he added.