German Government Eases Dismissal Rules for Top Earners in Major Labour Law Overhaul

Workers earning €177,500 or more in gross annual salary will soon face a significantly lower bar for employers seeking to terminate their contracts—even when the dismissal would otherwise be legally invalid. The change is part of a sweeping reform package titled “Upswing and Employment,” approved by the federal cabinet in early July 2026 and scheduled to take effect at the start of 2027.

Under the new rules, companies will be able to dissolve employment relationships against a severance payment for high-income employees, bypassing the usual requirement that a dismissal be legally justified. The measure targets roughly the top 5 percent of earners and is designed to give employers more flexibility in restructuring decisions.

Fixed-term contracts extended, sick notes tightened

Alongside the dismissal changes, the government is loosening rules on fixed-term employment. Contracts without a specific cause can now run for up to four years, with as many as six renewals permitted—a sharp increase from the current two-year limit with three extensions.

At the same time, the rules for reporting sick leave are becoming stricter. From 2027, employees will be required to present a medical certificate from the very first day of illness, effectively ending the practice of telephone sick notes that became common during the pandemic.

Court clarifies mass-layoff rules

The Federal Labour Court provided important guidance in late June 2026, ruling that minor errors in mass-layoff notifications do not automatically invalidate the dismissals. The key condition is that the protective purpose of the procedure remains intact. However, the court stressed that proper consultation with the works council remains essential—any failure there still carries serious consequences.

Three-week deadline remains critical

Employees still face a strict three-week window to file a lawsuit after receiving a dismissal notice—whether they work full-time or hold a mini-job. Those who successfully challenge an unlawful termination are entitled to back pay, but must actively seek new employment. The Lower Saxony Regional Labour Court granted affected workers only a one-week grace period after receiving notice in a 2025 ruling.

Disability protections hold, but litigation surges

Special protections for severely disabled workers remain unchanged: employers must obtain approval from the Integration Office before issuing a dismissal. Yet the number of legal challenges in this area is climbing rapidly. Social courts, including those in Munich, reported a more than 45 percent increase in case filings during the first half of 2026. Meanwhile, authorities are rejecting initial applications for severe-disability recognition at higher rates, adding to the pressure on the system.

Trial period for job switchers

A new “job-to-job trial” option aims to lower the barrier for workers considering a move. Employees can now work for up to four weeks—or six in exceptional cases—at a potential new employer while their original contract and pay remain intact. Full dismissal protection continues during the trial period. Labour market experts view the measure as a practical tool to reduce hesitation among workers who might otherwise stay put due to fear of losing protections.

Boosting collective bargaining

In a parallel move, the cabinet approved a National Action Plan in July 2026 to reverse the decline in collective bargaining coverage, which has fallen below 50 percent. The plan includes digitising union access rights and introducing more flexible working-time arrangements, aiming to make collective agreements more attractive to both employers and workers.

Current notice periods unchanged

The statutory notice periods remain the same for 2026. The basic period is four weeks, effective either on the 15th or the end of a calendar month. For employers, the period lengthens with tenure: one month after two years, four months after ten years, and a maximum of seven months after 20 years. During the probationary period—capped at six months—the notice period is two weeks.

en | boerse | 69838450 |