The German government is planning a reform of the country’s dismissal protection rules. Contrary to some early reports, however, the proposal does not seek to weaken statutory dismissal protection for all employees.
According to the current plans of the governing coalition, the proposed changes would apply only to employees with particularly high incomes.
The reform is part of the coalition agreement titled “A Programme for Economic Growth and Employment.” Draft legislation is expected during 2026 and 2027, with many employment law reforms scheduled to be adopted by the end of 2026 and to take effect on 1 January 2027.
Until then, Germany’s existing dismissal protection laws remain fully in force.
Dismissal Protection Could Become More Flexible for Top Earners
Perhaps the most significant element of the proposed employment law reform concerns dismissal protection for high-income employees.
Under the current proposal, employers would find it easier to terminate the employment of particularly well-paid employees by paying statutory compensation.
The planned rule would apply to employees whose annual income exceeds 1.75 times the social security contribution ceiling (Beitragsbemessungsgrenze) for Germany’s statutory pension insurance.
Based on the current contribution ceiling for 2026, this corresponds to an annual gross salary of approximately €177,450.
Because the contribution ceiling is adjusted every year, this income threshold could change before the reform comes into effect.
What Would Change?
Under current German law, employees are protected by the Protection Against Dismissal Act (Kündigungsschutzgesetz) provided they meet the statutory requirements.
In these cases, an ordinary dismissal is generally lawful only if it is socially justified.
At present, there are only three legally recognised grounds for dismissal:
- dismissal for personal reasons,
- dismissal for misconduct,
- dismissal for operational or business reasons.
In cases of operational redundancies, employers must also carry out a social selection process, taking into account factors such as age, length of service, family responsibilities, and severe disability.
The proposed reform would modify this system, but only for a small group of highly paid employees.
Importantly, employers would not receive an unrestricted right to dismiss these employees.
Instead, the proposal would make it easier to terminate employment in exchange for severance pay. In practice, this would shift part of the focus of dismissal protection away from preserving employment and more toward ensuring fair financial compensation.
General Dismissal Protection Would Remain in Place
One point is particularly important:
The general dismissal protection system is not expected to disappear.
Employers would still have to comply with all formal legal requirements, including:
- observing the applicable statutory or contractual notice period,
- issuing the dismissal in writing,
- properly consulting the works council where required,
- complying with special dismissal protection rules, such as those protecting pregnant employees or severely disabled individuals.
Employees would also still be able to challenge a dismissal before the labour courts.
The key difference would likely be that, for high earners, employers could more easily obtain a court order terminating the employment relationship in return for payment of severance compensation.
Who Would Be Affected?
According to the current proposal, the reform would apply only to employees earning more than approximately €177,450 gross per year.
This could include, for example:
- managing directors who are employees rather than corporate officers,
- senior executives,
- chief physicians,
- investment bankers,
- IT specialists,
- sales directors,
- highly paid technical or professional experts.
However, it remains unclear which components of remuneration would count towards the annual income threshold.
In particular, it is not yet known whether the following would be included:
- annual bonuses,
- commissions,
- profit-sharing payments,
- share-based compensation,
- long-term incentive plans,
- company cars,
- other forms of variable remuneration.
Only the final legislation will provide legal certainty on these questions.
Existing Rules for Senior Executives Serve as the Model
German employment law already contains special rules for certain senior executive employees (leitende Angestellte).
Under specific circumstances, employers may ask the labour court to dissolve the employment relationship without having to provide the same level of justification required in ordinary dismissal cases.
The proposed rules for high earners are modelled on this existing system.
The key difference is that eligibility would no longer depend primarily on the employee’s position within the company, but instead on their level of income.
Tax Advantages for Severance Payments Planned
In addition to easing dismissal protection rules, the reform package also proposes changes to the tax treatment of severance payments.
According to the current political proposals:
The faster an employee moves into a new job, the greater the tax advantage for their severance payment should be.
Exactly how this would be implemented remains to be determined.
Additional Employment Law Reforms Planned
The dismissal protection reform forms part of a much broader package of employment law changes.
Among the additional proposals are:
More Flexible Fixed-Term Contracts
For new hires until the end of 2030, employers would be allowed significantly greater flexibility regarding fixed-term employment contracts.
The proposals include:
- fixed-term contracts of up to 48 months,
- up to six extensions,
- allowing a renewed “first-time” employment relationship with the same employer,
- digital fixed-term agreements without the traditional written form requirement from 2027 onward.
Changes to Sick Leave Rules
The government also plans stricter rules regarding sick leave.
Proposals include:
- requiring a medical certificate from the first day of illness,
- abolishing the current option of obtaining a sick note via telephone consultation.
For employers, these changes would likely increase administrative responsibilities and raise additional data protection considerations.
Greater Flexibility Through Collective Agreements
Collective bargaining parties would receive considerably greater freedom to negotiate industry-specific solutions.
This would particularly affect areas such as:
- fixed-term employment,
- occupational health and safety,
- digitalisation,
- employee participation rights.
Reducing Bureaucracy
The government also intends to reduce numerous documentation and reporting requirements.
The stated objective is to ease the administrative burden on businesses without fundamentally weakening employee protection.
What Is the Current Legal Situation?
For now, nothing has changed.
The proposed dismissal protection reform currently exists only as part of the governing coalition’s political agreement.
No draft legislation has yet been introduced.
As a result:
- employers cannot yet rely on the proposed simplifications,
- employees should not make premature decisions or sign termination agreements solely because of the announced reform.
Conclusion
The planned dismissal protection reform is one of the most significant employment law initiatives expected in Germany over the coming years.
Contrary to some media reports, however, the proposal does not abolish dismissal protection or weaken it for all employees. Based on the current plans, the changes would apply only to a relatively small group of high earners.
Whether the reform will ultimately be adopted in its current form remains to be seen. Only once legislation has been passed will it become clear how the new dismissal protection rules will work in practice and which employees will actually fall within their scope.
Until then, Germany’s existing Protection Against Dismissal Act remains fully in force. Both employers and employees should monitor the legislative process closely and be prepared to adapt their employment strategies if the proposed changes eventually become law.
Leave a Reply