Germany: New Reform Agenda – Greater Flexibility for Employers and a Push for Competitiveness

The German government has unveiled an ambitious reform package aimed at strengthening economic growth, improving labour market flexibility, and enhancing Germany’s competitiveness as a business location. While many details remain to be clarified and not every proposal is equally convincing, the overall direction is noteworthy. Several of the measures touch on areas of German labour law that have traditionally been considered politically sensitive and difficult to reform.

For international businesses operating in Germany or considering investment in the country, three themes stand out in particular: greater flexibility in employment relationships, efforts to address labour shortages, and a reduction of regulatory and administrative burdens for employers.

 

Greater Flexibility in Employment Relationships

Perhaps the most significant proposal concerns Germany’s dismissal protection regime.

Under current German law, employers generally cannot terminate employees at will. In business units with more than ten employees, dismissals usually require a legally recognised justification and are frequently subject to judicial scrutiny before the labour courts. Legal remedy of an unfair dismissal is reinstatement and backpay. As a result, Germany is often viewed as having one of the more employee-protective termination regimes among major economies.

The government now proposes a new mechanism for employees earning more than EUR 177,450 per year. From 1 January 2027 onwards, employers might be given a more straightforward option to terminate employment relationships in exchange for a severance payment. While details are still under discussion, the proposal signals a willingness to introduce greater flexibility for highly compensated employees and their employers.

The reform package also seeks to make fixed-term hiring more attractive. For employees hired until the end of 2030, fixed-term contracts without an objective reason would be permitted for up to 48 months (currently: 24 months), with as many as six extensions during that period. In addition, the government intends to abolish the current wet ink requirement for fixed-term contracts from 2027, reducing administrative formalities and facilitating digital employment processes.

Complementing these changes, Germany’s employment promotion framework is expected to be adjusted to strengthen labour market mobility and facilitate transitions from one job to another. Together, these proposals indicate a first step towards a broader policy objective of making Germany’s labour market more dynamic and adaptable.

 

Measures Aimed at Increasing Workforce Participation

A second major theme of the reform package is the government’s attempt to address demographic challenges and labour shortages.

The recommendations of Germany’s Pension Commission, including a potential increase in the statutory retirement age, are expected to be considered by Parliament later this year. Given Germany’s ageing population and persistent shortage of skilled workers across many sectors, increasing labour force participation has become a central political objective.

The government also plans to encourage a faster return to employment after job losses. Under the proposed reforms, severance payments would receive more favourable tax treatment where employees rapidly take up new employment. The intention is to reduce periods of unemployment and support smoother transitions within the labour market.

 

A More Restrictive Approach to Sick Leave

Another proposal that has already generated substantial public debate concerns sick leave certification.

Employees in Germany who are unable to work due to illness are generally entitled to continued salary payments from their employer for up to six weeks. To qualify for this entitlement, employees must demonstrate their incapacity for work through a medical certificate issued by a physician, commonly referred to as an “AU” (Arbeitsunfähigkeitsbescheinigung).

Under the current rules, employees are generally required to submit such a certificate only if their illness extends beyond three calendar days. However, employers already have the legal right to require a certificate from the very first day of absence, and some employers have exercised this option on a case-by-case basis.

The government now intends to make first-day certification mandatory in all cases. In addition, telephone-based sick notes – originally introduced during the COVID-19 pandemic and later retained – are expected to be abolished. The package further proposes stricter sanctions against the intentional issuance of inaccurate medical certificates.

These proposals have triggered significant political and societal discussion. Supporters argue that the measures will help reduce abuse of sick leave and absenteeism. Critics, on the other hand, question whether the reforms will merely increase administrative burdens for employees, employers, physicians, and the healthcare system.

 

Reducing Administrative Burdens for Businesses

Alongside labour market reforms, the government is seeking to reduce compliance obligations and administrative complexity.

One proposal would abolish certain mandatory corporate officer functions that are not required by European Union law. This reflects a broader effort to reduce bureaucracy and compliance costs, particularly for small and medium-sized enterprises.

The government has also identified employee co-determination in relation to information technology as an area requiring reform. While no specific legislative proposal has yet been presented, policymakers have indicated that software deployments, updates, and other technological implementations should be capable of being introduced more efficiently while preserving the legal participation rights of works councils.

 

Tax and Regulatory Changes

The reform programme also contains a number of tax and regulatory measures intended to improve economic competitiveness.

On the employee side, the government proposes increases to various tax allowances and benefits, including the personal tax-free allowance, child-related tax benefits, and the employee lump-sum deduction. At the same time, higher-income taxpayers would face increased tax rates.

Employers may welcome the planned expansion of tax advantages for Sunday, public holiday, and night work premiums. Existing thresholds would be increased, and certain collectively agreed premiums could become entirely exempt from social security contributions.

From a corporate governance perspective, the government aims to restrict the use of certain European company structures that have been used to avoid German co-determination requirements. At the same time, it has announced that the EU Corporate Sustainability Due Diligence Directive (CSDDD) will be implemented strictly in line with European requirements, avoiding additional national obligations wherever possible.

Finally, employers’ associations and trade unions have been invited to propose further measures to strengthen competitiveness and resilience in key industries, including the automotive, chemical, steel, and engineering sectors. This may foreshadow additional reforms in the years ahead.

 

Outlook

While the practical impact of these proposals will depend on their eventual legislative implementation, the reform package represents a notable shift in tone and direction. For many years, debates on German labour law have largely focused on preserving existing protections and structures. The current government now appears prepared to prioritise flexibility, competitiveness, and economic growth more explicitly.

For international investors and businesses with operations in Germany, the proposed reforms warrant close attention. In particular, the planned changes relating to dismissal protection, fixed-term employment, and sick leave administration could affect employment strategies, workforce planning, and operating costs in the German market.