German reform package: Employment law implications

At a glance

• For employees hired up to 31 December 2030, fixed-term contracts without objective justification could be permitted for up to 48 months with up to six extensions. Re-hiring the same employee on a new fixed-term contract would also become permissible.
• The option of obtaining a sickness certificate by telephone is to be abolished, and employees would be required to present a medical certificate from the first day of absence.
• From 1 January 2027, a new termination mechanism involving a statutory severance payment option is proposed for employees earning more than 1.75 times the pension insurance contribution assessment ceiling
• Further, tax-advantaged premiums and severance payments are part of the reform.
• Practical implications remain subject to the legislative process.

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On 2 July 2026, the German Federal Government announced a comprehensive package of measures combining labour market, tax and social policy initiatives. The employment law aspects of the package concern longer fixed-term employment without objective justification, stricter requirements for sickness certification, a relaxation of dismissal protection for high earners, and tax changes affecting Sunday and public holiday premiums as well as severance payments.

Fixed-term employment contracts

The Government intends to extend the maximum duration of fixed-term employment contracts without objective justification to 48 months for employees hired up to 31 December 2030, while also permitting up to six extensions. For employers, this would represent a significant expansion of the current regime, which generally limits such contracts to a maximum of two years and no more than three extensions. In addition, it is proposed that employees may in future be re-hired by the same employer under a new fixed-term contract without objective justification.

Reform of sickness certification requirements

Particularly relevant in practice is the proposed reform of sickness certification requirements. The option of obtaining a sickness certificate by telephone is to be abolished. At the same time, employees would be required to submit a medical certificate from the first day of absence due to illness. Under the current rules, a medical certificate generally only needs to be provided where the incapacity for work lasts longer than three calendar days, although employers may require certification earlier. The proposed reform would fundamentally alter this principle. Rather than being required only after a longer period of absence, medical certification would become a general obligation from day one. What employers can currently impose on an individual basis would become the statutory default position.

Terminating employment through a statutory severance payment option

For employees earning more than 1.75 times the contribution assessment ceiling under the statutory pension insurance scheme, the Government plans to introduce, with effect from 1 January 2027, the possibility of terminating employment through a mechanism involving a statutory severance payment option. Based on current figures, the threshold would be just under EUR180,000 gross per annum. The proposal would primarily affect senior executives, highly qualified specialists and other highly remunerated employees who may currently fall within the scope of the Protection Against Dismissal Act, provided they are not already classified as senior managerial employees (leitende Angestellte) for dismissal protection purposes.

Tax changes

With regard to tax-advantaged Sunday and public holiday premiums, the maximum hourly rate eligible for favourable tax treatment is to be increased from EUR50 to EUR75 per hour as of 1 January 2027. In addition, where a collective bargaining agreement applies, such premiums are to become fully exempt from social security contributions to the same extent.

The package also envisages a preferential tax treatment for severance payments where employees take up new employment promptly. The tax benefit would increase depending on how quickly the employee transitions into a new role, thereby incentivising an early return to the labour market.

Practical take-aways

At present, these measures remain policy proposals only. Their actual impact will depend on the details of the legislative process and the final statutory provisions adopted. Employers should therefore monitor developments closely and assess at an early stage which HR policies and processes may require adjustment. Should the proposals be enacted in their current form, the reform of sickness certification is likely to have the most far-reaching practical implications. A statutory requirement to provide medical certification from the first day of illness would significantly alter existing absence reporting and verification procedures across all sectors.