5 minute read | July.07.2026
On July 2, 2026, the German Federal Government presented a reform package aimed at supporting economic growth and employment. The package includes 34 measures. Its overall goal is to make Germany a more competitive business location and to encourage investment.
Several of the planned measures would make German employment law more flexible. If implemented, they could make life easier for employers, especially start-ups and international companies. This applies in particular to fixed-term hiring and separations from senior employees and key employees.
In our three-part series, we look at the most important planned changes from an employer’s perspective:
Part I – More Flexibility for Employers: Planned Changes to Fixed-Term Employment and Terminations
Part II – Sick Leave and Pension Reform: What This Means for Workforce Planning and Restructurings
Part III – Co-Determination, Digitalization and Less Red Tape: The Planned Changes at a Glance
The German Federal Government is planning significant employment law reforms. From 2027, these reforms are expected to make fixed-term employment and terminations more flexible. The plans include allowing fixed-term employment contracts to be concluded in text form, expanding the use of fixed-term employment contracts without an objective reason, introducing a new way to end employment relationships with high earners, and creating tax incentives for severance payments.
Under the current plan, fixed-term employment contracts would no longer need to meet the strict written form requirement from January 1, 2027.
This would mean that fixed-term employment contracts could be concluded fully in text form and integrated into digital recruiting and onboarding processes. In practice, this could include scanned signatures or e-signing tools such as DocuSign or Adobe Sign.
Under current law, fixed-term employment contracts must either be signed by hand or signed using a qualified electronic signature. If the form requirement is not met, the fixed-term employment contract may become an indefinite employment contract, provided the employee challenges the fixed term in time.
For companies with decentralized teams or international founder teams, this change could make processes much easier. Fixed-term employment contracts could be concluded digitally and across borders without the same risk of accidentally creating an indefinite employment relationship because of a form error.
Another important part of the reform package is the planned expansion of fixed-term employment without an objective reason.
Under the Government’s proposal, employees hired by December 31, 2030 could be employed on a fixed-term basis without an objective reason for up to four years. During that period, the employment contract could be extended up to six times. The Government also plans to relax the current ban on prior employment, so that repeated fixed-term hiring by the same employer may become possible.
Under current law, fixed-term employment without an objective reason is generally limited to two years, except for certain special rules that apply to newly founded companies. Within those two years, the employment contract may generally be extended up to three times. Fixed-term employment without an objective reason is also generally not allowed if the employee has previously worked for the same company. This applies regardless of how long the earlier work lasted or how much time has passed since then.
If implemented, this change could give start-ups and international companies more flexibility in uncertain economic times. Unlike the current special rules for newly founded companies, the planned changes would not depend on the age of the company. They could therefore also help companies going through transformation or restructuring.
Companies bound by collective bargaining agreements should keep an eye on whether collective bargaining parties use possible opening clauses in the future. These clauses could change or limit the flexibility provided by the new statutory rules at collective bargaining level.
Another key proposal concerns the termination of employment relationships with high earners. For a limited group of very highly paid employees, protection against dismissal would be supplemented by a court-based mechanism allowing the employment relationship to be dissolved in return for severance payment.
From January 1, 2027, a new rule is expected to allow the employment relationship of certain high earners to be dissolved against payment of severance. The rule is intended to apply to employees whose annual income is above 1.75 times the income threshold for contributions to the statutory pension insurance. This is currently around EUR 177,450 gross per year. The model for this change is the existing rule for risk takers in the financial sector.
Under current law, an employer can ask the court to dissolve an employment relationship against payment of severance only if the employee has first successfully challenged the dismissal and if there are reasons showing that continued cooperation cannot be expected to serve the employer’s business purposes. In practice, the hurdles for this are high. For risk takers in the financial sector, an application to dissolve the employment relationship without giving reasons is already possible under current law.
For employers, the planned change could make separations from senior employees and key employees more predictable. It would give employers more flexibility in situations where continued cooperation no longer makes sense, but classic dismissal reasons are difficult to prove. In suitable cases, the new mechanism could help avoid or shorten lengthy dismissal protection proceedings.
The amount of severance is expected to follow the existing rules under the German Dismissal Protection Act (Kündigungsschutzgesetz). Under those rules, the court sets the severance amount within statutory maximum limits. As a general rule, severance can amount to up to 12 months’ earnings. For employees aged 50 or older with at least 15 years of service, severance can amount to up to 15 months’ earnings. For employees aged 55 or older with at least 20 years of service, severance can amount to up to 18 months’ earnings.
Severance payments are also expected to receive more favorable tax treatment in the future. The aim is to encourage employees to move into new employment as quickly as possible. According to the Government’s current announcements, the tax benefit would be greater the faster the employee starts a new job.
Under current law, severance payments may already benefit from reduced taxation in certain cases under the so-called one-fifth rule. However, current law does not provide a special incentive for quickly taking up new employment.
If the announced tax benefit is implemented, voluntary separation programs could become more attractive. This could make restructurings easier to implement.
The Government has also announced further measures to support transformation processes. These include strengthening training measures and developing existing tools such as transfer companies. However, concrete legislative proposals are still pending.
The proposed changes could be one of the most important steps toward more flexible German employment law in recent years. Employers would gain significantly more room to maneuver, especially when using fixed-term employment contracts and when managing separations.
One point is notable. The reform package does not address the long-discussed reform of the German Working Time Act. The recent debate about moving from a daily maximum working time to a weekly maximum working time does not appear in the program. Against this background, a short-term reform of German working time law currently seems rather unlikely.