Reform Package “Recovery and Employment”: What Employers Need to Know

On 2 July 2026, the Coalition Committee of the Federal Government adopted a comprehensive reform package entitled “A Programme for Recovery and Employment”. The package contains numerous intended changes of considerable significance for employment law practice.

The employment law measures in the reform package clearly pursue the objective of making the labour market more flexible, accelerating staffing decisions and reducing regulatory barriers for businesses. This is particularly evident in the planned changes regarding high earners, fixed-term employment and the introduction and use of AI-based systems.

The following overview contextualises the points most relevant for employers and identifies areas where HR, Legal and Finance should already begin preparations.

New Severance Mechanism for High Earners

For employees with an annual income exceeding 1.75 times the social security contribution ceiling for statutory pension insurance (GRV), a new provision is to be introduced as of 1 January 2027 that would enable the termination of the employment relationship subject to a severance option.

This provision could create a special termination mechanism for top earners and may have far-reaching consequences, particularly for executives, senior employees and other highly compensated key personnel. The social security contribution ceiling for the statutory pension insurance in 2026 stands at a gross annual income of EUR 101,400. The threshold of 1.75 times this amount corresponds to a gross annual income of EUR 177,450.

Employers should not, however, prematurely assume that this amounts to an “elimination of unfair dismissal protection”: the resolution refers to the termination of the employment relationship with a severance option “analogous to the risk-taker regulations in the financial sector”. The specific design—in particular the procedure, severance amounts, the relationship to general and special unfair dismissal protection, and any safeguards against abuse—remains subject to the legislative process.

Tax Privileges for Severance Payments upon Swift Re-employment

Severance payments are to be tax-privileged where the affected employee promptly takes up new employment. The tax advantage increases the faster the employee commences new employment.

This privilege creates incentives for immediate transitions and will influence bargaining positions in negotiating separation agreements. In practice, separation agreements should in future be more closely integrated with outplacement services, subsequent employment arrangements, garden leave provisions, payment timing and tax advisory.

Employers should avoid making binding commitments regarding tax advantages until the statutory requirements and evidentiary obligations have been finalised.

Certificate of Incapacity for Work from Day One

Under the reform package, the option to obtain a sick note by telephone is to be abolished. In addition, the submission of a certificate of incapacity for work is to become mandatory from the first day of illness. The fraudulent issuance of a certificate of incapacity for work is to be subject to increased penalties under Section 278 of the German Criminal Code.

Under current law, incapacity for work must be reported without undue delay; a medical certificate is generally only required for absences exceeding three calendar days, although employers may require submission at an earlier stage.

Under the announced new rules, employers would no longer need to issue individual workplace directives to require a certificate from the first day—this would become the statutory default.

Of particular practical relevance are the necessary amendments to employment contracts, works agreements, sickness policies and HR workflows, as well as communications to employees. At the same time, employers should review their established processes for electronic certificates of incapacity for work (eAU) to avoid delays and unnecessary follow-up enquiries.

(Temporary) Extension of Fixed-Term Employment Without Objective Justification and Abolition of the Written Form Requirement

For employees hired by 31 December 2030, fixed-term employment without objective justification is to be permitted for a maximum duration of 48 months with up to six extensions. In addition, a renewed initial hiring by the same employer is to be permissible, which would significantly relax the existing prohibition on prior employment. Furthermore, the written form requirement for fixed-term agreements is to be abolished as of 1 January 2027. The reform package would thus depart considerably from the current framework of the Part-Time and Fixed-Term Employment Act, under which fixed-term employment without objective justification is currently more narrowly restricted and the written form is a validity requirement.

Employers would thus gain considerably more flexibility for fixed-term hires. The abolition of the written form requirement reduces formal sources of error but simultaneously increases the importance of robust electronic documentation: fixed-term arrangements should continue to be clearly documented, version-controlled and stored in an evidentially secure manner prior to the commencement of work.

Particular care should be taken when examining existing cases, subsequent fixed-term appointments, renewed initial hirings and the distinction from fixed-term employment with objective justification, since the announced extension would only apply to employees hired by 31 December 2030.

The reform package does not, by contrast, contain a direct change to the statutory minimum wage. Indirectly, however, higher flat-rate taxes on marginal employment (Minijobs), possible changes to supplements and potential reductions in documentation requirements remain relevant. A distinction must be drawn between general bureaucracy reduction and the continuing working-time and minimum-wage-related recording and documentation obligations, particularly in marginal employment and in sectors subject to intensive monitoring. Employers should therefore review remuneration models, marginal employment arrangements and time recording not in isolation but as an integrated whole.

Sunday and Public Holiday Supplements

The thresholds for tax-exempt Sunday and public holiday supplements under Section 3b of the German Income Tax Act are to be increased to an hourly wage of up to EUR 75 as of 1 January 2027; under current law, the base wage for tax exemption purposes is capped at EUR 50.

Within the scope of a collective bargaining agreement, the tax-exempt supplement is also to be made fully exempt from social security contributions. Companies with shift, production, logistics or service operations should model the effects on payroll, collective agreement coverage, works agreements and cost planning at an early stage.

Marginal Employment (Minijobs)

The flat-rate tax on marginal employment is to be increased from two to five per cent. Employers should factor in the higher flat-rate tax when calculating marginal employment costs and assess whether existing marginal employment arrangements remain economically viable. Alternative engagement models should also be considered in the cost analysis.

Works Council Co-Determination in AI Deployment

To support the operational implementation of AI, software and its updates as well as updates to technical systems are to be introduced more quickly and efficiently in compliance with works council co-determination rights. The social partners are being asked to develop proposals for corresponding simplifications within the Works Constitution Act.

For employers, it remains essential to coordinate AI and software projects early on with the works council, data protection, IT security and relevant departments. Under current works constitution law, the introduction and use of technical systems may be subject to co-determination where they are designed to monitor employee conduct or performance; a statutory acceleration would therefore presumably not eliminate co-determination rights but rather structure them procedurally.

Collective Bargaining Parties to Develop Solutions on Fixed-Term Employment with Justification and Occupational Health and Safety

The coalition further calls upon the collective bargaining parties to propose, by mid-October 2026, specific regulatory areas in which deviations from existing legislation—such as in the area of fixed-term employment with objective justification or occupational health and safety—may be agreed through collective bargaining agreements. This prospectively opens up scope for sector-specific solutions but is also likely to increase the significance of collective agreement coverage, reference clauses and opening clauses.

Co-Determination: End of the “Shelf SE”

The possibility of circumventing German co-determination law through so-called “shelf SEs” (Societas Europaea) is to be eliminated. With respect to the planned new EU-level corporate form, the Federal Government is advocating that employee-level co-determination must not be undermined.

The planned change is likely to be of particular significance for growing corporate groups, private equity structures and international groups. In the future, structuring options to avoid or limit co-determination requirements may become more restricted; ongoing or planned restructuring and participation arrangements should therefore be reviewed at an early stage for potential implications.

Sunday Opening Hours

The extended Sunday opening hours for bakeries, confectioneries and libraries agreed in the coalition agreement are to take effect on 1 January 2027 under the reform package. From a working-time law perspective, it should be noted that Sunday and public holiday work is generally prohibited under current working-time legislation and is only permitted in statutorily prescribed exceptional cases. Where Sunday or public holiday work is permissible, compensatory rest and rest period requirements must be observed; at least 15 Sundays per year must remain work-free, and Sunday work generally triggers a substitute rest day.

Labour Market Measures

In addition, the Western Balkans Regulation is to be capped at 25,000 persons per year from 1 January 2027, which must be factored into workforce planning particularly by sectors with high demand for third-country workers.

Employment Transitions

Also relevant for restructuring and transformation processes are the announced instruments of the Federal Employment Agency: career counselling during employment, labour market hubs as a standard instrument under Social Code Book III, job-to-job qualification programmes and strengthened continuing training within transfer companies are intended to facilitate employment transitions and prevent unemployment.

Employers in sectors affected by transformation should factor these instruments into workforce restructuring, qualification measures and social plan negotiations at an early stage.

Bureaucracy Reduction

The reform package further provides for a Reporting Relief Act, a review of documentation obligations and the abolition of certain company-level designated officers where their appointment is not required by EU law. At the same time, the paper emphasises that relevant standards—including employee rights—are not to be lowered and that violations may be subject to stricter sanctions.

In practice, this means that reliefs should not be understood as a blanket reduction in HR compliance; rather, companies should assess which documentation, record-keeping and designated officer structures may actually be affected.

Occupational Health and Safety

In the area of occupational health and safety, the reform package announces simplifications for installations requiring supervision, an overhaul of the German Social Accident Insurance (DGUV) testing obligations for electrical installations and equipment, and improved data exchange between the federal government, states and accident insurance bodies. At the same time, the Federal Ministry of Labour and Social Affairs (BMAS) is to support regular, cross-institutional inspections in occupational health and safety.

Employers should therefore not prematurely reduce their health and safety organisation, inspection cycles and documentation processes but rather adapt them once the subsequent statutory details have been clarified.

Employers Should Now Review Affected Employee Groups and HR Processes

These are currently political resolutions, not yet applicable law. The specific legislative process remains to be seen; however, the coalition is pursuing swift implementation.

Employers should use the time before the publication of draft bills to identify affected employee groups and HR processes. Specifically, an initial review is recommended covering: remuneration data with regard to the high-earner provision; fixed-term employment practices including re-hirings; sickness policies and eAU processes; marginal employment cost calculations; supplement and shift models; planned AI and software projects with works council implications; potential transfer and qualification instruments; and existing HR compliance and occupational health and safety documentation. Existing templates for separation agreements, fixed-term employment arrangements, works agreements and HR policies should not be amended prematurely but should be prepared for short-notice adaptation.

Regardless of political assessment, the reform package contains individual measures that may have significant practical implications for recruiting, separation management, use of fixed-term employees and the deployment of AI-based systems. For internal communications, a measured assessment is therefore recommended: the reforms may enhance flexibility but will likely only become reliably plannable after political and legislative specification.

Should the announced measures be implemented in their essential elements, the planned changes to fixed-term employment, the separation of high earners and works council co-determination in AI deployment in particular could have a lasting impact on employment law practice and significant implications for HR strategies and processes.