German Coalition’s 34-Point Labour Package Splits Business and Unions – Tax Rewards and Looser Dismissals Lead the Way

Germany's labour reform speeds re-employment with severance tax bonus, eases dismissal for top earners from 2027, extends fixed-term contracts, and cuts taxes for families.

Business lobby groups have welcomed the flexibility, unions have condemned the weakening of job protection, and economists have questioned the overall impact. The German government’s comprehensive labour-market reform, announced on 2 July, is now racing to become law by the end of the year. At its heart are measures designed to speed up re-employment after a dismissal and, from 2027, to make it easier to part ways with top earners.

One of the most direct changes targets the tax treatment of severance payments. Workers who find a new job quickly after being laid off will receive a tax bonus on their severance, with the rate rising the earlier the new position starts. In return, the current “one-fifth rule” – which spreads the tax burden over five years – will be scrapped for these cases. Exact deadlines and tax percentages have not yet been finalised. The government says the aim is to boost labour mobility. The package also includes “labour-market turntables” — local hubs for job matching — and special job-to-job qualification programmes.

Economist Robin Jessen of the RWI – Leibniz Institute for Economic Research voiced scepticism. “It is not the state’s job to artificially make work more attractive at particular points in time,” he said.

From 1 January 2027, a new threshold will ease dismissal rules for high-income employees. Anyone earning more than 177,450 euros gross per year — 1.75 times the contribution assessment ceiling for social insurance — can henceforth be dismissed more easily, provided they receive a severance payment. According to the Institute for Employment Research (IAB), only 0.27 percent of all employees fall into this bracket. IAB expert Enzo Weber cautioned: “This group is often over 55 and has family obligations. The salary threshold could hamper career development.”

The coalition also plans to expand fixed-term contracts without a specific reason. For new hires signed by the end of 2030, the maximum duration will double from 24 to 48 months, and up to six renewals will be permitted. This change alone has drawn sharp criticism from employee representatives.

Family households gain concrete relief. A typical household with two children and an annual income of 60,000 euros will save more than 600 euros per year under the planned tax adjustments. Detailed changes include:

• Tax-free basic allowance: to rise to 12,900 euros by 2028
• Employee lump-sum deduction (Arbeitnehmerpauschbetrag): increasing to 1,430 euros
• Child benefit: reaching 272 euros per month in 2028
• Top tax rate (Spitzensteuersatz): kicks in at 70,600 euros of income
• Wealth surtax (Reichensteuer): 45 percent from 250,000 euros, 47 percent from 280,000 euros

From January 2027, a new cap on the tax-free allowance for Sunday and public holiday work will apply: a maximum of 75 euros per hour.

Pension reform within the package introduces a stock-market-based pension (Aktienrente) and links the retirement age to life expectancy. For mini-jobs (low-wage marginal employment), the employer’s tax contribution will increase to 5 percent.

The 34-point plan has drawn a clear line between supporters and detractors. Bert Sutter, president of the Association of Industrial Enterprises Baden, praised the greater flexibility on fixed-term contracts and the removal of special dismissal protection for top earners. Still, he stopped short of calling it a “great leap forward” – the compromise, he said, was not that bold. DIW Berlin president Marcel Fratzscher described the package as largely symbolic: “I don’t expect any notable growth impulses from it.”

Ver.di, the United Services Trade Union, fundamentally rejects any weakening of dismissal protection. Critics also warn that the new severance bonuses will mainly benefit highly skilled workers who are easy to place in new jobs. People in structurally weak regions or with health impairments could end up worse off.

As the legislative process heats up, the reform’s final shape remains uncertain – but the battle lines are already drawn.