German Employers Cheer, Unions Fume as Labor Market Reform Extends Fixed-Term Contracts to Four Years

Germany’s new economic package extends fixed-term contracts to four years, eases dismissal for high earners, raises mini-job taxes, and tightens sick leave rules, sparking business-union divide.

The federal government’s new economic package, announced in July 2026, promises to make Germany’s labor market more flexible — but the pitch has split the country. Business associations have welcomed the overhaul, while trade unions warn of a surge in precarious employment.

At the heart of the controversy: fixed-term contracts without a specific reason can now run twice as long as before. The maximum duration jumps from two to four years, and the number of permitted extensions rises from three to six. The new rules apply to new hires and will remain in effect until the end of 2030. Germany’s Institute for Employment Research (IAB) has cautioned that the change could lead to a “significant increase in precarious employment relationships.”

High earners are also in the government’s crosshairs. Employees earning around €15,000 gross per month — a group that makes up just 0.27 percent of all workers, according to the IAB — will be easier to dismiss starting in 2027. Employers will be able to terminate the employment relationship by offering a severance payment. Experts worry this income threshold could create a ceiling on careers: once someone crosses it, they become a liability. To sweeten the deal, the reform includes tax benefits on severance payments, but only if the affected worker quickly finds a new job.

The days of phoning in a sick note are over. The government is scrapping the remote certification option that was expanded during the pandemic. Employees now need a doctor’s certificate from the very first day of illness. Labor lawyers point out, however, that the principle of favorability (Günstigkeitsprinzip) still applies: existing contracts with more generous rules remain untouched.

Mini-jobs are getting more expensive for employers. The flat-rate tax on these low-wage positions will rise from 2 to 5 percent. At the current earnings ceiling of €603 per month, that means the monthly tax burden jumps from €12.06 to €30.15. At the same time, the opt-out option from the statutory pension insurance scheme disappears; all mini-jobbers will be automatically enrolled. The change lands as a blow to companies that have relied on cheap side jobs.

Co-determination rules are being tightened in two opposing directions. On one hand, the government wants to stop companies from using shelf SE (Societas Europaea) entities to bypass worker representation. On the other hand, it aims to accelerate the introduction of artificial intelligence in the workplace by simplifying the co-determination process. Tensions are already visible: at Volkswagen, the group works council has publicly criticized management’s strategy to slash models and variants, with plant closures not ruled out. Worker representatives are demanding long-term employment guarantees instead of short-term cost-cutting.

Two recent rulings by the Federal Labor Court (BAG) are shaping the legal landscape alongside the legislative plan. In November 2025, the court decided that employers cannot exclude workers from pay increases simply because they refused to sign a new contract. When it comes to overtime, the burden of proof remains squarely on the employee. A 2022 judgment made clear that anyone claiming overtime must show precisely when the extra hours were ordered, approved, or tolerated. The general duty to record working hours does not change that requirement.