Germany’s Labor Overhaul Clamps Down on ‘Shelf’ European Companies Used to Sideline Workers

Germany closes co-determination loopholes for shelf SEs, eases dismissal rules for high earners, and extends fixed-term contract limits until 2030.

A sweeping package of employment-law reforms adopted by the federal government in early July targets the use of so-called shelf European Companies (Vorrats-SE) — corporate shells set up purely to dodge mandatory co-determination rights. The move, part of the “Program for Recovery and Employment,” also tightens rules for foreign-owned firms operating on German soil, relaxes dismissal protection for top earners, and scraps the popular telephone sick-note option.

Co-determination loopholes slammed shut

Under the new rules, companies can no longer incorporate a dormant Societas Europaea (SE) as a means to block works councils or exclude worker representatives from supervisory boards. The practice had become a well-known workaround; the reform puts an end to it.

The Bundesarbeitsgericht (BAG, Federal Labor Court) simultaneously reinforced the rights of employees at German branches of foreign companies. In a ruling on 13 May 2026 (case no. 7 ABR 7/25), the judges held that a domestic site can qualify as an independent, works-council-capable Betriebsteil (operational unit) even if the parent company is headquartered abroad. The concrete case involved Malta Air’s operation at Berlin-Brandenburg Airport, which employs roughly 320 workers. Key is a minimum degree of local organisational independence — for example, the authority of on-site supervisors such as base captains to give instructions.

Easier firing for high earners — and more flexible fixed-term contracts

From 1 January 2027, employees earning more than 1.75 times the contribution assessment ceiling (Beitragsbemessungsgrenze, BBG) — currently around €177,500 a year in gross salary — will face reduced dismissal protection. Employers can then ask a court to dissolve the employment relationship against a severance payment, without having to state a specific reason. The maximum compensation is capped at 18 monthly salaries.

Fixed-term rules are also loosened temporarily. Until 31 December 2030, new hires can be given fixed-term contracts without a substantive reason for up to 48 months, with as many as six renewals. The previous ban on re-employing someone who had already worked for the same employer (Vorbeschäftigungsverbot) is lifted. Starting in 2027, the requirement for a written form (Schriftformerfordernis) when concluding a fixed-term agreement disappears.

Mass dismissals: slight errors tolerated, sequence still critical

Despite the easing, the BAG remains strict on formalities — but with nuance. On 25 June 2026 (case no. 6 AZR 7/26), the court ruled that minor mistakes in a mass-dismissal notification do not automatically invalidate the termination. An insolvency administrator had reported slightly incorrect figures to the Federal Employment Agency. Because the purpose of the notification — enabling early job placement — was still achieved, the dismissals stood.

The order of steps, however, is non-negotiable. In a decision of 1 April 2026 (case no. 6 AZR 152/22), the BAG stressed that the mass-dismissal notification to the authorities may only be filed after the consultation procedure with the works council has concluded. Reversing the sequence risks making all terminations void.

Telephone sick notes abolished, and a vacation-dismissal clarity

The reform package also eliminates the option of a telephone sick note. From now on, employees must present a medical certificate starting from the first day of illness.

What happens when a boss wants to fire someone while they are on holiday? The BAG settled that on 4 December 2025 (case no. 2 AZR 55/25): the two-week deadline for extraordinary dismissals runs even during an employee’s leave. No contact ban applies. The employer must make reasonable efforts to reach the worker — for instance, via their work mobile — in order to clarify the facts before issuing the notice.