Coalition Reform Package: Greater Flexibility in the Labor Market

In light of a stagnating economy, the CDU/CSU–SPD coalition intends to make the labor market more flexible through a comprehensive reform package that was announced yesterday. Chancellor Merz stated that the government is beginning to "loosen the shackles" that the system imposes on businesses.

Background

The leadership of the CDU, CSU, and SPD agreed on a comprehensive reform package ("Program for Recovery and Employment") during a coalition committee meeting. The package is designed to modernize Germany, reinvigorate the economy, and future-proof the welfare state. In addition to income tax relief effective January 1, 2027, the package includes further changes relevant to employment law practice.

Overview of the Planned Measures

Fixed-Term Employment Without Objective Justification

Going forward, fixed-term employment contracts without objective justification will be permitted for a maximum duration of up to 48 months, with up to six renewals. This represents a doubling of the current limits. The new rules are intended to apply to employees hired on or before December 31, 2030.

Severance for High Earners

Effective January 1, 2027, a new provision is to be introduced for high earners with annual income exceeding 1.75 times the statutory pension insurance contribution ceiling (Beitragsbemessungsgrenze), enabling the termination of the employment relationship with a severance option.

For reference: The statutory pension insurance contribution ceiling for 2026 stands at a gross annual income of EUR 101,400. The 1.75 multiple corresponds to a gross annual income of EUR 177,450.

In addition, severance payments are to receive preferential tax treatment if the employee promptly takes up new employment. The faster new employment is commenced, the greater the tax advantage.

Sick Notes

Telephone-based sick notes will be abolished, and penalties under Section 278 of the German Criminal Code (StGB) for the fraudulent issuance of certificates of incapacity for work will be increased. Going forward, a certificate of incapacity for work must be submitted from the first day of illness.

Mini-Jobs

The flat-rate tax on mini-jobs is to be raised from two to five percent.

Higher Supplements

The upper limits for tax-privileged Sunday and public holiday supplements under Section 3b(2) sentence 1 of the German Income Tax Act (EStG) will be increased for hourly wages of up to EUR 75, effective January 1, 2027. Tax-exempt supplements within the scope of a collective bargaining agreement will be fully exempted from social security contributions.

Practical Guidance and Outlook

The proposed changes are still reform plans and must go through the legislative process.

For employers, the reform package opens up considerable room for structuring arrangements, though the specific legislative implementation remains to be seen.

The extended fixed-term employment without objective justification would provide employers with significant advantages in workforce planning and flexibility. The proposed simplified severance-based separation mechanism for high earners could streamline termination and settlement processes. The stricter requirements for sick notes would help prevent fraudulent conduct by employees to the detriment of employers.

A new Working Hours Act is not yet included in the twelve-page outcome paper and, according to Chancellor Merz, is not expected to be discussed until "over the course of the summer." The CDU/CSU and SPD had agreed in the coalition agreement to introduce a weekly rather than a daily maximum working time. A ministerial draft on this matter was published on June 18, 2026. One initial decision has already been made: the extended Sunday opening hours for bakeries, confectioneries, and libraries agreed upon in the coalition agreement will enter into force on January 1, 2027.