Coalition Package July 2026: What the Planned Reforms Mean for Your Company

With the package of measures agreed in July 2026 under the title “A Programme for Recovery and Employment”, the CDU/CSU and SPD have set in motion initiatives that could fundamentally reshape the law on fixed-term employment, protection against dismissal, employee co-determination and sick leave notification. The package aims to strengthen Germany as a business location in the face of technological change, demographic pressure and growing international competition. Although no concrete draft legislation is available yet, it is already worth taking a closer look for employers. Below, we present the most important planned changes for you.

Law on Fixed-Term Employment: Expanded Structuring Options and Elimination of the Written Form Requirement

Under current law, fixed-term employment without objective grounds under Section 14 (2) of the German Act on Part-Time Work and Fixed-Term Employment (TzBfG) has been limited to two years and a maximum of three extensions. The prohibition on prior employment (Section 14 (2) sentence 2 TzBfG) has in most cases precluded re-engagement.

Going forward, for new hires through the end of 2030, fixed-term employment without objective grounds will be permitted for a period of up to 48 months, with up to six extensions. The prohibition on prior employment is also to be relaxed, so that re-engagement by a former employer would in future be permissible without objective grounds.

In addition, the written form requirement (Section 14 (4) TzBfG) is set to be abolished with effect from 1 January 2027. The package does not expressly stipulate which form will be permitted in future. It is likely that fixed-term agreements will be valid in text form or by way of a qualified electronic signature. This promises a significant simplification of digital contracting processes.

AI in the Workplace and Collective Bargaining Agreement Opening Clauses

Under Section 87 (1) no. 6 of the German Works Constitution Act (BetrVG), the works council has a co-determination right regarding the introduction and use of technical devices designed to monitor the conduct or performance of employees. This covers almost all IT systems, which in practice often leads to delays. In order to support companies in implementing AI and to safeguard jobs in the course of digital transformation, it should be possible in the future to introduce software and its updates, as well as updates to technical devices, in a simplified and more expeditious manner. In doing so, the works council’s rights to co-determination must be upheld. To this end, the social partners are to develop proposals on how cooperation can be facilitated and accelerated through appropriate provisions, for example within works constitution law.

In parallel, the collective bargaining parties are to submit proposals by mid-October 2026 identifying the areas (such as fixed-term employment on objective grounds or occupational health and safety) in which collective bargaining agreements may deviate from statutory requirements in the future.

Sick Leave Notification: Stricter Rules from Day One

The option to obtain a sick leave notification by telephone is to be abolished, and a statutory obligation to provide a medical certificate from the first day of illness is to be introduced. At the same time, the issuing of incorrect certificates of incapacity for work is to be subject to more severe criminal sanctions: the penalties for incorrect medical certificates under Section 278 of the German Criminal Code (StGB) are to be increased to counteract the misuse of sick leave notifications.

From a legal perspective, the obligation to provide a medical certificate from the first day of illness is not entirely new, as employers are already able to require a medical certificate from the first day today (Section 5 (1) sentence 3 of the German Continued Remuneration Act (EFZG)). What would be new is that this becomes the statutory default rule.

Employers should review their existing clauses on the obligation to provide medical certificates.

Easing of Protection Against Dismissal for High Earners

To date, a court-ordered dissolution of the employment relationship against payment of severance has only been possible in the case of executive employees or on grounds that preclude any further cooperation conducive to the operational objectives of the business – in each case subject to stringent requirements. Protection against dismissal in the upper salary segment is now set to be relaxed. With effect from 1 January 2027, a simplified dissolution mechanism against payment of severance is to apply to employees with an annual income exceeding 1.75 times the income threshold for contribution assessment under the statutory pension insurance scheme (approximately €177.450 gross in 2026). In this respect, the coalition paper takes its cue from a special rule applicable to the credit sector, which applies there to particularly high-earning risk takers (see Section 25a (5a) of the German Banking Act (KWG). The severance payment is then expected to be based on the maximum limits set out in Section 10 of the German Protection Against Dismissal Act (KSchG) and to amount to between 12 and 18 months' salary.

Shelf SE

The formation of a “Shelf SE” for the purpose of circumventing German board-level co-determination is to be prevented. Under this approach, the company is initially established as a mere shell, without any business operations and without any staff. Since no one is employed, the negotiation on employee participation is dispensed with, and the co-determination-free status is preserved even in the event of subsequent growth.

With regard to the planned European corporate form, the Federal Government intends to advocate that the protection afforded by employee co-determination is not undermined.

Further Measures

Beyond employment law, the package contains further initiatives that are of practical significance for employers.

Employees who take up a new position immediately after receiving a severance payment should be eligible for preferential tax treatment, which increases the sooner the transition is achieved. For employers, this may facilitate separation negotiations, as a severance payment becomes more attractive for employees on a net basis.

In addition, the upper limits for tax-privileged Sunday and public holiday supplements under Section 3b of the German Income Tax Act (EStG) are to be raised with effect from 1 January 2027, up to an hourly wage of €75. In the area of collective agreements, such supplements are to be entirely exempt from social security contributions. This makes weekend and public holiday work more attractive for employers who rely on it.

The coalition package also contains numerous further measures, for example relating to data protection, the EU Supply Chain Directive and pensions.

Recommended Action and Outlook

The package signals greater flexibility in relation to fixed-term employment and separations, stricter rules on sick leave notification, and a cautious first step towards reforming co-determination in IT matters. Before these initiatives become applicable law, they must still pass through the legislative process. Nevertheless, employers would be well advised to monitor developments closely and to assess at an early stage where adjustments may be appropriate.

We will keep track of developments on your behalf and will inform you as soon as specific draft legislation becomes available.