2027 Reform Shock: Germany Plans to Extend Fixed-Term Contracts to 48 Months as BAG Tightens Dismissal Rules

A coalition paper published in early July outlines sweeping labour law reforms set to take effect at the start of 2027. The most controversial measure would allow employers to offer fixed-term contracts without a specific reason for up to 48 months for new hires, double the current 24-month limit. The change would remain in place until the end of 2030.

Planned changes to severance taxation are equally far-reaching. A new tax bonus would be linked to how quickly a dismissed worker finds a new job. The existing “fifth-rule” (Fünftelregelung), which spreads severance payments over five years for tax purposes, would be scrapped. For high earners with annual salaries above roughly €177,450, dismissal protection would be loosened from January 2027.

Unions Verdi and the DGB have sharply criticised the package, particularly the expansion of fixed-term contracts. They argue it undermines job stability at a time when workers need more security, not less.

BAG delivers stronger protections in three key rulings

While the government pushes for flexibility, Germany’s Federal Labour Court (BAG) issued a series of employee-friendly decisions during the first half of 2026.

Dismissal during annual leave: an employer must still respect the two-week objection period even if the employee is on holiday. The BAG ruled that vacation does not relieve the company of its obligation to hear the employee’s side promptly.

Probationary-period protection for disabled workers: a termination during probation is invalid if the representative body for severely disabled employees (Schwerbehindertenvertretung) was not properly involved. A mere stamp confirming receipt does not suffice, the court decided in January. The body must be given a full week to submit a statement.

Illness-related dismissal: after a new period of incapacity exceeding six weeks, the employer must offer a fresh occupational reintegration management (bEM) process. An earlier refusal by the employee does not excuse the company from repeating the process. Moreover, the BAG clarified that a registered letter’s scan receipt alone cannot prove the bEM invitation was delivered.

O2 Telefónica cuts more than 1,000 jobs: warning on severance deals

The telecoms giant plans to eliminate over 1,000 positions, roughly every sixth or seventh role in the company. O2 is relying on voluntary programmes, but experts caution that severance agreements (Aufhebungsverträge) should never be signed without legal review. Such contracts typically trigger a 12-week waiting period before unemployment benefits start.

There is no automatic entitlement to a redundancy payment. Compensation usually emerges only from negotiations during a dismissal-protection lawsuit or through social plans attached to site closures. The rough rule of thumb is 0.5 months’ gross salary per year of service. In fast-decision programmes, employees may be offered additional bonuses between €30,000 and €40,000.

Real-life cautionary tales from Austria

Cases in neighbouring Austria show how quickly workers can lose out. In Upper Austria, a warehouse employee was pressured into signing a mutual termination with a retroactive date. After a court challenge, the company had to pay €6,068 gross in compensation. ‘Such agreements demand extreme caution,’ warns Andreas Stangl, president of the Chamber of Labour (AK).

Another case from the service sector in Burgenland involved an employee who waited three months for his first pay. Only in court did he secure back payments for special bonuses, holiday replacement pay and out-of-pocket expenses – a total of €5,760.

en | boerse | 69765421 |