A Divided Germany Walks a Tightrope with Sweeping Labor Market Overhaul

A 34-point reform package unveiled in Berlin on 2 July aims to reshape the German labor market in ways that have already ignited fierce debate. The coalition under Chancellor Merz wants to cut high sick?leave rates and make hiring easier — but critics from unions, medical associations and even the DIW economic institute warn the changes could backfire.

From the first day of illness, employees will have to present a doctor’s certificate. The regulation, which previously could only be imposed on an individual basis by employers, now becomes a nationwide standard. The option of a telephone sick note — used in just 0.8 to 1.2 percent of all sickness notifications — is to be scrapped entirely. Merz justified the move on 3 July by pointing to annual costs from absenteeism of between €82 billion and €85 billion. The chief of the AOK health fund dismissed it as “pure symbolism,” while an IGES study places Germany seventh in the EU with 6.8 percent of working time lost.

SPD leader Klingbeil argued on 5 July for a pragmatic rollout, saying sick people should not have to drag themselves to a doctor’s office on day one. Labor law experts also note that the “favorability principle” protects existing contracts that grant workers better conditions. Meanwhile, physicians’ associations estimate up to 30 million extra practice visits per year. DAK chief Storm has proposed a Scandinavian?style partial sick note instead, a model the health ministry is now examining.

Easier fixed?term contracts and wider dismissal thresholds

The coalition is simultaneously loosening rules on fixed?term employment without a specific reason. Contracts can now run for up to 48 months, with as many as six extensions. The arrangement is initially valid until the end of 2030.

Parallel to that, the small?business clause in the Dismissal Protection Act is being raised: the threshold below which companies are exempt from general dismissal protection jumps from 10 to 50 employees. Millions of workers in medium?sized firms would no longer need to fear social justification requirements for dismissals, though protections remain for pregnant women, severely disabled employees and works councils.

Tax shifts: relief for families, higher rates for top earners

The package includes annual tax relief of roughly €10 billion, planned for implementation on 1 January 2027. A typical family earning €60,000 a year can expect savings of up to €600. At the other end of the scale, top earners face higher rates: 45 percent on income above €250,000 and 47 percent above €280,000. Severance payments, by contrast, are to be given preferential tax treatment.

Widespread rejection and open questions

A YouGov survey found that 59 percent of respondents oppose the tougher sick?leave rules. DIW economists question whether there is any causal link between telephone sick notes and rising absenteeism; they note that in 2024 roughly 40 percent of all sick days were due to long?term illnesses lasting more than six weeks — a problem the new certificate rule does not touch.

At this stage the agreement remains political. A formal legislative draft has not yet been submitted, meaning none of the proposed changes are currently in force. Employers are advised to review their existing processes but to wait for the next steps in the legislative process before making any adjustments.

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