German Study Warns Productivity Gains Came at Health’s Expense as New Labor Reforms Take Shape

A sweeping package of workplace measures adopted by Germany’s ruling coalition will require employees to present a doctor’s note on the first day of illness — scrapping the pandemic-era practice of remote certifications and the common three-day grace period. The changes, which also extend fixed-term contracts and reduce dismissal protection for high earners, arrive alongside fresh evidence that productivity improvements in recent years have taken a heavy toll on workers’ wellbeing.

The IFES Institute surveyed 1,500 works council chairs and found that 73 percent of companies view productivity as their top priority. Yet more than half of respondents said the productivity increases of the last three years came at the expense of employee health. The result: a deteriorating workplace atmosphere and elevated sickness absence rates. Paradoxically, while 63 percent of firms report a skills shortage, many remain reluctant to hire specific groups — 35 percent shy away from long-term unemployed candidates and 29 percent from applicants over 50.

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Under the coalition’s new rules, the telephone-based sick note introduced during the pandemic will be eliminated entirely. Workers must now provide a medical certificate from day one of illness, rather than the previous norm of day three in many companies. The package also grants employers more flexibility: fixed-term contracts without a specific reason can now run up to 48 months, with up to six renewals — but only until 31 December 2030. Employees earning more than €177,500 gross per year will face reduced protection against dismissal, with tailored severance arrangements as compensation. Those provisions will partly take effect on 1 January 2027.

Several recent rulings by the Federal Labour Court (BAG) have strengthened employee rights in other areas. In a decision of 13 May 2026 (case no. 7 ABR 7/25), the court held that German locations of foreign companies can qualify as independent operating units. The specific case involved Malta Air at Berlin’s BER airport; the court ruled its roughly 320 employees are entitled to form their own works council, provided there is a minimum level of organisational autonomy on site.

The use of artificial intelligence to monitor staff is emerging as a flashpoint. The Association of German Labour Lawyers (VDAA) warns that AI agents processing personal data may trigger co-determination rights under Section 87(1) No. 6 of the Works Constitution Act. In plain terms, works councils must have a say when algorithms track employee performance. The European Union’s AI Act does not create additional co-determination rights beyond those already established in German law.

The BAG has also clarified the rules for mass redundancies. A judgment of 1 April 2026 (case no. 6 AZR 152/22) declared that dismissals are invalid if notification to the Federal Employment Agency occurs before the consultation procedure with the works council is complete. However, the court offered some relief on 25 June 2026 (case no. 6 AZR 7/26), ruling that minor errors in the notification — such as slightly overstating the number of planned redundancies — do not automatically render all dismissals void.

At the European level, the European Commission is working on a new company form called “EU Inc.” A draft regulation from March 2026 proposes online incorporation within 48 hours and no minimum capital requirement. Labour representatives have raised alarm, warning that large corporations could use the vehicle to circumvent co-determination rights and creditor protections. The German government does not see an immediate weakening of the Works Constitution Act. The regulation is expected to take effect in 2027.

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