Germany Scraps Phone Sick Notes, Doubles Fixed-Term Contracts in Sweeping Labour Reform

The pandemic-era convenience of telephoning in a sick note is over. Under a 34-measure reform package agreed by Germany’s coalition parties – CDU, CSU and SPD – employees must provide proof of incapacity for work from the very first day of illness. The government is also ramping up penalties for doctors who issue bogus certificates, a move it says will curb abuse of the system.

That change is just one piece of a broader overhaul that spans taxation, pensions, bureaucracy and hiring rules. The package, which the coalition calls the “German Reform Hammer”, aims to stabilise the economy through a €10-billion tax relief programme and a significant loosening of labour-market regulation – but it has drawn sharp criticism from unions and some economists.

Fixed-term rules rewritten

The most striking labour-market shift concerns fixed-term contracts without objective cause. Currently capped at 24 months, they can now run up to 48 months, with up to six renewals allowed. The new rules apply to all employees hired before 31 December 2030. From 1 January 2027 the requirement for a written form will also be dropped, making extensions easier to arrange.

For high earners – those earning up to €15,000 a month, or 1.75 times the pension contribution ceiling – the reform introduces simplified dismissal against a severance payment. The severance will be taxed at a preferential rate if the employee quickly takes a new job, an incentive the government hopes will speed up labour mobility.

Tax relief paired with higher levies on top incomes

The tax measures, due to take effect on 1 January 2027, with full impact expected in 2028, lift the basic tax-free allowance, child benefit and the employee lump-sum deduction. A family with two children and a gross annual income of €60,000 stands to save up to €600 a year.

At the other end of the spectrum, the “rich tax” rate is being tightened: a 45% marginal rate will apply from €250,000 of annual income, climbing to 47% above €280,000. The top marginal rate of 42% for lower incomes remains unchanged. The flat tax on minijobs rises from 2% to 5%, and the tax deduction for handyman services falls from 20% to 15%.

Pension, health insurance and bureaucracy changes

On pensions, the coalition will implement all 33 recommendations of its expert commission by the end of 2026. Among them: a capital-funded pension component that could increase contributions by up to two percentage points, a retirement age that will rise beyond 67, and the elimination of a full pension after 45 contribution years without any discount.

The statutory health insurance system is to be relieved by €16.3 billion in 2027. In housing, the partners agreed a nationwide ban on the expropriation of private rental housing by local authorities.

Bureaucracy faces a sustained assault: ministers promise to scrap every fourth documentation requirement within a year and to abolish reporting obligations wholesale. From 2027, a “deemed approval” rule will apply – applications will be automatically approved if the authority fails to decide within four months.

Mixed reactions from business, unions and academia

Business groups largely welcomed the direction. BDA president Rainer Dulger called the agreement an overdue course correction, while economist Gabriel Felbermayr said the reform thrust was positive. Friedrich Merz described it as “a good day for Germany” that would help get the country back on track.

But the labour-friendly elements drew furious responses. Frank Werneke, head of the ver.di union, attacked the scrapping of phone sick notes, arguing it fosters a “culture of mistrust” toward employees. IG Metall went further, branding the package an outright assault on workers’ rights.

DIW president Marcel Fratzscher was unimpressed, calling the measures a symbolic package that lacks a genuine growth impulse. The DIHK chamber of industry and commerce expressed disappointment over the higher top tax rates.

en | boerse | 69678347 |