Severance Forfeiture Ruling Shadows German Labour Reforms as Coalition Overhauls Job Protection and Taxes

A mid-June ruling by the Solingen Labour Court (Case No. 3 Ca 1629/25) serves as an abrupt reminder that an agreed severance payment is not guaranteed until it lands in a bank account. The court dismissed a worker’s claim for more than €415,000 after he placed private orders through his employer’s internal system while a termination agreement was already signed. The judges applied Section 313 of the German Civil Code (BGB), ruling that the violation undermined the basis of the settlement. The severance was never paid because the misconduct occurred before the money had been disbursed.

The case illustrates a maxim that both sides of the bargaining table will need to heed as the coalition government rolls out the biggest shake-up of German employment law in years. The reform package, approved on 2 July by the coalition committee, touches everything from how quickly a laid-off worker should find a new job to how long bosses can keep staff on fixed-term contracts.

High-earners lose traditional job protection from 2027

Starting 1 January 2027, workers earning more than 1.75 times the annual contribution assessment ceiling – estimated at roughly €177,450 in 2026 – will no longer enjoy the standard regime of dismissal protection. Instead, they will shift to a so-called “severance protection” model. An employer can ask a court to dissolve the employment relationship against a payment of between 12 and 18 months’ salary. The mechanism borrows from rules already applied to risk-takers in the financial sector. Crucially, it only applies to new contracts signed after the law takes effect. Employer associations have welcomed the flexibility; unions have condemned it.

Fixed-term caps double through 2030

For new hires starting before the end of 2030, the maximum duration of a fixed-term contract without a specific reason can climb from two years to four years – exactly 48 months. The number of permissible renewals rises from three to six. The reform also drops the requirement for a written form.

Doctors’ notes return on day one

Another headline change takes effect in January 2027: workers must produce a medical certificate from the very first day of illness. The telephone sick note, introduced during the pandemic, is abolished. In parallel, the government plans tougher penalties for fraudulent medical certificates.

Weekend and holiday bonuses capped

Currently, employers can pay tax-free supplements for Sunday and public holiday work at percentages of the base wage – 50, 125 or 150 percent depending on the day. Under the new rules, any tax-free supplement is limited to €75 per hour. Where a collective bargaining agreement applies, the contributions remain exempt.

Minijobs become costlier

The flat-rate tax on minijobs rises from 2 to 5 percent. For employers, this is a modest but noticeable increase in a segment that many rely on for low-hour staff.

Severance tax incentives reward quick re-employment

The core idea behind the tax overhaul is to solve a longstanding conflict in the system. Until now, an employee who found a new job soon after being laid off often lost the tax advantage of a severance pay-out. The new model uses a degressive system: the shorter the unemployment gap, the larger the tax benefit. The basic decision was taken on 2 July, though precise calculation details remain to be worked out. Under current law, the so-called one-fifth rule can soften the tax burden on severance payments, but since 2025 it has only been claimable through the annual tax return. The reform seeks to make the incentive immediate and more effective.

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