Labour law reform 2027: What employers can expect

Labour law is set to undergo significant changes: with the coalition paper “A Programme for Recovery and Employment”, the governing coalition has presented a package of measures that will overhaul many areas of labour law. Specific draft legislation is expected in 2026/2027; numerous provisions are set to be adopted by the end of 2026 and come into force on 1 January 2027. Until then, the current legal situation will apply – but companies and works councils should review their processes relating to labour law at an early stage and prepare for the changes.

More flexible fixed-term contracts as an opportunity in employment law

Of particular relevance to employment law is the extension of fixed-term contracts without objective grounds. The following will apply in future to new hires up to 31 December 2030:

• A maximum duration of 48 months for fixed-term contracts without objective grounds
• Up to six extensions within this overall period
• Re-hiring as a new employee with the same employer is possible
• Abolition of the written form requirement as of 1 January 2027, thereby opening the way for digital contract processes

This creates much-needed flexibility and planning certainty for project- and transformation-driven staffing requirements and strengthens competitiveness. At the same time, this opens up legally compliant alternatives for many sectors to the widespread use of agency staff, which is associated with significant legal risks. Important for employers: fixed-term contracts must be carefully aligned with the flexibility clauses in collective agreements.

Protection against dismissal for high earners is being relaxed

A key aspect of the reform concerns protection against dismissal. For employees with an annual income exceeding 1.75 times the contribution assessment threshold for statutory pension insurance – currently around 177,450 EUR gross – it is to become possible, from 1 January 2027, to terminate the employment relationship more easily in return for a severance payment. The exact details remain to be seen, but for some employees, traditional protection against dismissal under labour law will thus be fundamentally rethought.

In addition, severance payments will enjoy tax advantages: the quicker the transition to new employment, the greater the tax benefit. For employers, this opens up more predictable and cost-transparent separation strategies for highly paid executives.

Fewer sick days, more administration

Labour law is also setting new standards when it comes to absences:

• Certificate of incapacity for work required from the first day
• End of sick notes issued by telephone

It remains to be seen whether this will lead to a noticeable reduction in the number of days lost to absence, as hoped, or whether it will actually increase. What is certain, however, is that the administrative burden will rise, particularly when it comes to processing sensitive health data. Employers should adapt their processes, carry out data protection impact assessments and update staff information in good time.

Remuneration: Surcharges are becoming more attractive

Work on Sundays and public holidays is to be financially rewarded. The tax thresholds under the Income Tax Act (§ 3b EStG) are to be raised to an hourly wage of up to EUR 75; collective agreement-based surcharges will be made entirely exempt from social security contributions. This reduces non-wage labour costs in shift-based operations and increases the appeal of flexible working models. In practical terms for employment law, this means that updates to payroll systems and collective agreements are absolutely essential.

Greater scope for collective bargaining parties

The parties to collective agreements are taking centre stage. By mid-October 2026, they are to submit concrete proposals on which areas of employment law – such as fixed-term contracts or health and safety at work – might allow for deviating provisions under collective agreements. Cooperation with the works council on the introduction of software and the updating of technical equipment is also to be simplified and accelerated. In future, the works council’s role could be more limited to framework regulations. The potential for sector-specific flexibility is considerable, but depends on actual implementation.

Reducing red tape and further changes

The reform package also relieves companies of reporting and documentation obligations:

• Pauschale Aufhebung gesetzlicher Berichtspflichten gegenüber staatlichen Stellen, sofern kein Ministerium die Erforderlichkeit begründet (Beweislastumkehr)
• Abbau von Dokumentationspflichten: Ziel ist, binnen zwölf Monaten mindestens jede vierte Pflicht außerhalb von EU- und Verfassungsrecht abzuschaffen – ohne Absenkung arbeitsrechtlicher Schutzstandards
• Abolition of in-house officers whose appointment is not based on EU requirements (such as safety officers, occupational safety specialists or women’s and equality officers)

However, the documentation requirements under the NachweisG and the EntgTranspG are likely to remain in place. Further points of contact with labour law arise, amongst other things, from simplified inspection requirements for electrical installations (DGUV), longer Sunday opening hours with implications for working time planning, the 1:1 transposition of the EU Supply Chain Directive (CSDD) for very large companies, and the end of the provisional SE (Vorrats-SE) as a means of circumventing co-determination. The latter is hardly realistic. This is because, in its ruling in the Olympus case (judgement of 16 May 2024 – C-706/22), the European Court of Justice (ECJ) not only confirmed the admissibility of the ‘standby SE’, but also clarified that employee participation in the SE is exhaustively regulated in Directive 2001/86/EC (SE Directive). It is not possible to abolish the ‘standby’ SE in Germany with the aim of preventing the co-determination status from being frozen without a participation procedure being carried out, without amending the SE Directive itself. The latter is highly unlikely. The coalition committee is engaging in symbolic politics here. What Article 11 of the SE Directive permits is a more specific definition of procedural abuse. This provision could be tightened up. In practice, it will therefore become even more important to clearly document the economic motives and background to the choice of a provisional SE as a structural option.

Conclusion and recommended action

The reform package is refreshingly bold in the field of labour law and tackles issues that have long been considered untouchable. For employers, the opportunities outweigh the challenges: more flexible fixed-term contracts, more predictable terminations and more attractive remuneration models. Whether these simplifications will actually take effect, however, depends on the specific legal framework.

Act now: Review your contract, remuneration and compliance processes at an early stage and prepare your company specifically for the changes in employment law.