Millions of German Workers to Lose Job Protection as Coalition Raises Dismissal Threshold to 50

The new coalition government of CDU, CSU, and SPD has unveiled a 34-point labor market overhaul that fundamentally shifts the balance between employer flexibility and employee security. Presented in early July 2026, the package targets dismissal protection, sick-leave documentation, and tax law — but its most explosive measure extends the small-business exemption.

Under current law, the general protection against socially unjustified dismissal applies once a company has more than ten employees. The reform hikes that threshold to 50. Millions of workers in smaller firms would immediately lose the right to challenge a layoff as unfair. Special protections for pregnant women, severely disabled staff, and works council members remain untouched. Separately, the coalition wants to allow fixed-term contracts without a material reason for up to 48 months — double the current maximum of 24 months under certain conditions.

Employer associations welcomed what they call a long-overdue course correction. Unions warn that decades-old safeguards are being dismantled.

Chancellor Friedrich Merz justified a second centerpiece — a mandatory medical certificate from the first day of illness — by pointing to sharply rising sickness absence rates. The government will permanently abolish the phone-based sick note that was introduced during the pandemic. Critics argue the rule will swamp doctors’ surgeries. With an absence rate of 6.8 percent, Germany ranks seventh among European OECD countries. Labor lawyers note that existing contracts with later sick-note deadlines remain valid under the favorable principle, meaning employers cannot immediately force current staff into the new regime.

Any worker asked to sign an amended contract has no legal obligation to accept it. Changing core terms unilaterally is unlawful. If an employee refuses, the employer’s only tool is a change dismissal — a move subject to strict requirements that include a valid business reason or conduct issue. Pay cuts are particularly hard to enforce. In practice, such disputes often end in a settlement with a severance payment.

The Federal Labor Court (Bundesarbeitsgericht) has reinforced the importance of procedural correctness in mass layoffs. Dismissals are invalid if the mass-dismissal notification is filed incorrectly or too late. The consultation process with the works council must be completed before the employer notifies the labor agency. Only after that may the actual termination letter be sent.

A June 15 ruling by the Solingen Labor Court illustrates the risks of compliance failures. An employee lost an entitlement to severance worth over €415,000 after serious misconduct came to light following a mutually agreed termination agreement. The court found that the misconduct constituted a fundamental disruption of the contract’s basis, wiping out the payment.

The package is flanked by tax changes effective January 1, 2027. The basic personal allowance and the child allowance will rise, delivering around €10 billion in annual relief to low- and middle-income earners. To finance the cut, the so-called wealth-tax rate will tighten: from €250,000 annual income the rate climbs to 45 percent; from €280,000 it reaches 47 percent.

Alongside the legislative push, new studies show that a home-office share of up to 60 percent can boost productivity by 20 percent. Yet many German companies insist on a return to the office. Experts attribute this to psychological factors in management culture — the desire for control often stands in the way of flexible working arrangements.

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