The coalition formed by the Union and the SPD has approved a relatively severe reform package that fundamentally alters the social and labor legal framework of the republic. This 34-point program, presented on Thursday morning and scheduled for phased implementation until the end of 2027, aims to provide extensive relief for businesses and middle-income earners, funded by higher taxes on top earners and stricter conditions for recipients of social benefits.
Several radical changes impact the labor market. Protection against dismissal is effectively removed for high-earners. Fixed-term contracts are massively expanded: until December 31, 2030, employees can be hired for fixed periods of up to 48 months without needing to state a reason, double the previous limit. This can include up to six extensions, and even subsequent employment with the same company. Critics, including trade unions, denounce this as a “sale of employee rights” and an invitation to bypass dismissal protections, as an employee can potentially remain in a temporary contract status for nearly four years without the employer needing to provide justification.
An even more specific change affects high-income workers-those earning above 1.75 times the contribution assessment ceiling for pension insurance, which equates to a gross monthly salary of nearly 15,000 euros. Following a practice used in the financial sector for risk-takers, employers will be allowed to terminate the employment relationship by offering a severance payment, seemingly without the need for a social reason. In essence, for this entire income group, legal dismissal protection is practically abolished.
Administrative law is also slated for a major overhaul with the establishment of the “deemed approval” (Genehmigungsfiktion) as standard procedure. If a government office does not register a special need for review within four months of receiving complete application documents, the application is automatically considered approved. This reverses the principle of “withholding consent,” meaning the state will now be required to actively block, rather than actively allow, a project. This measure is intended to accelerate large projects in renewable energy and housing construction, though it is expected to create significant conflict with environmental and nature conservation interests.
This is coupled with a stringent austerity drive in the public sector. The federal government plans to cut eight percent of positions across nearly all federal and intermediate administrative offices, with only minor exceptions for security agencies and critical infrastructure. However, even in these core areas, overhead costs within the administrative apparatus are targeted for cuts, while field operations are not. While the plan is justified by the hope of “digitalization returns,” labor councils and unions criticize the measure as unrealistic and dangerous to the state’s capacity to function.
In social policy, the coalition introduces stricter measures against alleged misuse of benefits. Telephone sick leave will be abolished; employees must provide a medical certificate starting from the first day of illness, reverting to a more rigorous practice predicted to increase doctor visits. Furthermore, access to social benefits will be tied to “legal” residency rather than “ordinary” residency, tightening rules particularly for EU citizens after five years. Individuals with active arrest warrants will receive no social benefits whatsoever.
A comprehensive data exchange between all relevant authorities-including social and immigration offices, tax authorities, security services, health insurance providers, and energy companies-will be legally formalized. Authorities will be able to receive alerts from the central foreign register, for instance, and obtain details about an individual’s other residences from energy providers.
The financial pillar of the package involves massive wealth redistribution. Basic and child tax allowances, as well as child benefits, will be increased, the flat-rate amount for employees will rise, and income tax progression will be flattened. For example, a family with two children and taxable income of 60,000 euros is projected to pay over 600 euros less in taxes annually. The total relief volume amounts to roughly ten billion euros per year and is expected to take full effect in 2028.
The package is financed, in part, by a noticeable increase in the “rich tax.” A tax rate of 45 percent will apply to taxable incomes starting at 250,000 euros, increasing even to 47 percent above 280,000 euros-a clear rise compared to previous peak burdens. Additionally, the flat tax rate for minimum-wage jobs will increase from two to five percent, making marginal employment noticeably more expensive for employers. Tax deductions for skilled trades will be reduced from 20 to 15 percent, and the maximum allowable amount will fall from 1,200 to 900 euros per year.
In housing construction, the coalition proposes establishing a new state-owned housing company focused on providing affordable living where the market fails to do so. Simultaneously, the additional national capital buffers for real estate loans will be eliminated on January 1, 2027, intended to provide banks with more resources to finance housing projects. Moreover, federal law will prevent states from socializing private rental housing stock through municipalization acts, marking a clear resistance to left-leaning housing policies at the regional level.
The package goes beyond many previous governments in terms of bureaucracy reduction. Reporting obligations will be generically lifted unless a ministry explicitly justifies their specific need (a reversal of the burden of proof). Several operational officers, whose appointment is not based on EU regulations, will be abolished. Instead, the responsibility for adhering to material requirements will fall more heavily on companies; however, violations will now be subject to significantly higher penalties. The requirement for written form in fixed-term contracts is removed, and works councils’ co-determination rights regarding software implementation will be accelerated by requesting social partners to propose corresponding easing measures within labor law.
The legislative package is expected to be introduced to the Bundestag in the coming months, while the reform of old-age security is already scheduled to be approved by the end of 2026.
