Easier dismissal due to high pay? The reform plans for high earners

The announced changes to protection against dismissal for high-earning employees could easily give the impression that, in future, employers will be able to part ways with these employees by paying a severance payment – without having to meet the requirements of the Unfair Dismissal Protection Act. However, a closer look at the reform plans shows that this assumption falls short. Below, we provide an overview of the proposed changes and put them into context.

1. What is the current legal situation?

If a dismissal is found to be unlawful in proceedings under the Unfair Dismissal Act, the employment relationship generally continues – even if the employer does not wish to continue the employment. A judicial dissolution in return for a severance payment may only be considered via an application for dissolution under Section 9 (1), of the Unfair Dismissal Protection Act . To this end, the employer must demonstrate and prove that continued employment serving the purposes of the business can no longer be expected in future. As an expression of the principle of protection of existing employment, case law imposes high requirements on this prerequisite, particularly as the legislature has not provided any specific definition of the concept of ‘unreasonableness’ in this context. 

The practical significance of these high hurdles is considerable: if a dismissal is overturned in court, proceedings often end in practice with a court settlement. Such a settlement requires the employee’s consent. In current practice, it is becoming increasingly difficult to reach agreements, as these often depend on how quickly employees can find alternative employment or how close they are to retirement. As the current opportunities on the labour market are severely limited for all groups of employees, this often results in disproportionately high severance payments for employers.

2. What is planned?

At the heart of the reform is the introduction of a simplified right of dissolution for employers in relation to employees whose remuneration exceeds the threshold of 1.75 times the contribution assessment ceiling for statutory pension insurance. As things stand, this corresponds to an annual remuneration of around 177,450 EUR (a slightly higher amount is expected for the calendar year 2027). However, it is as yet unclear which components of remuneration will be taken into account when determining this threshold. In particular, it remains to be seen whether only the basic salary or also variable remuneration components such as bonuses, profit-sharing payments, share options or a company car will be included in the calculation.

In future, it should be possible to dissolve the employment relationship for such employees even if the dismissal is found to be socially unjustified within the meaning of Section 1 (2) of the Unfair Dismissal Protection Act in proceedings. In such cases, the employer will no longer be required to provide specific grounds for termination.

The specific legal framework is still to be determined. In particular, the question arises as to whether a separate termination mechanism will be created or whether the existing application for termination under Section 9 of the Unfair Dismissal Protection Act is simply to be extended. It is also as yet unclear whether the new provisions will apply to existing employment relationships.

However, the amount of the severance payment is to remain unchanged; it continues to be determined in accordance with Sections 9 (1) and 10 of the Unfair Dismissal Protection Act. Under these provisions, the court may, in principle, set a severance payment of up to twelve months’ earnings. For older employees with longer service, this maximum amount increases to up to 18 months’ earnings. The Act defines ‘month’s earnings’ as not only the gross basic salary, but all monetary payments, such as variable remuneration or benefits in lieu of pay.

Important: Employers should not regard the planned reform as a carte blanche for dismissals without cause. Even the proposed simplified procedure for terminating employment would by no means allow the employment relationship to be terminated in every case. Nevertheless, in practice, the new provision may serve to facilitate the reaching of a mutually agreed settlement more quickly in separation negotiations with highly paid employees.

3. Classification under existing special provisions

Simplified termination of the employment relationship is by no means unfamiliar under German employment protection law. For example, in the case of senior executives, the employer may apply to the court for the dissolution of the employment relationship without having to provide specific grounds for termination.

A comparable special provision also exists for so-called ‘risk-takers at credit institutions. These are employees whose professional activities have a significant influence on an institution’s risk profile. The Brexit Tax Accompanying Act introduced a provision in Section 25a (5a) of the German Banking Act which likewise facilitates termination. Here, too, the employer’s application for dissolution does not require any specific justification.

The proposed option for termination would thus form part of a series of existing special provisions. All these provisions are based on the same fundamental principle: protection against dismissal remains in place in principle, but the employer is given the option to terminate the employment relationship following an unsuccessful dismissal protection proceeding in return for the payment of a severance payment.

The key difference from the current legal situation, however, lies in the basis for granting this privilege. Whilst simplified termination has hitherto been linked to the employee’s specific role, responsibility or position, the proposed new provision is to be based solely on the level of income. In future, therefore, it will no longer be the employee’s position within the company, but their remuneration, that determines whether the employer is entitled to simplified termination.

4. What employers should bear in mind now

For employers, the proposed regulation primarily means greater legal certainty and flexibility when terminating the employment of highly paid employees. This is particularly true in cases where, from the employer’s perspective, continued employment no longer appears sensible, but where, until now, there have been insufficient grounds for termination. This reduces the risk of having to continue employing staff following employment protection proceedings . At the same time, the greater predictability of termination processes could encourage a willingness to fill or create new positions.

Furthermore, the new regulations are likely to increase the willingness to reach a settlement before or during unfair dismissal proceedings. If employers can rely on a simplified judicial termination process, the negotiating position of both parties changes, as a clear framework is established for the amount of severance pay.

There is no immediate need for action until the legislation comes into force. However, employers should monitor developments and, particularly when devising separation strategies for highly paid employees, bear in mind that the negotiating position in unfair dismissal proceedings may change in future.