High Earners and Unfair Dismissal: A Major Reform Ahead?

High earners in unfair dismissal litigation: More protection through severance than continued employment?

The coalition committee has announced plans to relax protection against dismissal for so-called high earners. From 1 January 2027, a special provision is to be introduced for employees with an annual income exceeding 1.75 times the contribution assessment ceiling for the statutory pension insurance scheme. Based on current figures, this would affect employees with a gross annual remuneration of more than around EUR 177,500.

In the public debate, the impression is sometimes given that employers will in future be able to ‘buy their way out’ of employing high-earning staff by paying a severance payment. A closer look, however, shows that protection against dismissal for high earners will, in principle, remain in place. Employers will, however, be able to apply to the court for the termination of the employment contract in a dispute over protection against dismissal, subject to certain conditions, in return for the payment of a severance payment.

Alignment with the risk-bearing provisions in the financial sector

According to the plans known so far, the new regulations are to be modelled on the existing risk-bearer provisions in the financial sector (Section 25a(5a) of the German Banking Act (KWG)). Under this provision, employers of certain risk-bearing employees may, in proceedings concerning protection against unfair dismissal, apply to the court for the termination of the employment relationship without having to provide specific grounds for termination. This provision was introduced in 2019 and extends a mechanism that previously applied only to senior executives to a wider group of particularly exposed employees.

The coalition committee now apparently intends to significantly extend this approach once again, so that in future it will also cover employees with an income exceeding 1.75 times the contribution assessment ceiling for the statutory pension insurance scheme.

It is worth noting that the planned provision would, for the first time, decouple the simplified termination application from the requirement to hold a specific corporate role. Until now, this privilege has been conditional either on holding the position of a senior executive or on acting as a risk-bearer for a major institution. In future, however, the level of remuneration alone could suffice.

What is the current situation?

Under Section 9 of the German Employment Protection Act (KSchG), an employer may, in principle, only seek the judicial termination of an employment relationship if the labour court deems the dismissal to be invalid and, furthermore, if there are circumstances which make it unlikely that continued cooperation would serve the company’s business purposes. According to existing case law, these requirements are stringent.

In the case of senior executives and certain risk-bearers, the employer is not required to demonstrate that continued cooperation is unreasonable. The background to this is the legislature’s assumption of a special relationship of trust, the continuation of which should not ultimately be enforced against the employer’s will. However, in labour court practice, proving that an employee qualifies as a senior executive or risk-bearer has often proved challenging for employers. This issue regarding the burden of proof is likely to be alleviated following the reform.

Still required: a court application for annulment – no ‘buying one’s way out’ of protection against dismissal

However, the actual scope of the planned reform is often misunderstood.

Even in future, the employer must first serve a notice of termination and defend its validity in court. General protection against dismissal under the German Unfair Dismissal Act (KSchG) is expected to remain in place. A court-ordered termination will still only be considered if the labour court deems the notice of termination to be invalid.

Above all, however, the following applies: Under Section 9 of the Employment Protection Act (KSchG) and the relevant case law of the Federal Labour Court (in particular the Federal Labour Court judgement of 28 August 2008 – 2 AZR 63/07), an application by the employer for termination requires that the dismissal is invalid solely on the grounds of a lack of social justification.

The provisions governing the judicial termination of the employment relationship do not, in principle, apply if the dismissal is already legally invalid on other grounds (Section 13(3) of the German Employment Protection Act (KSchG)). The planned reform is unlikely to change this.

Practical guidance

It is precisely this point that limits the scope of the proposed new legislation.

According to existing case law, an application by the employer for the termination of the employment relationship is generally out of the question if the dismissal is based, for example, on

• a flawed works council consultation,
• deficiencies relating to a notice of collective redundancy,
• a lack of official approval,
• special provisions on protection against dismissal, or
• other formal errors, such as the absence of an original signature or a signature by the person(s) authorised to give notice of termination.

In such cases, the dismissal remains invalid and the employment relationship continues. The employer cannot ‘rectify’ the flawed dismissal by paying a severance payment.

The planned reform would therefore not create a general right to terminate employment relationships in return for a severance payment. It would merely ease the conditions for judicial termination following a dismissal contrary to social policy.

Greater protection regarding severance pay, less protection of existing employment

The practical impact of the reform is nevertheless likely to be significant.

Until now, a successful action for unfair dismissal has generally resulted in the employment relationship continuing. In future, employers could find it considerably easier to ensure that the employment relationship with highly paid employees is terminated in return for a severance payment, despite the dismissal being invalid.

Labour law literature therefore accurately describes the existing special provision for senior executives as a shift from job security to protection through severance pay. Something similar could also apply in future to employees earning above the specified income threshold.

In this context, the amount of the severance payment would continue to be set by the court and would likely be based on the provisions of Section 10 of the Employment Protection Act (KSchG). Under these provisions, severance payments of up to twelve months’ salary may be awarded; for older employees with long service, this may even amount to 15 or 18 months’ salary.

Conclusion

The announced reform does not mean the abolition of protection against dismissal for high earners.

Employers must still serve notice of dismissal and demonstrate and prove its validity in court. Furthermore, an application for termination of the employment contract is likely to remain out of the question in future if the dismissal is invalid for reasons other than a lack of social justification.

The real change lies rather in the fact that, in future, employers will find it easier to bring an unsuccessful unfair dismissal case to a close through a court-ordered termination in exchange for a severance pay. The reform will therefore alter the consequences of dismissal rather than the conditions for it.

For highly paid employees, the focus of protection against dismissal could shift noticeably in future from job security to protection in the form of severance pay.