German Government Has Plans for Labor and Employment Law Reform

Germany’s political landscape is undergoing significant changes. After new elections had to be held early in February, the Christian Democratic Union and the Social Democratic Party concluded a coalition agreement. This new government promises to tackle a range of issues, many of which will have direct implications for German employment law and, thus, employers.

For foreign employers with operations and employees in Germany, understanding these changes is crucial to maintaining compliance and navigating the evolving labor and employment framework. Below is an overview of the key labor-related provisions in the 2025 coalition agreement that are expected to be implemented over the next four years. 

Labor and Skilled Worker Retention

The coalition government emphasizes securing a steady supply of labor and skilled workers as a cornerstone of Germany’s future economic success. The agreement outlines measures to reduce bureaucratic hurdles and promote skilled worker immigration, including the creation of a centralized “Work-and-Stay” agency, aimed at streamlining recruitment processes. For employers, this could mean easier access to talent from abroad, but it also underscores the importance of compliance with evolving immigration and labor market policies.

Minimum Wage 

The government has reiterated its commitment to minimum wage as a basic benchmark for fair compensation. The Minimum Wage Commission is expected to remain independent, yet its future recommendations will be based on 60% of the median gross wage of full-time employees. By 2026, the government aims to raise the minimum wage to 15 euros per hour, an increase from the current rate of 12.82 euros per hour. This increase could have significant consequences for companies employing lower-wage workers, requiring updates to compensation strategies to remain compliant.

Strengthening Collective Bargaining

The coalition has proposed measures to boost the influence of collective bargaining agreements. The plan is to pass the so-called Federal Collective Bargaining Compliance Act. The previous government had already wanted to pass such a law. However, this never happened. The aim of the act is to strengthen collective bargaining compliance and autonomy in Germany. For instance, public contracts worth over 50,000 euros (or 100,000 euros for innovative startups) will be linked to compliance with collective bargaining agreements. While this aims to promote fair wages, businesses in Germany must stay attuned to developments in collective agreements and ensure compliance with new criteria for public procurement. 

Work Time Flexibility

The coalition has outlined a proposal to increase flexibility in working hours. This includes the introduction of a weekly instead of daily maximum work time, a potentially significant shift in employment law. Although these changes are still being developed with social partners, employers with employees based in Germany should monitor the evolution of this policy, especially if it leads to more flexible work models, which may require adjusting internal HR policies.

Additionally, the government plans to simplify electronic timekeeping requirements, particularly for small and midsize enterprises (SMEs), which could ease administrative burdens while ensuring compliance with European Union (EU) regulations on work time.

Tax Advantages for Overtime and Extended Work Hours

In an effort to encourage greater workforce participation, the government has proposed tax exemptions for overtime pay and additional hours worked beyond the standard 40-hour workweek. This could have a significant impact on businesses in sectors for which overtime is common. While the specifics are still under negotiation, employers should anticipate potential changes in tax treatment and adjust their compensation structures accordingly.

Digitalization and AI in the Workplace

With the increasing integration of artificial intelligence and digital tools into the workplace, the coalition agreement acknowledges the need for regulatory frameworks to address the impacts of these technologies. One notable initiative is the promotion of online works council meetings and elections, which could streamline communication and decision-making in remote work environments. For employers with German operations, this may involve adapting to new digital workplace tools and ensuring that data protection and worker rights are adequately managed.

Reduction of Bureaucracy 

The path taken by the previous government to simplify strict formal requirements is planned to continue. The coalition partners discussed the following points: Fixed-term agreements may soon be concluded in “text form” (for example, email) instead of requiring a handwritten signature. This would significantly simplify the process for companies, especially those with central functions abroad or those that have already (faster than the legislature has) largely digitized their processes. The Civil Code’s Sec. 126 ff (written form rules) are planned to be simplified and adapted to new technologies, making HR processes leaner, yet legally robust. Also, Germany’s national Supply Chain Due Diligence Act may be repealed and replaced by a streamlined law implementing the EU’s corporate responsibility directive. Mandatory reporting under the act would vanish, but precise EU Corporate Sustainability Due Diligence Directive obligations will depend on the EU’s ongoing reforms.

Retirement and Pension Reform

Pension reforms are also a major focal point in the coalition agreement. The statutory pension level is to be secured at 48% until 2031, with tax funds used to cover the additional costs. The government also plans to enhance company pension schemes, particularly for SMEs and low-wage earners. For employers, this could mean increased responsibilities in offering or supporting pension schemes, as well as new initiatives to ensure employees’ retirement security.

Working in Retirement

The government aims to incentivize continued work beyond retirement age by allowing for partial tax exemptions on earnings up to 2,000 euros per month for pensioners who choose to remain employed. Furthermore, the restrictions on temporary employment for retirees will be eased. This change may open up new opportunities for companies to retain experienced workers in the labor force longer, without facing additional regulatory hurdles.

From Proposal to Practice: What’s Next?

While the coalition agreement presents ambitious plans, the real challenge lies in implementation. Many of the proposed measures are still in the consultation and development stages, and their actual rollout could take time. Employers should stay vigilant and proactive in understanding how these proposals will be transformed into concrete legal requirements.

For employers with a presence in Germany, the 2025 coalition agreement signals a shift toward more digitalization, a reduction of bureaucracy, greater flexibility in work time, and enhanced support for skilled labor retention. Many of the proposed changes will likely benefit both employers and employees, and it is crucial for businesses to stay ahead of these developments, ensuring compliance and preparing for potential challenges.

Andre Gieseler is an attorney with Littler in Hamburg, Germany. © 2025 Littler. All rights reserved. Reposted with permission.