Termination Options for High Earners in Germany: What Employers and Senior Employees Must Know

Germany’s governing coalition wants to change what happens when a very highly paid employee is dismissed without valid grounds. Under the plan agreed in early July 2026, labour courts would, from 1 January 2027, be able to end the employment relationship against payment of severance for employees earning more than 1.75 times the pension contribution ceiling – currently around €177,450 a year – instead of ordering that the employment continues.

For in-house counsel, HR leaders, CFOs and senior employees, this would reshape litigation risk, settlement dynamics and the way remuneration is structured. This guide explains who would likely be affected, how severance is calculated under the Protection Against Dismissal Act (Kündigungsschutzgesetz, KSchG), and what both sides should do now. No bill has been published yet, so everything below describes the anticipated shape of the reform, not settled law.

Kurzüberblick: Kündigungsschutz für Hochverdiener

Der Koalitionsausschuss von CDU, CSU und SPD hat Anfang Juli 2026 im „Programm für Aufschwung und Beschäftigung“ vereinbart, den Kündigungsschutz für Hochverdiener zum 1. Januar 2027 zu lockern. Erfasst sein sollen Beschäftigte, deren Jahresvergütung das 1,75-Fache der Beitragsbemessungsgrenze der gesetzlichen Rentenversicherung übersteigt – 2026 also rund 177.450 Euro brutto. Vorbild ist die Risikoträgerregelung für bedeutende Banken in § 25a Abs. 5a KWG: Das Arbeitsgericht soll das Arbeitsverhältnis bei einer sozialwidrigen Kündigung auf Antrag des Arbeitgebers ohne weitere Begründung gegen Abfindung auflösen können. Aus Bestandsschutz würde Abfindungsschutz.

Die Kündigung bliebe am Maßstab des § 1 KSchG überprüfbar. Die Anhörung des Betriebsrats (§ 102 BetrVG) bzw. des Sprecherausschusses sowie der Sonderkündigungsschutz, etwa bei Schwangerschaft, Elternzeit oder Schwerbehinderung, sollen unberührt bleiben. Offen sind unter anderem die Übergangsregelung für bestehende Arbeitsverträge und die Frage, ob nur das Fixgehalt zählt. Ein Gesetzentwurf liegt noch nicht vor.

Legislative status: a political agreement, not yet a bill

The reform is one of 34 measures in the coalition committee’s package of 1–2 July 2026, titled “A Programme for Recovery and Employment” (Ein Programm für Aufschwung und Beschäftigung). The relevant commitment is short: for high earners, the coalition will introduce a rule “analogous to the risk-taker rule in the financial sector” with effect from 1 January 2027, allowing the employment relationship to be dissolved against severance where annual income exceeds 1.75 times the pension contribution ceiling.

So, what is the new law in Germany for high earners? As of the date of this article, there is none. No ministerial draft (Referentenentwurf) has been published by the Federal Ministry of Labour and Social Affairs (BMAS). A bill must still pass the Bundestag, and only the text promulgated in the Federal Law Gazette (Bundesgesetzblatt) will count. The 1 January 2027 start date is a political target, and the timetable is tight.

The package also contains a second, linked measure: severance payments are to receive favourable tax treatment if the departing employee quickly takes up new work – the faster the new job starts, the greater the tax benefit. For high earners, the two measures are designed to work together.

Who would be a “high earner”?

The threshold: 1.75 times the pension contribution ceiling

The threshold is tied to the contribution assessment ceiling of the statutory pension insurance (Beitragsbemessungsgrenze, BBG). For 2026, the ceiling is €8,450 a month or €101,400 a year; since 2025 there is a single nationwide ceiling, with no separate figure for eastern Germany.

1.75 × €101,400 = €177,450 per year (2026)

The ceiling is adjusted every year in line with wage growth, so the threshold will move each year. The 2027 figure will be higher than today’s. Employers should recalculate it annually against the current official figures rather than rely on a fixed number.

Fixed pay only – or bonuses too?

The coalition paper speaks of “annual income” without defining it. However, the model it names – § 25a(5a) of the Banking Act (Kreditwesengesetz, KWG) – looks only at annual fixed remuneration. Many commentators therefore expect the new threshold to count base salary only, not bonuses, commissions or long-term incentives. Until a draft settles the point, employers should model both readings. The answer will decide who falls inside the category and, as shown below, can also affect the size of any severance award.

Not the same as senior executives (leitende Angestellte)

German law already has a special rule for top managers. Under § 14(2) KSchG, an employer’s application to dissolve the employment of managing directors, plant managers and similar senior executives needs no justification – but only if they are entitled to hire or dismiss employees independently. That test is narrow and turns on function, not pay. The planned category would be defined by income alone. It would therefore reach many specialists, senior physicians, sales leaders and other high earners who have no hiring or firing authority. The existing § 14(2) rule would continue to apply alongside it.

How court-ordered dissolution would work

Today: continued employment is the rule

The KSchG applies once the employment has lasted more than six months in a business with regularly more than ten employees. If a court then finds a dismissal socially unjustified under § 1 KSchG, the dismissal is invalid and the employment never ended. The employee can demand to be kept on and is owed back pay for the entire period of the dispute.

Severance instead of continued employment is the exception. Under § 9 KSchG, the court dissolves the relationship only on application: by the employee, if continuing is unreasonable for them, or by the employer, if no further cooperation serving the business can be expected. Courts apply strict standards to an employer’s application, and it often fails.

Planned: dissolution without justification

A dismissed employee would still file an unfair-dismissal claim (Kündigungsschutzklage) within three weeks of receiving the notice (§ 4 KSchG). The court would still review whether the dismissal is socially justified. The change comes afterwards: if the dismissal fails that test, the employer could apply for dissolution against severance without having to give reasons – as § 14(2) KSchG already allows for senior executives. How will labour courts decide between continued employment and compensation? For this group, the answer would largely lie with the employer.

Severance under §§ 9 and 10 KSchG

The statutory caps

The reform would build on the existing machinery rather than create a new formula. Under § 10 KSchG, the court sets an “appropriate” severance of up to 12 monthly earnings. The cap rises to 15 months for employees aged 50 or over with at least 15 years’ service, and to 18 months for those aged 55 or over with at least 20 years’ service.

A “monthly earning” is what the employee receives in money and benefits in kind, at regular working time, in the month the employment ends (§ 10(3) KSchG). Regular annual payments such as a 13th salary are generally included pro rata. Whether and how performance bonuses count depends on the individual pay structure – a point that matters greatly for bonus-heavy packages.

The half-month rule of thumb

In practice, courts and parties often start from half a gross monthly salary per year of service, adjusted for age, labour-market prospects and the strength of the dismissal grounds. This is a negotiating convention, not an entitlement. The examples below are illustrations for planning only, not predictions of any court’s award; the figures assume the 2026 threshold and a factor of 0.5 to 0.75 monthly salaries per year of service.

Scenario 3 shows why the bonus question matters twice. It decides whether the employee is a high earner at all. It can also change the monthly earnings on which severance is calculated – by 75 percent in this example.

Tax and social security

Severance is taxable income. Relief under the so-called fifth rule (Fünftelregelung, § 34 EStG) remains available, but since 2025 employers no longer apply it in payroll; the employee claims it in their annual income tax return, which affects cash flow. Severance paid for the loss of employment is generally not subject to social security contributions. The coalition’s planned additional tax privilege for employees who quickly start a new job could change the net figures further. Both sides should negotiate on the after-tax value, not the gross headline, and take individual tax advice.

The blueprint: the risk-taker rule in the banking sector

The coalition expressly models its plan on an existing rule. Since 2019, § 25a(5a) KWG has provided that, at significant banks, the employer’s application to dissolve the employment of certain risk takers needs no justification. The rule is narrow: it covers only risk takers with a material influence on the institution’s risk profile whose annual fixed remuneration exceeds three times the pension contribution ceiling.

The planned reform would lift this model out of banking supervision and apply it across the economy – with a much lower threshold (1.75 instead of 3 times the ceiling) and without the functional risk-taker criterion. Employers in regulated finance already segment their workforce by remuneration and role under the Remuneration Regulation for Institutions (Institutsvergütungsverordnung) and can extend that discipline to the new analysis. For everyone else, the banking experience offers a guide to how courts are likely to handle the unjustified dissolution application in practice.

Safeguards that would remain

What procedural protections still apply? Almost all of them – and for employers, getting them right would become even more important.

Procedural defects block the dissolution route

According to settled case law of the Federal Labour Court (BAG), an employer can only apply for dissolution if the dismissal is invalid solely because it is socially unjustified. If it is also invalid for another reason – for example, because the works council was not properly heard – the dissolution route is closed and the employment simply continues. A procedural mistake would therefore cost the employer exactly the advantage the reform is meant to provide.

Works council and spokespersons’ committee

Where a works council exists, it must be heard before every dismissal (§ 102 of the Works Constitution Act, Betriebsverfassungsgesetz, BetrVG); a dismissal without proper hearing is invalid regardless of its merits. Many high earners are senior executives within the meaning of § 5(3) BetrVG. For them, the works council only needs to be informed (§ 105 BetrVG), but a spokespersons’ committee (Sprecherausschuss), if one exists, must be heard – and omitting that hearing also makes the dismissal invalid (§ 31(2) SprAuG). Employers should classify each high earner correctly before starting the process.

Special dismissal protection

Special protection regimes would continue to apply in full. During pregnancy and after childbirth (§ 17 MuSchG) and during parental leave (§ 18 BEEG), a dismissal requires prior approval from the competent state authority. Employees with a recognised severe disability can only be dismissed with the prior consent of the Integration Office (§ 168 SGB IX). Works council members enjoy near-absolute protection and can only be dismissed for cause with the works council’s consent (§ 15 KSchG, § 103 BetrVG). A high-earner dissolution route could not be used to sidestep any of these.

Collective and contractual terms

Collective agreements, works agreements and individual contracts may provide longer notice, enhanced protection for long-serving staff or agreed severance formulas. These continue to bind the employer and must be checked alongside the statute.

Impact on litigation risk and settlements

Less leverage for the employee

Today, the realistic threat of reinstatement is the senior employee’s strongest card. An employer facing the return of a departed executive into a broken relationship will often pay a premium to avoid it. Once dissolution against severance becomes the predictable outcome, that premium shrinks. Negotiations would converge on a number – the likely court award plus the cost and time of litigation – rather than on the binary choice between return and exit. Settlement levels for this group are likely to fall.

Back-pay exposure

A key cost driver today is default-of-acceptance pay (Annahmeverzugslohn, § 615 BGB): if the dismissal is invalid, the employer owes salary for the entire duration of the dispute. Earnings the employee made elsewhere, or wilfully failed to make, are deducted (§ 11 KSchG). For high earners, this exposure grows by five figures every month the case runs. It would not disappear under the reform – salary remains owed until the date the court sets for the end of the employment – but reinstatement risk and open-ended continuation would largely fall away.

Budgeting separation costs

With a more predictable outcome, finance and HR can model separation costs by seniority band, length of service and pay structure. Settlement offers can then be positioned against a realistic judicial benchmark.

Practical steps for employers

The following are strategic pointers, not drafting templates.

1. Segment the workforce. Identify who sits above or close to the threshold, on both readings (fixed pay only and total pay), and track how the annual adjustment of the ceiling moves people in or out.
2. Watch the timing of new contracts. Whether the rule will reach existing contracts is not yet settled. Some reports suggest it may apply only to new ones – if so, the timing of hires and contract changes could become relevant.
3. Review remuneration design. The split between fixed and variable pay may determine both threshold status and the severance base. Structure new packages with both effects in mind.
4. Get the process right. Classify each high earner correctly (senior executive or not), and document the hearing of the works council or spokespersons’ committee. A procedural error closes the dissolution route.
5. Screen for special protection before any dismissal: pregnancy, parental leave, severe disability, works council membership.
6. Model separation costs by seniority band using the § 10 KSchG framework, so that finance can budget realistically.
7. Take targeted legal and tax advice, including on collective agreements and the planned tax privilege for severance.

What senior employees should consider

1. Check your status. Compare your fixed pay and your total pay with the threshold. Note that it rises every year.
2. Keep an eye on the transitional rules. Should the final law apply only to new contracts, as some reports suggest, a job change could affect your level of protection. A contractual severance clause may be worth raising in negotiations.
3. Negotiate on known terms. For dismissals under the current regime, the reinstatement threat remains a strong lever – and the three-week deadline for filing a claim applies without exception.
4. Look at the net figure. The tax treatment of severance, including the planned privilege for a quick return to work, can shift the value of an offer considerably.

Open questions to watch

• Reports suggest the rule will cover only contracts concluded after it takes effect. How amendments, promotions and group-internal transfers would be treated is unclear.
• Qualifying pay. Whether only fixed salary counts, as in the banking model, or also bonuses, long-term incentives and benefits in kind – both for the threshold and for the severance base.
• Reference period. Whether the threshold is measured by contractual annual pay, pay actually received, or pay at the time of dismissal.
• Cross-border employees. How the threshold applies to secondees, remote workers and staff paid partly abroad.
• Constitutional challenges. Critics, including a study published by the trade-union-affiliated Hans Böckler Foundation, argue that treating employees differently by income alone raises constitutional questions. Legal challenges are likely once a law is passed.
• Collective bargaining. Whether unions and employers’ associations respond in collective agreements.

Conclusion

The planned reform would turn dismissal protection for employees earning above roughly €177,450 a year from protection of the job into protection by severance. It would not abolish dismissal protection: the dismissal itself remains reviewable, and hearing requirements and special protection stay in place. For employers, the priorities are to segment the workforce on both pay readings, design remuneration with the fixed-versus-variable question in mind, model severance exposure under § 10 KSchG and make processes error-proof, because a procedural mistake closes the new route. For senior employees, disputes would more often end with a defined payment than a return to work – and, depending on the transitional rules, the timing of a new contract might matter.

With no bill yet published, informed preparation is the best way to manage the risk on either side of the table. We will update this article once a draft is available.

This article provides general information and does not constitute legal or tax advice. Status: 30 September 2026.

Sources

1. Kündigungsschutzgesetz (KSchG), Gesetze im Internet
2. Betriebsverfassungsgesetz (BetrVG), Gesetze im Internet
3. Bürgerliches Gesetzbuch (BGB), Gesetze im Internet
4. Bundesministerium für Arbeit und Soziales (BMAS)
5. Deutsche Rentenversicherung, Beitragsbemessungsgrenze
6. Bundesarbeitsgericht (BAG)
7. Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)
8. Bundesgesetzblatt (BGBl)