Understanding the upcoming top earners severance 2027 changes is essential for anyone negotiating a package in Germany.
top earners severance 2027: what the reform actually changes
The core of the proposal is an income threshold above which the full protection of the German Dismissal Protection Act (KSchG) no longer applies unrestrictedly. For employees whose annual salary clearly exceeds the contribution assessment ceiling of the statutory pension insurance, a reduced protection shall apply. Concretely, this means: the employer does not have to carry out a strict social selection when dismissing a top earner. Also, the possibilities to contest a dismissal in court are reduced – for example, by shortened limitation periods or an eased burden of proof for the employer in cases of urgent operational requirements.
Important: the reform does NOT create a general freedom to dismiss. The fundamental protection against arbitrary dismissal (Art. 12 GG, Art. 2 GG) remains intact. Also, the special dismissal protection for pregnant employees, severely disabled persons, works council members, or parents on parental leave remains untouched. Yet for the large group of highly paid specialists and managers without special status, the risk distribution shifts markedly to the employee’s disadvantage.
Existing contracts and transitional rules: what applies to legacy agreements
A central point is the protection of existing contracts. According to the current plan, contracts concluded before the reform comes into force (presumably 1 January 2027) shall enjoy a trust protection. That means: for legacy contracts the full dismissal protection under the previous law continues to apply – provided no essential contract changes are made. These include, for example, a salary increase beyond the new threshold, a move into a managerial position, or the conclusion of a new settlement agreement.
In practice, this protection is often circumvented: employers offer affected top earners “voluntarily” amended contract conditions that formally count as a mutual adjustment but substantively bring about the transition into the new, weaker regime. Anyone receiving such an offer should NOT sign hastily. A legal review is mandatory here, because the line between a harmless adjustment and a harmful waiver of contract protection is thin. Also a look at the planned reform of dismissal protection by the black‑red coalition shows how politically contested these transitional rules are.
Negotiating severance: new parameters for top earners from 2027
The reform alters the basis for severance negotiations fundamentally. Previously, the “rule of thumb” (0.5 to 1.0 gross monthly salaries per year of employment) was a common reference point – supported by the employer’s risk of losing before the labor court. If this risk diminishes because dismissal protection is loosened, the pressure on the employer to pay high severance also falls.
Nevertheless, even under the new regime the severance amount remains a matter of negotiation. The employer still has an interest in a smooth transition to avoid reputational damage, loss of know‑how, or protracted litigation. The new parameters are:
- Lower initial offers: Employers will tend to make lower first offers. Affected employees should prepare for this and not accept the first offer.
- Greater weight on “soft” factors: length of service, age, maintenance obligations, industry skill shortage – these social criteria remain bargaining chips, even if the statutory social selection falls away.
- Tax structuring options: the fifth‑rule (§ 34 EStG) stays unchanged. A clever spread of the severance across several calendar years can markedly reduce the tax burden – a lever many overlook in the heat of negotiation.
- Litigation funding as leverage: Since the cost risk of a dismissal protection suit rises for the employee (lower chances of success), hiring a litigation funder can strengthen the bargaining position: the employer sees that the claimant will not back down for cost reasons.
Employees should consider how top earners severance 2027 impacts their negotiation strategy.
Common pitfalls in settlement agreements under the new regime
With the reform, new traps appear in settlement agreements. Top earners should avoid the following mistakes:
- Waiver of contract protection without consideration: signing a settlement that silently gives up the old dismissal protection throws away money. Every waiver must be compensated by a tangible improvement (higher severance, leave, outplacement, continued bonus payments).
- Unclear wording regarding the waiting period for unemployment benefit: a settlement without a pressing reason usually triggers a 12‑week blocking period for unemployment benefit I. The phrase “mutual termination” is not enough – a “pressing reason” (e.g., an impending operational dismissal) must be documented.
- Missing regulation of variable remuneration components: bonuses, long‑term incentive plans, stock options, company car use – all of this has to be spelled out in the settlement. Standard clauses (“all claims are settled”) often cut exactly these positions.
- No paid leave for job search: without paid leave during the notice period the employee loses valuable time for reorientation. Everything is negotiable, but only if it is fixed in writing.
Checklist: steps affected employees should take now
Even though the reform only takes effect in 2027, early action makes sense – especially for employees who are already close to the future income threshold or who are negotiating a contract extension or salary increase:
- Review your income: Does your gross annual salary (including bonuses, benefits, pension contributions) already exceed the expected threshold (orientation: 2024 western contribution ceiling €90 600, with a markup for “clearly above” ≈ €120 000+)?
- Screen your contract: Are there clauses on dismissal protection, severance, change‑of‑control, post‑contractual restrictions? Are they still up to date?
- Document your performance: collect appraisals, project results, customer feedback – they strengthen your position if a dismissal is threatened (“no urgent operational need because you are a key performer”).
- Activate your network: discreet talks with headhunters, industry contacts, alumni groups – the best protection is an alternative offer.
- Obtain a preliminary legal consultation: a specialist employment lawyer can assess your individual risk and develop a negotiation strategy. Fees for an initial consultation are often deductible as business expenses.
- Check litigation funding: if a dispute looms, a litigation funder (such as RechtStark) can assess cost coverage – without any financial risk to you.
Planning ahead for top earners severance 2027 can give you leverage in discussions.
Defining who counts as a top earner under the law
The exact income threshold has not yet been fixed. Reference points from the current legislative drafts and coalition talks are:
- Reference value: the contribution assessment ceiling of the statutory pension insurance (2024: €90 600 West / €89 400 East) serves as the basis.
- Multiplier: under discussion is a factor of 1.5 to 2.0 – roughly €135 000 to €180 000 gross per year.
- Elements to include: not only the base salary but also variable pay (bonuses, commissions), fringe benefits (company car, housing), employer‑financed pension schemes, stock options (at exercise time) count toward the “remuneration” under § 23 KSchG (Continued Pay Act) and will likely be taken into account.
- Exceptions: shareholders‑managers, AG board members and GmbH managing directors are not employees under the KSchG – nothing changes for them. Likewise, managerial employees in the sense of § 5 Abs. 3 BetrVG (hiring and firing authority) already fall under a special regime today (no KSchG protection, only protection against immoral dismissal). The reform targets the “real” employees with top pay who are not managerial staff.
Outlook: further reform steps and case law expectations
The planned reform is part of a broader package to “modernize” labor law. Other building blocks that may follow in parallel or with a delay are:
- Digitalizing the dismissal process: electronic termination notices, digital claim filing, video hearings – this speeds up proceedings but also shortens deadlines.
- Extending fixed‑term contracts: debate over allowing contract extensions without objective reason up to five years (instead of the current two) for start‑ups – relevant for top earners moving into young companies.
- Case law on the “clearly exceeding” threshold: the Federal Labor Court will give concrete meaning to the indeterminate terms (“clearly exceeds”, “top earner”). First rulings are expected 2028/2029 and will sharpen the practical reach of the reform.
- Collective‑law opening clauses: industries with strong unions (metal, chemicals, public sector) could negotiate stricter protection standards for their top earners via collective agreements – a reason to check whether the employer is bound by a collective treaty.
For affected top earners the reform is no cause for panic, but a wake‑up call. Those who review their contract design, negotiation strategy, and legal safeguards now create options that may become more expensive or even unavailable in 2027. The combination of legal expertise, tax foresight, and – if needed – litigation funding remains the best defense in a changing legal landscape. Especially when it comes to negotiating severance for top earners 2027, preparation decides the outcome.
Note: This article is for general information purposes only and does not replace individual legal advice. For a free initial assessment of whether litigation funding may be an option for your case, you can contact RechtStark.