Terminating Employees in Germany: A Comprehensive Guide for International Businesses

Expanding into the German market offers significant opportunities for small and medium-sized enterprises (SMEs), but navigating the country’s labor laws requires precision. Unlike “at-will” employment systems, Germany’s framework prioritizes worker protections, making terminations a legally intricate process. For businesses leveraging an Employer of Record (EOR) like FMC Group, understanding these rules is critical to ensuring compliance while managing workforce transitions effectively. This guide demystifies the termination process for open-ended and fixed-term contracts, equipping decision-makers with actionable insights for the German market.

The German Labor Law Landscape

German employment law operates under a principle of “protective dismissal,” where terminations must adhere to statutory justifications, formal procedures, and socially equitable considerations. The Dismissal Protection Act (Kündigungsschutzgesetz, KSchG) serves as the cornerstone, applying to companies with more than 10 employees and workers with over six months of tenure. Outside these thresholds, employers retain greater flexibility but must still avoid discriminatory practices or violations of public policy.

Two contract types dominate the market:

1. Open-ended contracts (unbefristete Verträge): The default arrangement, offering indefinite employment with termination protections.
2. Fixed-term contracts (befristete Verträge): Time-bound agreements ending automatically unless renewed, subject to strict duration limits.

Missteps in terminating either type can lead to litigation, reinstatement orders, or severance claims. Let’s explore the termination pathways for both.

Terminating Open-Ended Contracts

Ordinary Dismissal: Notice Periods and Valid Grounds

Ordinary termination (ordentliche Kündigung) requires employers to provide advance notice while justifying the dismissal under one of three KSchG-approved categories:

1. Personal reasons: Chronic underperformance, prolonged illness (≥6 weeks/year), or loss of work authorization.
2. Conduct-related reasons: Theft, harassment, or repeated policy breaches after a written warning.
3. Operational reasons: Restructuring, outsourcing, or financial distress eliminating the role.

Notice periods escalate with seniority:

Tenure	Notice Period	Effective Date
<6 months	2 weeks	Anytime
6 months–2 years	4 weeks	15th/month-end
2–5 years	1 month	Month-end
5–8 years	2 months	Month-end
8–10 years	3 months	Month-end
10+ years	4–7 months	Month-end

For example, dismissing an 8-year employee requires a 3-month notice by June 30 for a September 30 exit. Contracts cannot shorten these periods, though extensions are permissible.

Extraordinary Dismissal: Immediate Termination

Gross misconduct—fraud, violence, or divulging trade secrets—permits immediate termination (außerordentliche Kündigung) without notice. Employers must act within two weeks of discovering the offense and substantiate the severity through evidence like CCTV footage or witness statements. However, courts frequently overturn such dismissals if procedural missteps occur, such as failing to consult the Works Council.

Terminating Fixed-Term Contracts

Automatic Expiry

Fixed-term contracts conclude on their predetermined end date without requiring dismissal notices. For instance, a 12-month contract for parental leave coverage expires automatically, sparing employers the KSchG’s rigorous termination criteria. However, three rules govern their use:

1. Objective justification: Roles tied to temporary needs (e.g., seasonal demand, project work) allow unlimited durations.
2. Without cause: Contracts lacking justification are capped at two years with up to three renewals.
3. Conversion risks: If an employee continues working post-expiry without a new contract, courts may deem the role permanent.

Early Termination Exceptions

While fixed-term agreements typically bind both parties, extraordinary dismissal remains viable for grave misconduct. Additionally, mutual separation agreements (Aufhebungsvertrag) can dissolve contracts early, often involving severance incentives.

Key Differences: Fixed-Term vs. Open-Ended Contracts

Aspect	Open-Ended Contracts	Fixed-Term Contracts
Termination Notice	Required (statutory/contractual periods)	None (automatic expiry)
Dismissal Justification	Mandatory under KSchG	Not required if expiry date honored
Renewal Flexibility	N/A	Limited to 2 years without cause
Conversion Risk	N/A	Permanent status if employment continues post-term
Severance Obligations	Common in mutual exits	Rare unless early termination clause invoked

Severance Pay and Mutual Exits

Though not legally mandated, severance packages (Abfindung) often resolve disputes. Standard formulas allocate 0.5–1.5 monthly salaries per year served, with €15,000–€50,000 typical for mid-career professionals. Mutual agreements avoid litigation risks but require employee consent. Notably, small businesses (<10 staff) face lower severance expectations unless contractual clauses apply.

Conclusion: Prioritizing Proactive Compliance

Germany’s labor laws prioritize employee security, making terminations a high-stakes process. For international SMEs, partnering with an EOR ensures adherence to notice protocols, valid dismissals, and risk-averse severance strategies. By distinguishing fixed-term and open-ended rules, businesses can align workforce planning with regulatory realities, turning legal complexities into competitive advantages.

FMC Group’s Employer of Record service streamlines these challenges, allowing you to focus on growth while we safeguard compliance. Contact us to navigate Germany’s labor landscape with confidence.

Disclaimer: Although we carefully researched and compiled the above information, we do not give any guarantee with respect to the actuality, correctness, and completeness.