The Changes to the Law on Fixed-Term Employment Are Not Merely Symbolic

Right up until the end of the German coalition negotiations between the CDU, CSU and SPD, one of the biggest points of contention was the issue of fixed-term employment contracts without material reason. There are currently thousands of workers in Germany working on fixed-term contracts. ZEW labour market researcher Michael F. Maier explains exactly what the coalition parties agreed upon regarding fixed contracts and how the new regulations would affect both workers and employers.

What did the CDU, CSU and SPD agree upon in regard to fixed-term contracts without material reason in the coalition agreement?

The coalition agreement makes provisions for imposing restrictions on fixed-term contracts without material reason. Compared to the existing regulations, the primary aim of the new changes is to limit the number and duration of fixed-term employment contracts without material reason. The coalition parties have agreed to limit the number of workers on unfounded fixed-term contracts in companies with over 75 employees to no more than 2.5 per cent of the company’s total staff. It was also agreed that the longest permissible duration for a fixed-term contract without a material reason shall be reduced from 24 to 18 months, with only one extension of the contract, rather than three, being permitted. These represent substantial changes to the existing regulations and therefore cannot be dismissed as a mere symbolic move. Meanwhile, the limits placed on fixed-term contracts with material reasons are far less comprehensive and there are no proposed changes to the permissible grounds for offering workers a fixed-term contract. According to German law, material grounds for a fixed-term employment contract include, for example, cases in which the company only needs certain tasks performed for a limited period of time or the employee’s suitability for the position needs to be verified.

How many workers are likely to be affected?

There are no up-to-date figures currently available on this. According to figures from the Institute for Employment Research (IAB), in 2013 there were around 1.3 million people in Germany working on fixed-term contracts without material reason. Two-thirds of these workers are in companies with 75 or more employees. The IAB estimates that under the new rules these companies would have to cut around 400,000 of their fixed-term positions. On the macroeconomic level, these changes are also significant given that in 2016 fixed-term contracts made up almost half of all new hires. However, these changes will not apply to all professions. Researchers, for example, are exempt from the new rules since their fixed-term contracts are governed by the Academic Fixed-Term Contract Act (Wissenschaftszeitvertragsgesetz).

Will these new regulations benefit all workers?

From the companies’ point of view, fixed-term contracts are a mechanism which allow them to be flexible in response to economic changes. This is all the more important given that employees on permanent contracts are comparatively strongly protected by law with respect to dismissals. The need for flexibility on the part of companies therefore often butts heads with employees’ striving for job security. Whether the regulations proposed in the coalition agreement will lead to more permanent work contracts, however, is unclear. In a tough economic climate, companies are likely to shy away from offering workers permanent positions. With shorter time limits on fixed-term contracts without material reason, workers on this type of contract could be let go sooner. Furthermore, these changes could mean that, rather than staying with the same employer under a new fixed-term contract, workers find themselves in repeated fixed-term employment with different employers, which does not represent an improvement in employee job security. Particularly in the case of low-qualified workers, this could lead to their precarious employment status becoming permanent more quickly, since these workers generally benefit from skills that they pick up on the job. Younger workers will also feel the effects more keenly. If the changes lead to a reduction in the number of fixed-term contracts, fixed-term employment in the form of a trial period will cease to serve as a stepping stone to a permanent position.

Could these proposed regulations restrict the flexibility of German businesses?

There are other alternative human resource strategies companies can use to remain flexible. For one, firms could focus more on hiring temporary workers and entering into service contracts with freelancers or other companies, in order to avoid using fixed-term contracts. Companies can also deal with fluctuations in the economy by increasing or reducing overtime.