Challenges for a new German government

Germany has elected a new Bundestag on 23 February 2025 and will thus receive a new government. Regardless of its composition, the new government will face a number of employment law challenges this year. Particularly, several EU directives have been pending implementation for some time.

Therefore, we hereby provide an overview on planned draft laws yet to be implemented and offer a forecast regarding their adoption in 2025 as well as an outlook on the changes already adopted for this year.

Firstly, we will look at the long-discussed legislative proposals on the recording of working hours, wage transparency, employee data protection and family start time.

Secondly, you will find a summary of the simplifications to the written form requirement that have been adopted, the requirements for the use of AI that have already come into force, the adjustments that have been made to the remuneration of works councils, and the publication of the FAQs on the Remuneration Ordinance for Institutions.

Pending reforms:

There are several employment law reforms that a new federal government will have to tackle and that could come into force in 2025 or later.

Working Hours Recording

Following judgements of the European Court of Justice and the German Federal Labour Court which ruled that lawmakers must implement recording of all working hours by employers, a draft law was presented in 2023. This draft provided for flexible documentation of working hours and obligations to record them during the working day. However, the draft has not yet progressed beyond the development phase. The former federal government responded to a question about the status of this project by stating that the Occupational Safety and Health Act (ArbSchG) requires employers already to introduce a system that is capable of recording working hours and only the way in which they are recorded needs to be specified. The draft therefore only aims at creating the design of a time recording system. An exact date was not available at that time. In view of the recent elections a timely reform seems unlikely.

The draft proposal requires electronic recording of working hours in the future. This includes existing systems for time tracking, apps, and spreadsheet programs. The system of trust-based working hours should also be possible with the implementation of the proposed law, but under the condition that all working hours are documented. Furthermore, it should continue to be possible to delegate recording of working hours to employees, provided that a suitable system is made available for this purpose. However, responsibility for compliance with occupational safety requirements remains with the employer.

Employers are obligated to keep records of working hours for a period of at least two years and provide them to the employee upon request. In the event of non-compliance with the regulations for recording, storing, and providing proof of working hours, the draft provides for a fine of up to EUR 30,000.

The draft bill presented by the former federal government will therefore not be implemented in its current form. However, the new federal government will have no other choice but to present a concept for a new regulation.

For an in-depth analysis of the current legal situation regarding the recording of working hours, we recommend the following article on the Federal Labour Court ruling: Obligatory working time recording in Germany: rationale published | Simmons & Simmons.

EU Pay Transparency Directive

The EU Pay Transparency Directive aims to further reduce pay inequalities between women and men. It will require employers to provide information on starting salaries and ranges in the job description or before the interview. A notification only in the job interview will not be sufficient. Employees will be able to request information about their individual income and the average income of comparable employees broken down by gender and groups of employees who perform the same work or equivalent work regardless of the size of the company. The directive also states that employers with at least one hundred employees are obligated to publish information on pay gaps between female and male employees.

The EU Pay Transparency Directive must be implemented in Germany by 7 June 2026, and this project will therefore fall within the legislative period of the next federal government. Employers should already regularly review existing salary structures to ensure that they do not contain gender-specific pay differences. This can be accomplished by documenting salary determination processes and criteria as well as establishing comparison groups among employees. Employers should also ensure that job advertisements contain clear and transparent information regarding the salary or salary range. For further insights and a more detailed analysis of the EU Transparency Directive we recommend the following: A new approach to remuneration transparency | Simmons & Simmons.

Employee data protection

On 8 October 2024, the previous government presented a draft law on the Employee Data Act as the European Court of Justice (ECJ) declared that Section 26, I sentence 1 of the German Data Protection Act (Bundesdatenschutzgesetz, BDSG), the central regulation for data processing in an employment relationship, is not compatible with EU law. The current draft law would require employers to inform employees more extensively about the processing of their personal data regarding the purpose of data collection, the type of data processed and the duration of storage. Furthermore, the draft law now contains an explicit regulation on video surveillance in the workplace, where a strict examination of the necessity of such surveillance is now provided for.

The draft bill did not find a majority in its previous version. But the ECJ's decision will have to be implemented, and employers are already advised to review their existing contractual provisions and operational processes with regard to data protection requirements, particularly with regard to application procedures, digital working time recording systems, performance appraisals and video surveillance equipment.

Family Start Time

The EU directive on work-life balance for parents and family care takers should have already been implemented by 2022. However,  it remains unclear, whether and in what form the law will come into force in 2025. It will therefore be up to the newly formed government to implement the EU directive. The draft Family Start Time Act provides for a two-week leave of absence for one of the partners with full pay compensation. According to the draft law, a minimum period of employment is not required. It should also be possible to assert the claim without a registration period. The plan is that this leave will count towards the parental leave entitlement.

What can be expected in the next legislative period:

One of the central topics in the election campaign was the current economic situation. It can be assumed that the next federal government will take further measures to simplify employers' reporting and notification obligations. For example, the CDU's election manifesto includes plans to modernise working time legislation in line with EU standards, to abolish the Supply Chain Act, to replace the written form requirement with text form wherever possible and to reduce companies' reporting obligations at federal level. The SPD's manifesto also includes plans to further reduce bureaucracy and to advance the digitalisation of labour law.

It remains to be seen which of these proposals will ultimately be included in the coalition agreement of the governing parties. In any case, it is likely that German labour law may change significantly in the next legislative period.

Recent and upcoming changes:

The following employment law changes from the past year will continue to be relevant for employers this year or will only come effective at the turn of the year:

Relaxation of the written form requirement

On 1 January 2025, the strict written form requirement will end for most employment contracts, which in future can also be concluded in text form, for example by e-mail (Bureaucracy Relief Act IV). The essential terms of the employment contract can now be issued in text form and sent to the employee electronically (§ 2 NachweisgesetzG), unless stricter requirements apply, such as for fixed-term employment contracts. Among other things, this also applies to applications for parental leave and employee leasing agreements. Reference letters can in the future also be issued electronically provided the employee agrees. For further insight on this change, we recommend to look into the following article: German employment contracts via Email | Simmons & Simmons.

AI Act

The EU AI Act is directly applicable in Germany since 1 August 2024. It implies that employers involve the works council prior to implementing AI. Particularly, if AI is used to monitor the behaviour or performance of employees it is mandatory to obtain approval by the works council before implementation.

The regulation of high-risk AI systems is supposed to start in August 2026. In particular, many applications in the HR sector harbour a high risks for employers. Especially in the case of AI systems selecting applicants or termination selection processes. AI systems are only allowed to make a pre-selection or recommendation in these areas. The final selection must be made by humans. There is a high risk of discrimination when using AI systems for the selection or promotion of applicants, since AI systems generally draw on past successful applications for this purpose. If certain groups have been more successful in the application process, AI systems may possibly give preference to applicants from these groups in the selection process. It is crucial for employers to carefully review the selection and leave the final decision-making authority to humans.

The AI Regulation also requires that beginning on 2 February 2025, all employees involved in the operation and use of AI systems must have AI skills. For employers, this means mandatory AI training in the company, as well as extended training for employees who come into contact with high-risk AI. The employer should inform the works council in advance about planned AI training courses and coordinate with it regarding the implementation, content, and selection of participants.

Works Council Remuneration

As a result of the so-called "Volkswagen verdict" of the Federal Court of Justice (Ref.: 6 StR 133/22, 10 January 2023) which found that excessive remuneration paid to VW works councils was criminal embezzlement, statutory works council remuneration was adjusted. The verdict initially led to many companies significantly and unlawfully reducing remuneration paid to works council members to avoid criminal liability. Since the position of works council members is honorary, remuneration for works council activities is provided through paid leave. The regulations for such leaves of works council members are found in Section 37 and 38 of the Works Constitution Act (BetrVG). These stipulate that employees can be released from work to perform their works council duties without being completely free of their contractual work obligations. A complete exemption for unrestricted release from work for works council duties only applies in companies with at least 200 employees.

An amendment to the Works Constitution Act came into force on 24 July 2024: Remuneration of works council members must now correspond to that of a comparable employee and is determined when the member takes office. This allows employers to ensure fair compensation if works council members fulfil operational qualifications, which minimises the risk of criminal prosecution for remuneration errors.

Publication of the FAQs on the Remuneration Ordinance for Institutions

The FAQs on the Remuneration Ordinance for Institutions were published by the BaFin in July 2024. The Remuneration Ordinance regulates the remuneration of executives in banks and financial institutions to regulate excessive salaries and minimise risky behaviour. The FAQs supplement and concretise the existing EBA Guidelines and are intended to update the previous interpretation aids. The interpretative guidance will not be completely replaced, but can continue to be used as a supplement, meaning that three different sets of regulations for banks and credit institutions must now be observed. Banks and financial institutions are required to implement these new FAQs by 1 January 2025 at the latest.

The FAQs now stipulate that banks and financial institutions must clearly and comprehensibly disclose the remuneration structures of managers. This applies to both fixed salaries and variable remuneration such as bonuses and long-term incentives. The FAQs also stipulate that severance arrangements should not create negative incentives, i.e. they must not support or reward undesirable behaviour. Therefore, both the length of employment and the circumstances of contract termination must be considered when determining the amount of severance pay.