A. General Validity Requirements

Written form (§ 623 BGB)
Every notice of termination must be in written form with a handwritten signature. Oral notice or notice sent by e-mail or WhatsApp is void under § 125 sentence 1 BGB. The Federal Labour Court (BAG) confirmed in its decision of 16.09.2004 (2 AZR 659/03) that electronic form is expressly excluded.

Receipt (§ 130 BGB)
The termination becomes effective upon receipt by the employee. If placed in the letterbox, receipt is deemed to occur on the same day if this happens at the usual collection time (BAG, 22.04.2010 — 6 AZR 828/08).

Scope of the Protection Against Dismissal Act (KSchG) (§§ 1, 23 KSchG)
The Protection Against Dismissal Act applies when the employee has been employed for more than 6 months and the establishment normally has more than 10 employees.

Works council hearing (§ 102 BetrVG)
The works council must be heard before any dismissal. Dismissal without a hearing is invalid. The BAG (23.10.2008 — 2 AZR 163/07) established the principle of subjective determination: the employer only communicates the reasons known to it.

Notice periods (§ 622 BGB)
Staggered according to length of service: from 4 weeks (up to 2 years) to 7 months (from 20 years). During probation: 2 weeks.

Claim period (§§ 4, 7 KSchG)
The employee must bring a claim within 3 weeks of receipt — otherwise the termination is deemed valid.

B. Personal Grounds for Dismissal

Legal basis: § 1(2) sentence 1 KSchG

Dismissal for personal reasons does not require culpable conduct. It is based on attributes or circumstances pertaining to the person of the employee.

Typical cases: Long-term illness, frequent short absences, loss of driving licence, withdrawal of a professional licence (e.g. medical approval, pilot licence), imprisonment, lack of work permit, permanent reduction in performance.

Three-stage test (BAG, 29.01.1997 — 2 AZR 9/96)

• Stage 1 — Negative future prognosis: At the time of receipt of the notice, it must be feared that the employee will not be able to fulfil their duties in future.
• Stage 2 — Substantial operational impact: Absences or reduced performance must lead to noticeable disruption of operations or economic burden. A rule of thumb for substantial economic burden is continued pay costs of more than 6 weeks per year.
• Stage 3 — Balancing of interests: Length of service, age, maintenance obligations and, where applicable, operational contribution to the illness must be taken into account.

BAG leading decisions: BAG, 25.04.2018 — 2 AZR 611/17 (frequent short absences): High absences in the past alone do not establish a sufficient negative prognosis if the employee shows that the illness has been cured.

Workplace integration management (§ 167(2) SGB IX)
Before a dismissal on grounds of illness, workplace integration management (BEM) must be offered if the employee was absent for more than 6 weeks within one year. If BEM is not carried out, the employer bears the full burden of proof that no other employment was possible (BAG, 24.03.2011 — 2 AZR 170/10).

C. Conduct-related Dismissal

Legal basis: § 1(2) sentence 1 KSchG

Conduct-related dismissal requires culpable misconduct — conduct that the employee could control and influence.

Typical breaches of duty: Unexcused absence, refusal to work, breach of confidence (§ 17 UWG), competing activity, insult, theft, embezzlement, forgery, breach of instructions, appearing under the influence of alcohol.

Formal warning as a requirement: As a rule, a formal warning is required before a conduct-related dismissal (§§ 314(2), 323(2) BGB by analogy). It must specify the conduct in question, expressly censure it, call for a change in behaviour and warn of dismissal as a consequence. Exceptionally, no warning is needed in the case of serious breaches where a warning would be a useless formality (BAG, 13.12.2007 — 2 AZR 818/06).

Balancing of interests (ultima ratio): The dismissal must be proportionate. Relevant factors include: seriousness of the breach, length of service, previous clean record, age, maintenance obligations.

The Emmely judgment (BAG, 10.06.2010 — 2 AZR 541/09): The BAG held that the summary dismissal of a cashier for embezzlement of deposit vouchers worth €1.30 was disproportionate. Even with serious breaches, the balancing of interests may favour the employee where there is long service and a previously clean record.

Suspicion-based dismissal: Permissible where there is a strong, fact-based suspicion of a serious breach. Prerequisites: exhaustion of reasonable investigations and hearing of the employee before giving notice (BAG, 12.05.2010 — 2 AZR 587/08). Failure to hear the employee renders the dismissal invalid.

D. Operational (Redundancy) Dismissal

Legal basis: § 1(2) sentence 1 KSchG

Operational dismissal is based on an entrepreneurial decision leading to the loss of the job. The employee’s fault is irrelevant.

Requirements:

1. Entrepreneurial decision — courts may only review for obvious arbitrariness, not economic reasonableness (BAG, 17.06.1999 — 2 AZR 141/99). Typical cases: closure, outsourcing, rationalisation, loss of an order.
2. Pressing operational need — the measure must be operationally necessary.
3. No available position — continued employment in the establishment or undertaking must be ruled out; modification of contract may be an alternative to termination.
4. Social selection (§ 1(3) KSchG) — where several comparable employees are affected, consideration must be given to: length of service, age, maintenance obligations, severe disability. Key performers may be exempted where there is a justified operational interest (§ 1(3) sentence 2 KSchG). Social selection need only be adequate, not optimal — judicial review only for serious defects (BAG, 05.12.2002 — 2 AZR 697/01).

Mass dismissal (§ 17 KSchG): Above certain thresholds (e.g. more than 25 employees in establishments with 60–500 employees within 30 days): obligation to consult the works council and to notify the employment agency. Defective notification renders the dismissals invalid (BAG, 22.11.2012 — 2 AZR 371/11).

Reconciliation of interests and social plan (§§ 111–113 BetrVG): In the event of operational changes: obligation to consult the works council. A name list in the reconciliation of interests (§ 1(5) KSchG) leads to a reversal of the burden of proof and limited judicial review of social selection.

E. Extraordinary (Summary) Termination (§ 626 BGB)

Immediate termination of the employment relationship without notice. Two-stage test: (1) important reason as such; (2) in the individual case, continuation of employment until expiry of notice would be unreasonable. Notice must be given within 2 weeks of learning of the ground for termination (§ 626(2) BGB).

Before a conduct-related dismissal, the employer must in most cases first give the employee a formal warning (Abmahnung). But a warning that is formally defective is of no use in court. This article explains in plain terms what matters.

Imagine an employee repeatedly turns up late for work. You cannot simply dismiss them for that straight away — German employment law requires you as the employer to first give the employee a clear, official warning. That is exactly what the Abmahnung is.

The warning serves two purposes at once: it tells the employee unmistakably what they did wrong — and it warns them that their employment is at risk if it happens again. The 4 mandatory elements (concrete description of the conduct, censure, call for a change in behaviour, warning of dismissal) are the core. If even one is missing, the warning is worthless in court.

In addition, there are formal requirements (written form, receipt, authority to warn, timeliness), limits on validity (typical validity period of about 2–3 years, substantive link to the later dismissal), and exceptions where no prior warning is required.

Written form: Not required by law, but strongly recommended

Here the law surprises many employers: Unlike the notice of termination (§ 623 BGB), a formal warning does not have to be in writing. An oral warning is legally possible.

In a dispute before the labour court, the employer must prove that a valid warning was given — content, date and receipt. That is almost impossible to show if it was only oral. The warning should therefore be in writing — and it should be handed over in a way that allows receipt to be proven (e.g. in person against a written acknowledgment or by registered mail).

When is no prior warning required?

There are situations in which the employer may dismiss the employee directly — without a prior warning. The bar is high, however. The law and the courts interpret these exceptions narrowly (e.g. in cases of particularly serious breaches of duty where a warning would be a useless formality).

Implementation deadline: 7 June 2026

A. Content of the Directive

Directive (EU) 2023/970 entered into force on 6 June 2023. Its aim is to enforce the principle of “equal pay for equal work or work of equal value” across the Union. It replaces the previous German Pay Transparency Act (EntgTranspG) of 2017, which was widely seen as ineffective in practice: information rights applied only from 200 employees, reporting obligations only from 500.

The five core areas of the Directive:

1. Job advertisements (Art. 5): Obligation to state salary ranges or starting pay in job advertisements. Prohibition on asking applicants about their previous salary.
2. Workers’ right to information (Art. 7): Any worker may request in writing information on their individual pay level and the average pay of comparable workers by gender. Response period: 2 months.
3. Duty to inform on pay criteria (Art. 6): Employers with at least 50 workers must provide easily accessible information on criteria for determining and developing pay. Criteria must be objective and gender-neutral.
4. Reporting obligations (Art. 9): Regular reports on the gender pay gap — staggered by company size (from 100 workers).
5. Sanctions and reversal of burden of proof (Art. 18, 23): Anyone who breaches transparency obligations must prove that there is no discrimination. Workers are entitled to pay arrears for at least 3 years plus compensation.

Tiered reporting obligations by company size

* National law may provide for obligations for smaller companies too.

B. Obligations for companies from 7 June 2026

The following obligations apply directly from the implementation date — regardless of company size, unless otherwise stated:

• Transparent job advertisements with salary range or starting pay; prohibition on asking about previous salary
• Duty to inform on pay criteria (from 50 workers)
• Workers’ right to request information in writing; response within 2 months
• Reporting obligations on gender pay gaps as set out in the table above (staggered by size)

II. Transparency and information obligations during the employment relationship

1. Duty to inform on pay criteria (Art. 6 Directive)
Employers with more than 50 workers must, from 7 June 2026, provide their workers with easily accessible information on the criteria used to set pay, pay levels and pay progression. The criteria must be objective and gender-neutral. National law may provide exceptions for employers with fewer than 50 workers.

2. Individual right to information (Art. 7 Directive)
From 7 June 2026, all workers – regardless of company size – have the right to request in writing information on their individual pay level and on the average pay levels of comparable workers, broken down by gender. The employer must respond within two months.

Key differences from previous German law: Previous EntgTranspG: right to information only from 200 workers, and only on the median pay of comparable workers of the other gender. New Directive: right to information from the first worker, covering all pay components (basic salary, bonuses, benefits in kind, variable components) for both genders. The reference value is the average, no longer just the median.

Note: The Directive prohibits confidentiality clauses in employment contracts that prevent workers from disclosing their pay. Such clauses become ineffective from the implementation date. Employers must also actively inform their workers once a year about the existence of this right to information.

3. Removal of confidentiality clauses
Clauses in employment contracts that require workers not to disclose their pay to colleagues are inadmissible under the Directive. Employers must remove or adapt such contract terms.

III. Reporting obligations (Art. 9 Directive)

For employers with 100 or more workers, mandatory reporting obligations on the gender pay gap apply on a staggered basis. Reports must be submitted to the competent national authority and partly published. The first reporting period relates to the year 2026.

D. Practical tips for employers

According to a Mercer study, at the end of 2025 only 28 per cent of German companies felt prepared for the new requirements. Given the June 2026 deadline and the considerable implementation effort, there is an urgent need for action.

Step 1: Current-state analysis of pay structures

Before any further measures, the current pay structures must be assessed:

• Record all pay components – base salary, variable elements, bonuses, benefits in kind, occupational pension
• Group positions by equal or equal-value work (creating comparison groups)
• Calculate the gender pay gap per group and overall – split into adjusted and unadjusted
• Document current criteria for pay setting and progression
• Identify weak spots: where are there differences that are not objectively justified?

Step 2: Adapt recruitment processes

The adaptation requirements in recruiting are concrete and apply from 7 June 2026:

• All job advertisements must contain a salary range or starting salary – internal and external.
• Application forms, interview guidelines and HR policies must be updated to reflect the prohibition on asking about salary.
• Hiring decisions and salary offers must be based on and documented by objective, traceable criteria.
• Template job advertisements and onboarding materials must be revised.

Step 3: Align pay system with objective criteria

Pay decisions must be based on a transparent, gender-neutral system:

• Develop or revise a job evaluation system with clear, objective criteria (qualification, responsibility, effort, working conditions)
• Introduce salary bands for comparable positions
• Guidelines for individual salary adjustments, bonuses and allowances that prevent subjective or arbitrary allocation
• Review existing bonus systems and performance appraisals for gender-specific bias

Step 4: Revise employment contracts and internal guidelines

• Identify and remove all confidentiality clauses in employment contracts that require employees not to disclose their pay
• Create an internal pay policy that sets out criteria for salary adjustments, promotions and variable pay
• Update standard employment contract templates

Step 5: Adapt data infrastructure and HR systems

Reporting obligations require a robust data basis:

• Check whether existing HR software or payroll systems can produce the required analyses (average pay by gender and employee category, pay quartiles)
• If necessary, invest in suitable tools and standardised recording processes (costs: approx. €5,000 to €50,000 depending on company size)
• Ensure compatibility with CSRD/ESG reporting obligations to avoid duplicate work (Art. 9 Directive recommends harmonisation)
• Establish a recurring reporting process with clear responsibilities and deadlines

Step 6: Involve the works council

The Directive expressly strengthens the works council’s co-determination rights:

• The works council must be involved in the joint pay evaluation (Art. 10 Directive)
• Works councils have the right to request and review information on pay structures
• Early, cooperative involvement of the works council is recommended to avoid later conflicts in co-determination procedures

Step 7: Training and awareness

• HR departments and managers are to be trained – in particular on the new obligations in recruiting and on legally sound pay structuring
• Raise awareness of unconscious bias in job evaluations and salary negotiations
• Inform the workforce about the new right to information (annual obligation from 7 June 2026)

For directors and board members, two questions are central: When is the company insolvent — and when does delaying action lead to criminal liability or damages? This article outlines the relevant concepts under German insolvency law (InsO).

1. When is there an insolvency situation?

The Insolvency Code (Insolvenzordnung) recognises three grounds for insolvency. If one of them is present, the company is generally required to file for insolvency (see below).

Illiquidity (§ 17 InsO)
Illiquidity (Zahlungsunfähigkeit) exists when the debtor is unable to meet due payment obligations. It is sufficient that illiquidity has occurred; over-indebtedness is not required. What matters is the ongoing ability to pay due debts. Typical signs: cash shortfall, cheques or bills not honoured, suppliers not paid.

Imminent illiquidity (§ 18 InsO)
Imminent illiquidity (drohende Zahlungsunfähigkeit) exists when the debtor is likely to be unable to meet existing obligations when they fall due. A forecast that funds will be insufficient is enough. This is especially relevant for those obliged to file: they need not wait until the till is empty — the duty can arise as soon as illiquidity is imminent (cf. § 15a(1) InsO in relation to illiquidity or over-indebtedness).

Over-indebtedness (§ 19 InsO)
A corporation (e.g. GmbH, AG) is over-indebted when its assets do not cover its liabilities. An exception applies if continuation of the business is more likely than not (§ 19(2) InsO). In that case there is no over-indebtedness despite a negative balance sheet. The assessment follows commercial law principles; the going-concern prognosis must take all circumstances into account.

2. Duty to file for insolvency (§ 15a InsO)

Managing directors of a GmbH and board members of an AG must apply for the opening of insolvency proceedings without culpable delay, and in any event within three weeks, after illiquidity or over-indebtedness has occurred. If they fail to do so, they can be held liable for damages under § 15a(4) InsO and, under § 15a(5) InsO, may face criminal sanctions for wrongful trading (Insolvenzverschleppung).

The three-week period starts when illiquidity or over-indebtedness has occurred or was recognisable to the person under the duty to file. Anyone who files late or not at all risks wrongful trading liability.

3. When does wrongful trading (Insolvenzverschleppung) arise?

Wrongful trading in the criminal sense (§ 15a(5) InsO in conjunction with § 401(1) no. 1 AO where tax advantages are involved) or civil liability for breach of the duty to file arises when:

• a ground for insolvency (illiquidity or over-indebtedness) has occurred,
• the person under the duty to file (managing director, board member) knew or ought to have known this with due care,
• they do not file for insolvency “without delay” (without culpable hesitation) — at latest within three weeks —,
• and creditors are harmed by the delay (e.g. further liabilities arise that would not have arisen if the application had been made in time).

Liability for damages under § 15a(4) InsO applies to losses suffered by creditors after expiry of the three-week period or as a result of culpable delay. In criminal law, wrongful trading can be pursued as an administrative offence or, in serious cases, as a criminal offence.

4. Legal consequences

Breaches of the duty to file for insolvency and wrongful trading can have serious consequences for managing directors and board members:

• Civil law: Liability for damages to the company and to creditors (§ 15a(4) InsO). The person under the duty is liable for creditor losses caused by the delayed filing (“shortfall in dividend” and other disadvantages). In the case of a GmbH, liability to the company for breach of duty (§ 43 GmbHG) may also apply.
• Criminal and administrative sanctions: Wrongful trading can be punished as a criminal offence (§ 15a(5) InsO) with imprisonment or a fine. In certain situations, administrative fines or tax-related sanctions (§ 401 AO) may also apply.
• Personal liability: Liability attaches to the acting officers personally; coverage by the company or D&O insurance is only possible within the policy terms and does not prevent criminal prosecution.
• Reputation and follow-on effects: Convictions can lead to removal from office, disadvantages in future appointments and professional consequences.

5. Practical tips for companies to avoid these consequences

• Early warning: Regular liquidity planning (e.g. 13-week cash flow), monthly review of receipts and payments, and clear escalation thresholds. This allows you to detect imminent illiquidity in good time.
• Over-indebtedness review: For corporations, perform an over-indebtedness test annually or as soon as there are signs of crisis (including going-concern prognosis) and document it in writing. Where the going-concern prognosis is positive, this may rebut over-indebtedness.
• Act immediately: As soon as illiquidity or over-indebtedness is identified: obtain legal advice without delay (insolvency specialist) and, if appropriate, involve a preliminary insolvency administrator. Prepare the insolvency application and file within the three-week period — do not wait in the hope of a “rescue”.
• Documentation: Record decisions and dates (when was the crisis identified, when was advice obtained, when was the application filed?) in a traceable manner. This helps in later liability disputes.
• Avoid creditor preference: After the crisis has arisen, do not make preferential payments to connected creditors — such payments may be voidable and can aggravate liability.
• Check insurance: Review D&O policy for coverage in relation to the duty to file and wrongful trading; comply with notification periods and other policy obligations.

Practical note: As soon as illiquidity or over-indebtedness is identifiable, managing directors and board members should obtain legal and, where appropriate, insolvency advice without delay and prepare the insolvency application. Waiting in the hope of averting the crisis may be well-intentioned — but legally it can lead to liability and criminal exposure once the deadline has passed.

It is recommended to establish structured planning before carrying out an M&A transaction - both on the sell-side and on the buy-side. This planning should be documented: first, to structure the intended transaction and align each phase of the process with the overarching objectives; and second, to be able to evidence compliance with directors' duties of care across legal forms (e.g. § 43(1) GmbHG, § 93 AktG).

Accordingly, a checklist should be prepared at an early stage. A precise definition of transaction objectives and their ongoing review throughout the process are crucial so that both seller and buyer can continuously compare progress against their previously defined goals.

Recommended checklist:

• Define the transaction objectives.
• Determine the transaction structure (including preparatory and post-closing integration measures) and identify potential acquirers, their goals and negotiation strategies (with a priority list).
• Analyse transaction feasibility in light of the target company's competitive advantages/unique selling points (feasibility study); identify deal-breakers, minimum acceptable positions (pain threshold) and an alternative strategy (Plan B).
• Identify necessary or useful partners for implementing the transaction structure (including concrete contact persons), as well as their respective goals and negotiation strategies.
• Define negotiation tactics, process design and timeline.
• Set up the internal and, where appropriate, external team; clearly allocate responsibilities and roles.

After that, the key motives for the M&A transaction should be clearly defined. In practice, several (often up to eight) motives are distinguished. A clear separation between buy-side and sell-side motives is particularly important.

From the seller's perspective, core objectives may include focusing on the core business, securing succession, improving the balance-sheet structure and safeguarding long-term business success. From the buyer's perspective, objectives may include revenue growth, acquisition of additional production capacity, cross-selling potential and expansion into new markets and regions.

Conclusion: Clarity regarding the respective transaction objective is of central importance for both parties and should not be underestimated at any stage of the process.