Fixed-term contracts are a popular tool under employment law for meeting temporary staffing needs without subsequently having to terminate the employment relationship in accordance with the stringent requirements of the German Protection Against Unfair Dismissal Act (Kündigungsschutzgesetz). This can be done without any problems during the first two years by using a fixed-term contract without objective grounds. No specific reason is required for a fixed-term contract without objective grounds. After two years at the latest, only a so-called ‘fixed-term contract with objective grounds’ with the same employer can be entered. In its judgement of 4 March 2026 (7 AZR 297/24), the Federal Labour Court (BAG) specified the requirements for objective grounds.
Dear Readers,
What do the temporary operational need for work performance, the facilitated transition following vocational training or studies, the replacement of another employee, the specific nature of the work performance, the probationary period, reasons relating to the person of the employee, remuneration from budget funds, or a court settlement have in common? These are the grounds for a fixed-term contract with objective grounds under sec. 14 (1) of the German Fixed-Term Employment Act (TzBfG). The subject of the Federal Labour Court’s ruling is the objective ground of a 'court settlement’.
The substantive ground for a court settlement under sec. 14 (1), sent. 2, no. 8 TzBfG is given if the fixed term of an employment contract is based on a court settlement. A further requirement is that a dispute (e.g. a dispute concerning the right to terminate the contract or an action for a declaratory judgement) between the employer and the employee regarding the existence or continuation of the employment relationship is settled.
In practice, this is a tried and tested method: employer and employee are in dispute over a dismissal – and, in the proceedings for protection against unfair dismissal, agree on the basis of a settlement to continue the employment relationship for a while longer, before then allowing it to end on a fixed-term basis. Sec.14(1), sent. 2, no. 8 TzBfG serves as the legal basis, citing a judicial settlement as a recognised objective ground for a fixed-term contract.
An employee was employed on a fixed-term basis. Upon the expiry of said fixed-term contract, the employee took legal action against the terms of the original fixed-term contract. As part of these proceedings, both parties agreed on a settlement which provided for the employment relationship to end at a later date – following a further fixed-term contract. This settlement was jointly proposed to the labour court by both parties and was confirmed by the court by order (sec.278 (6), sent.1, alt. 1 Code of Civil Procedure (ZPO)).
The Federal Labour Court has ruled that a judicial settlement within the meaning of sec. 14 (1), sent. 2, no. 8 TzBfG requires the court to play a responsible role in shaping its content. This requirement is not met if the parties merely submit a fully negotiated text to the court for formal approval. In this case, the court is confined to a mere declaratory function – which, in the Federal Labour Court’s view, is not sufficient to fulfil the requirements for the grounds for a fixed-term contract. In contrast, the fixed-term contract is valid if the court itself submits a proposal for a settlement or expressly adopts a proposal put forward by one of the parties (sec. 278 (6), sent. 1, alt. 2, ZPO).
Employers wishing to validly agree on time limits in settlements must ensure that the court not only formally approves the settlement but also actively contributes to its formulation or adoption. With this judgement, the Federal Labour Court puts an end to the uncertainty.
Warm (labour law) greetings from Munich!
Note: This blog post has already been posted in the employment law blog of Erik Schmid at Rehm-Verlag (www.Rehm-Verlag.de).
