BAG: Settlement not enough for termination

A German court ruled that a settlement agreement ending employment must involve active court participation to be legally valid. Employees cannot be forced into fixed-term contracts without proper justification, even if both sides agree.

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Ruling: Settlement alone doesn’t end employment

Germany’s highest labor court (BAG) ruled on March 4, 2026 (case no. 7 AZR 297/24) that a settlement agreement ending an employment contract isn’t automatically valid just because both sides signed it. For employees, this means: If your employer tries to end your job through a settlement without the court actively shaping the deal, the termination might not hold up in court.

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Why the court stepped in

German law requires a „substantive reason” to end a fixed-term contract. A settlement can count as a reason—but only if the court plays an active role in shaping it. In this case, the court merely approved a deal the employer and employee had already negotiated. The judges clarified that courts must do more than rubber-stamp agreements; they need to ensure the deal protects the employee’s rights.

What happened in this case

A nuclear power plant worker had his contract extended through a settlement agreement, with his job set to end on June 30, 2023. The company argued the settlement was valid because both sides agreed to it. However, the worker later sued, claiming the settlement didn’t meet legal requirements. The court sided with him, noting the company couldn’t prove a real need to end the contract, especially since the worker was on paid leave until the end date.