Attack on small businesses? The Federal Fair Wages Act and who really benefits from the new rules for federal contracts

Well-intentioned, disastrously executed, barely noticed and massively underestimated: How the federal government is harassing the economy with a new law

The Fair Wages Act was intended to be a social achievement, ensuring fairer wages in Germany – but for many companies, it is increasingly proving to be a bureaucratic nightmare. Anyone wishing to carry out federal public contracts in the future must guarantee strict collectively agreed working conditions. What is a breeze for large corporations threatens to become an insurmountable obstacle for small and medium-sized enterprises (SMEs) and startups. While politicians speak of it as an important safeguard for employees, business associations are sounding the alarm: disproportionate administrative burdens, absurd documentation requirements, and a looming patchwork of regulations could further weaken Germany's already struggling economy. Let's take a detailed look at a law that deeply impacts the structure of the German economy – and may ultimately achieve precisely the opposite of its intended purpose.

No more government contracts without a collective bargaining agreement? This now threatens small businesses and start-ups – procurement chaos is inevitable

On February 26, 2026, the German Bundestag passed a law that has received surprisingly little attention in the public debate, considering its potential impact on Germany's economic competitiveness. The Federal Collective Bargaining Compliance Act will henceforth obligate companies that execute federal public contracts to adhere to collectively agreed working conditions. What at first glance appears to be a social achievement, on closer inspection reveals itself to be a regulatory instrument whose side effects may counteract its stated objectives. The law applies to contracts with a net value of €50,000 or more and affects all new federal procurement procedures after its enactment. A higher threshold of €100,000 applies to startups, and contracts with the German Armed Forces are entirely exempt.

The passage of the law marks the provisional culmination of a long political dispute. The SPD had pushed for the project for years, while the CDU/CSU initially attempted to soften it during coalition negotiations and ultimately accepted compromises. The result is a set of regulations that neither fully satisfies its proponents nor appeases its critics. Trade unions criticize numerous loopholes, while business associations warn of further strain on Germany's already weakened economic position.

The erosion of collective bargaining agreements as the initial problem

To understand the motivation behind the Collective Bargaining Compliance Act, it's worth looking at the development of collective bargaining coverage in Germany. The figures paint a dramatic picture of decline. In 1996, around 80 percent of all employees still worked in companies covered by collective agreements. This figure has fallen steadily since then. In 2010, the rate was still at 61 percent, and in 2022 at 51 percent. The latest data from the Institute for Employment Research shows that by 2024, only 41 percent of all employees will be working in companies with industry-wide collective agreements, with a further eight percent in companies with company-specific agreements. The share of companies themselves covered by collective agreements fell from 33 percent in 1998 to a meager 17 percent in 2024.

This development has real consequences for millions of workers. Employees without a collective bargaining agreement earn on average eleven percent less and work longer hours than their colleagues covered by such agreements. Over the course of a year, this translates to roughly €2,000 less income. The EU Minimum Wage Directive aims for 80 percent collective bargaining coverage, and Germany, with its current rate of around 49 percent (combining industry and company agreements), is far from achieving this. The declining rate of collective bargaining coverage is largely attributable to the downturn in the private sector, as it has remained largely stable in the public sector.

The reasons for this long-term trend are multifaceted. The structural shift towards a service and digital economy plays a central role. In smaller service sector companies and new digital business areas, the workforce is significantly less unionized than in traditional industry. Newly founded companies are considerably less likely to be bound by collective bargaining agreements than established businesses. Furthermore, there is a generational shift in corporate culture, in which flexible compensation models and individual agreements have gained in importance.

Mechanics and scope of the law

The Act on Compliance with Collective Bargaining Agreements obligates companies bidding for federal contracts to adhere to collectively agreed working conditions for the duration of the contract. This includes wages, working hours, rest periods, and vacation entitlements. The relevant working conditions are those of the representative collective agreement for the respective industry, the selection of which is determined by the Federal Ministry of Labor and Social Affairs. Even companies not bound by collective agreements must submit a so-called commitment to comply with collectively agreed standards within the scope of the contract. This obligation explicitly extends to any subcontractors used, which further increases the administrative burden.

Violations could result in contractual penalties, contract termination, or exclusion from future tenders. Monitoring will be carried out through random audits of public contracting authorities. The German government emphasizes that the documentation requirements will be streamlined through a certification process. However, the specific implementing regulations for this process are still pending.

The scope of the law is limited by several compromises. Supply contracts are exempt, even if they exceed the threshold of €50,000. The exemption for the German Armed Forces applies until at least 2032. Contracts awarded by states and municipalities are not affected. However, almost all German states, with the exception of Bavaria and Saxony, already have their own laws on compliance with collective bargaining agreements for state contracts.

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The economic dilemma of the middle class

The German Association for Small and Medium-Sized Businesses (BVMW) sees the law as posing a significant risk of displacement for smaller providers. The logic behind it is understandable. Small and medium-sized enterprises typically have a higher proportion of labor costs in their total costs than large corporations. The obligation to offer collectively agreed working conditions therefore affects them disproportionately. Even if a medium-sized company pays fair wages that are only slightly below the collectively agreed level, it must now implement the full adjustment to the collectively agreed wage in order to participate in the federal procurement market.

The German Chamber of Industry and Commerce (DIHK) argues that the law creates complex liability and payroll accounting problems. Chief legal counsel Stephan Wernicke succinctly summarizes the criticism: the intended protection of employees is being achieved at the cost of disproportionate disadvantages for companies. Ultimately, this harms all parties, even the state itself, because medium-sized businesses are less likely to bid for public contracts. The law is, in the end, a competitive disadvantage.

Oliver Zander, CEO of the employers' association Gesamtmetall, uses even harsher language. He describes the law on adherence to collective bargaining agreements as organized irresponsibility and accuses the coalition of contradicting its own promises to reduce bureaucracy with this legislation. Zander draws parallels to the supply chain due diligence law, which he says has already driven countless medium-sized companies to the brink of despair. He argues that the new law brings with it a morally disguised distrust of businesses, absurd bureaucratic procedures, excessive reporting requirements, and new regulatory authorities.

Startups between innovation and regulation

The law on adherence to collective bargaining agreements poses a particular challenge for young companies. Startups often operate with flexible compensation models that combine base salary, stock options, and performance-related bonuses. For good reason, they are rarely bound by collective bargaining agreements, as rigid structures are difficult to reconcile with the dynamic growth and rapidly changing needs of young companies.

The increased threshold of €100,000 for startups only marginally mitigates the impact. As soon as a young technology company wants to acquire a major federal contract, it has to adopt pay scales designed for established industrial companies. This can mean that a software startup wanting to develop a digital solution for a federal agency suddenly has to comply with the salary structures of the IT collective agreement, even though its business model is based on a completely different cost structure.

The consequence is predictable: Innovative young companies will increasingly avoid the federal procurement market, while large IT corporations and consulting firms, which are already bound by collective bargaining agreements, will further expand their market share. Particularly in the area of ​​public administration digitalization, where agile startups are urgently needed, the law could therefore prove counterproductive.

The patchwork of procurement law

Another structural problem arises from federal fragmentation. Since the Federal Wage Compliance Act applies exclusively to federal procurement, an additional regulatory patchwork is created. Medium-sized companies bidding for public contracts at the federal, state, and local levels will have to comply with different wage compliance regulations in the future. Depending on the state, different thresholds, exceptions, and documentation requirements apply. Bavaria and Saxony have no such regulations at all.

This patchwork of regulations not only creates additional administrative burdens but also legal uncertainty. A construction company from Baden-Württemberg, simultaneously carrying out a federal contract, a state contract, and a municipal contract, may have to comply with three different collective bargaining agreements. This might be manageable for large corporations with specialized legal departments. For a medium-sized craft business, it becomes a challenge.

The macroeconomic context

The Fair Wages Act comes at a time of considerable economic strain for Germany. Industry is losing thousands of jobs every month, international competitiveness is under pressure, and energy costs continue to burden businesses. While other industrialized nations, such as the US under President Trump, are creating regulatory relief for businesses while simultaneously protecting their markets with tariffs, Germany is relying on additional regulation with the Fair Wages Act.

The special infrastructure fund will generate numerous public contracts in the coming years. The construction industry already recorded a real increase in orders of 6.8 percent in 2025 compared to the previous year, with a nominal volume of €113 billion. All companies in the main construction sector generated approximately €172 billion in revenue in 2025. Especially in this environment of massive public investment, the question arises whether the Fair Wages Act will increase the cost of procurement procedures and restrict the pool of bidders.

The AfD denounced the law in the Bundestag as an attack on collective bargaining autonomy and warned of additional bureaucracy for small and medium-sized enterprises. The Left Party considered the law riddled with loopholes, as the exemptions for deliveries and the German Armed Forces would exclude a third of federal contracts. Even the trade unions see the law only as a first step. IG Metall criticized the fact that the collective bargaining agreement criterion plays no role precisely where massive investments are made, namely in deliveries and procurement for defense.

Who really benefits in the end?

The sobering analysis reveals a law that is unlikely to achieve its stated goals to a significant extent. Increasing collective bargaining coverage through public procurement law is an indirect lever with limited impact, as the share of federal contracts in the overall economic contract volume is comparatively small. The real beneficiaries could be large companies and corporations that are already bound by collective agreements and whose compliance departments can easily handle the additional bureaucratic burden.

The losers are already clear: smaller, medium-sized businesses that cannot or will not shoulder the administrative burden, and startups whose business models are difficult to reconcile with rigid wage structures. The German economy needs more flexibility, not less. It needs less bureaucracy, not more. And it needs a state that trusts its companies instead of burdening them with ever-increasing documentation requirements. The Wage Compliance Act delivers the opposite. It remains a signal from a political system that is increasingly losing sight of the difference between good intentions and good execution.

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