Judges at the Federal Constitutional Court in Karlsruhe said that the total cut in benefits should never be allowed to exceed 30 percent, and in cases where lower payments would cause “extraordinary hardship”, no penalties should be imposed at all.
The sanctions allowed under Germany's so-called Hartz IV benefits system, which combines social welfare and long-term unemployment payments, have long been controversial with critics saying they violate the right to a dignified existence.
Under the current rules, a jobseeker's monthly dole can be docked if they fail to turn up for a job interview, turn down employment or miss training opportunities.
In extreme cases, recipients can lose up to 60 percent of their benefits — and repeat offenders can be cut off altogether for three months.
But judges in Karlsruhe found that the 60-percent reduction was “unreasonable given that the burden it entails seriously encroaches upon the minimum standard of living guaranteed by fundamental rights.”
Furthermore, judges said that a 30-percent dole cut was “only permissible if the sanction can be waived in cases of extreme hardship” and if its three-month duration can be shortened depending on the jobseeker's cooperation.
A single jobseeker with no children currently receives €424 a month, while couples receive €764.
In 2018, a total of 441,000 jobseekers were financially penalized at least once.
In the wake of the ruling, Dietmar Bartsch, a leading lawmaker from the far-left opposition party Die Linke, called for a complete overhaul of the system.
“Hartz IV plunges people and their families into the abyss,” he tweeted.
#HartzIV als System ist eine unzulässige #Sanktion. Hartz IV stürzt Menschen und ihre Familien ins Bodenlose. Hartz IV hat den #Sozialstaat ramponiert. Wir brauchen ein neues System der #Arbeitslosenversicherung, das Sicherheit gibt und die Angst vor sozialem Absturz nimmt. https://t.co/OJiXRuLocD
— Dietmar Bartsch (@DietmarBartsch) November 5, 2019
“We need a new system of unemployment benefits that provides security and removes the fear of social decline.”
But Labour Minister Hubertus Heil, a Social Democrat, earlier this year defended the Hartz IV sanctions.
“The welfare state needs to have the means to demand the reasonable and binding cooperation” of benefits recipients, he said in January.
The penalties for falling foul of the job centre's guidance are harshest for those under the age of 25.
The Hartz IV system is part of the hated “Agenda 2010” labour reforms forced through by then chancellor Schröder to tackle the country's unemployment.
The reforms have been credited with helping Germany achieve record-low unemployment of around five percent, but the tough-love approach has also been hugely divisive.
Critics say Hartz IV has pushed people into low-paid, precarious jobs, and increased inequality in Germany.
Opponents also say the threat of sanctions places a huge psychological burden on jobseekers.
Schröder paid a heavy political price for the hated measures, losing the following general election in 2005 to now chancellor Angela Merkel.
Tuesday's court setback is likely to revive debate about Schröder's reforms legacy, putting further strain on Merkel's shaky coalition with the SPD.
The ruling was sparked by a complaint from a jobseeker in the city of Erfurt who was sanctioned after refusing a job in a warehouse in 2014 because he wished to work in sales.
His benefits were then docked again when he missed an opportunity to trial
a sales position.
He lost a total of €234.60 in monthly payments, pushing him into “a downward spiral of resignation and existential fear”, according to his lawyer.