This empirical study investigates the effect of the German disability law on employment dynamics, using data on all employers affected from the Federal Labour Office and data from the IAB Establishment Panel. The data allow us to analyze the second threshold of this law which stated (in our observation period 1999/2000) that firms with 25 or more employees must employ at least two disabled persons or pay a penalty. Descriptive as well as multivariate analyses suggest that employment growth is slightly dampened if firms stand just before this threshold and do not have a sufficient number of disabled employees (i.e. would have to pay the penalty when crossing the threshold). There is, however, no indication that firms in a similar situation above the threshold reduce employment in order to avoid the penalty.