This empirical study investigates the effect of the German disability law on employment dynamics, using data from the Federal Labour Office and the IAB Establish-ment 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.