How to hire employees in Germany

Expanding your business into Germany requires a deep understanding of the country’s intricate employment landscape. Germany’s labor laws are complex and ever-evolving, making it crucial to consider hiring and employment practices with care and compliance. This comprehensive guide will provide you with invaluable insights on how to hire in Germany.

From deciphering labor codes to effectively attracting and retaining local talent, you’ll gain the knowledge necessary to build a skilled and compliant workforce that drives your success in this dynamic market. Discover strategies for handling payroll payments compliantly, mitigating risks, and fostering a positive workplace culture that resonates with German employees.

» Explore all there is to learn about payroll in Germany.

Germany: What to know before hiring

Strict data protection laws (GDPR)

Germany adheres to the EU’s General Data Protection Regulation (GDPR), which imposes strict regulations on how companies collect, store, and use employee data. Employers must comply with GDPR to avoid hefty fines for data breaches or mishandling of employee information.

» Go over the differences between UK GDPR and EU GDPR.

Complex tax system

Germany has a complex income tax system with various deductions and brackets. Additionally, employers are responsible for withholding taxes from employee salaries and remitting them to the tax authorities. Employers may need professional guidance on navigating payroll tax deductions and ensuring accurate tax withholdings and remittances for employees and the company.

» Learn more about tax compliance here.

A solid social security system

Both employers and employees contribute to a comprehensive social security system that provides benefits like pensions, healthcare, unemployment insurance, and long-term care. Employers must understand their share of social security contributions and factor them into overall labor costs.

» Get all the info you need on payroll security breaches here.

Three options for employing people in Germany

1. Via a legal entity

Setting up a legal entity, such as a GmbH (Gesellschaft mit beschränkter Haftung), allows companies to hire employees directly. This process involves registering the business with German authorities, obtaining necessary permits, and complying with local labor laws. This option provides complete control over the workforce and operations but requires significant time and financial investment.

Pros

• Direct relationship with employees.

Cons

• It’s costly and time-consuming to set up.
• Employers are directly responsible for regulatory compliance.

» Learn how to set up an entity in Germany.

2. Via an employer of record (EOR)

An employer of record in Germany handles all employment-related legal and administrative responsibilities, including payroll, tax compliance, and benefits. The EOR enables foreign companies to hire employees in Germany without establishing a legal entity.

The EOR manages the employment relationship, while the company directs the employee’s day-to-day activities. This option allows quick market entry with minimal setup costs and reduced compliance risks.

Pros

• Quick and straightforward to assemble.
• It’s reasonably priced upfront.
• Takes care of legal compliance for you.

Cons

• It’s more challenging to scale up than with a legal entity.

» Find out more about what an employer of record does here.

3. Hiring independent contractors

Hiring independent contractors in Germany can be a flexible and cost-effective solution, especially for short-term projects or specialized tasks. Contractors operate independently and are responsible for their taxes and social security contributions.

However, companies must ensure proper classification to avoid legal issues. Clear contracts should define the scope of work, payment terms, and project duration to ensure compliance with German labor laws.

Pros

• Affordable wages.
• Speedy hiring process.

Cons

• No control over employee operations.
• Compliance and permanent establishment risks.

» Learn how to onboard an independent contractor.

Employees vs. contractors in Germany

» Avoid misclassification by learning how to draft independent contractor agreements.

Labor laws in Germany

Working hours and rest periods (Arbeitszeitgesetz)

This law regulates working hours in Germany, including:

• Maximum daily working hours: 8 hours (can be extended to 10 hours with exceptions).
• Maximum weekly working hours: 48 hours on average over six months.
• Mandatory breaks: Minimum 30 minutes for working days exceeding 6 hours.
• Overtime regulations: Compensation and rest period requirements for overtime work.

Paid leave (Bundesurlaubsgesetz)

This law guarantees minimum paid leave entitlements for employees:

• Minimum annual vacation: 20 days (based on a 5-day workweek).
• Public holidays: Paid time off on national and state holidays (varies by state).
• Sick leave: Full pay for up to 6 weeks of illness, followed by potential sick pay from health insurance.

Parental leave and parental allowance (Bundeselterngeld- und Elternzeitgesetz)

This law provides benefits and job protection for parents:

• Parental leave: Both parents are entitled to parental leave (paid or unpaid).
• Maternity leave: Minimum 14 weeks of maternity leave at full pay
• Parental allowance: Financial support for parents during leave

Protection against dismissal (Kündigungsschutzgesetz)

This law protects employees from unfair dismissal by employers:

• Notice periods: Minimum notice periods required for termination, based on length of service
• Justification for dismissal: Employers need a valid reason to dismiss an employee
• Severance pay: Employees may be entitled to severance pay in cases of unfair termination.

Other laws

• Minimum wage (Mindestlohngesetz): Germany has a national minimum wage, currently €12.41 per hour.
• General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz): This law prohibits workplace discrimination based on factors such as race, gender, religion, or age.
• Co-determination (Mitbestimmung): In larger companies (over 2,000 employees), employees have representation on supervisory boards, influencing company decisions.
• Solidarity surcharge (Solidaritätszuschlag): This tax on all income earners, including employees, helps fund German reunification efforts.

» Learn more about the vital labor laws in Western Europe.

Compliance risks in Germany

Incorrect payroll contributions

In Germany, employers must withhold income tax (Lohnsteuer) and social security contributions (Sozialversicherungsbeiträge) from their employees’ salaries and remit them to the relevant authorities.

Suppose a company fails to accurately calculate and withhold the correct amounts or remit the contributions on time. In that case, it may face penalties and interest charges from the German authorities, such as the Federal Central Tax Office (Bundeszentralamt für Steuern) and the German Pension Insurance (Deutsche Rentenversicherung).

» Look at how an EOR can assist you with global payroll compliance.

Unfamiliar employment laws

Germany has a comprehensive set of labor laws that govern various aspects of employment, such as working hours, minimum wages, leave entitlements, termination procedures, and employee representation.

Key legislation includes:

• The Civil Code (Bürgerliches Gesetzbuch)
• Working Time Act (Arbeitszeitgesetz)
• Federal Vacation Act (Bundesurlaubsgesetz)
• Dismissal Protection Act (Kündigungsschutzgesetz)

Non-compliance with German labor laws can lead to legal disputes, fines, and reputational damage. For example, suppose a company fails to provide the minimum statutory leave entitlements or does not follow the required termination procedures. In that case, it may face employee lawsuits and penalties from labor authorities, such as the Federal Labor Court (Bundesarbeitsgericht).

» Here is a guide on the evolution of workforce compliance.

Employee misclassification

In Germany, there is a clear distinction between employees (arbeitnehmer) and independent contractors (freiberufler or selbstständige). Under German labor laws, employees are entitled to various protections and benefits, while independent contractors are not.

Misclassifying an employee as an independent contractor can have significant financial and legal consequences. If the German authorities, such as the German Pension Insurance or the Customs Office (Zoll), determine that a worker was misclassified, the company may need to pay back taxes, social security contributions, and penalties. Additionally, the misclassified worker may claim employee rights and benefits retroactively.

» Discover how an EOR can help prevent employee misclassification.

Permanent establishment risk

A permanent establishment (PE) is a fixed place of business through which a foreign company operates in Germany. Examples include a branch office, a factory, or a construction site lasting more than six months.

Suppose a foreign company is deemed to have a permanent establishment in Germany. In that case, it becomes subject to German corporate income tax and trade tax on the profits attributed to the PE. This can significantly increase the company’s tax liability and compliance obligations. Additionally, having a PE may trigger other legal requirements, such as registering with local authorities and complying with German accounting standards.

» Be proactive: Learn how to prevent permanent establishment risk.

Unions and labor organizations in Germany

German Confederation of Trade Unions (DGB)

• The DGB is Germany’s largest trade union confederation, representing millions of blue-collar and white-collar workers and civil servants.
• It comprises eight individual unions, each covering a specific sector (e.g., metalworkers, service workers, education).
• The DGB advocates for employee rights, fair wages, and social justice through collective bargaining with employers and lobbying the government.

Examples of DGB member unions:

• IG Metall (Industriegewerkschaft Metall) is Germany’s largest single trade union. It represents workers in the metalworking, textile, and plastics industries.
• ver.di (Vereinigte dienstleistungsgewerkschaft): This union represents workers in various service sectors such as banking, insurance, and retail.
• IG Bauen-Agrar-Umwelt (IG BAU): This union represents construction, agricultural, and environmental workers.

» Build a motivated workforce with global employee benefits.

How much does it cost to hire an employee in Germany?

• As of January 1, 2024, the minimum wage in Germany is €12.41 per hour. This translates to a gross monthly minimum of around €2,151 for a full-time employee (based on a 40-hour workweek).
• In addition to the minimum wage, employers are responsible for paying their share of social security contributions (employer PRSI) on top of employee salaries. The current employer’s PRSI rate is 10.5% of employee earnings.
• Costs associated with advertising open positions, interviewing candidates, and onboarding new hires.
• Investments in employee training and development programs.
• Depending on the company and industry, additional costs for benefits like health insurance, company cars, or meal vouchers.

» Compare and calculate global employee costs.

Employer payroll contributions in Germany

» Uncover all you need to know about wage garnishments.

How do foreign companies pay workers in Germany?

• Paying in euros (€): The euro is Germany’s official currency, and most German employees expect to be paid in euros. Foreign companies can open a German bank account to facilitate payroll payments in euros. Alternatively, they can use a global payroll provider or EOR service to handle payroll in euros on their behalf.
• Paying in foreign currency: While less common, some foreign companies may pay their German employees in foreign currency, such as US dollars or British pounds. In such cases, the salary should be clearly stated in the employment contract, and the conversion rate used for payment should be transparent and agreed upon. Employees may be subject to currency exchange fees or fluctuations, which should be considered.
• Payroll outsourcing: Foreign companies without a legal entity in Germany may outsource their payroll to a local German payroll provider or an EOR service. These providers can handle the complexities of payroll calculations, tax withholdings, and regulatory compliance, ensuring accurate and timely payments to employees in Germany.

» Go over how you can pay employees and comply with labor laws in more detail.

How do employers pay taxes in Germany?

Employer tax contributions

• Income tax withholding: Employers must withhold income tax (Lohnsteuer) from their employees’ salaries and remit it to the tax authorities monthly. Employers calculate the income tax using tax tables or software provided by the German tax authorities.
• Social security contributions: Employers and employees must contribute to the German social security system, which includes health insurance, pension insurance, unemployment insurance, and long-term care insurance. The employer’s share of social security contributions is typically around 20% of the employee’s gross salary, while the employee’s share is approximately 20%.
• Solidarity surcharge: The solidarity surcharge (Solidaritätszuschlag) is an additional tax levied on income tax to help finance East and West Germany reunification. Employers are responsible for withholding the solidarity surcharge from their employees’ salaries and remitting it along with the income tax.
• Trade tax (Gewerbesteuer): Businesses engaged in commercial activities are subject to a local tax levied by municipalities. The trade tax rate varies depending on the city and is calculated based on the employer’s taxable income.

In addition to withholding and remitting taxes on behalf of their employees, employers in Germany are also responsible for contributing to various statutory insurance programs. These contributions include:

• Health insurance (Krankenversicherung)
• Pension insurance (Rentenversicherung)
• Unemployment insurance (Arbeitslosenversicherung)
• Long-term care insurance (Pflegeversicherung)
• Accident insurance (Unfallversicherung)

The employer’s share of these contributions can range from 20% to 25% of the employee’s gross salary, depending on the specific insurance program and the employee’s circumstances.

» Explore this detailed guide with all you need to know about cross-border payments.

Work permits

Citizens of the following countries and entities don’t need a visa or permit to work in Germany:

• EU
• Switzerland
• Liechtenstein
• Norway
• Iceland

For stays exceeding three months, you must register your presence at the local Residence Registration Office or Immigration Office.

Citizens of the following don’t need an entry visa from the German Embassy in their home country:

• USA
• Canada
• Australia
• New Zealand
• Israel
• Japan
• South Korea

After finding employment in Germany, employees from these countries can apply for a work and residence permit at the Foreigners’ Registration Office (Ausländerbehörde).

Non-EU citizens from countries not listed above must obtain a work permit or visa, such as:

• Employment visa: This visa allows one to work in Germany. It is specific to their job role and requires proving that an EU citizen cannot fill the position.
• Freelance visa: This visa is suitable for self-employed individuals with a viable business plan and potential clients; it allows people to work independently in Germany.
• Job seeker visa: This visa provides a limited period for exploring job opportunities and securing a job offer in Germany.
• General work permit: This permit is for those who secure a job in Germany that an EU national couldn’t fill. The primary criterion is qualification for the role, without needing exceptional skills.
• Highly skilled worker permit: This permit is designed for highly skilled professionals and is available if you possess extensive expertise and a substantial income.
• EU blue card for Germany: This card is for eligible candidates with an annual salary of at least €56,400 (or €43,992 for specific shortage occupations).
• Work permit for freelancers: This permit is available for application for freelancers or self-employed individuals with evidence of potential clients.

» Uncover all you need to know on global immigration laws.

Employment contracts in Germany

• Job title and description
• Start date and duration
• Probationary period
• Working hours
• Compensation
• Benefits
• Termination conditions
• Place of work
• Annual leave
• Confidentiality and non-compete clauses
• Social security and taxes
• Performance evaluation
• Training and development
• Health and safety
• Dispute resolution
• Applicable law

» Look through this guide for information on the types of employment contracts.

Working hours in Germany

• The average workweek in Germany falls between 36 and 40 hours from Monday to Saturday, although most companies operate Monday to Friday.
• The maximum working week is 48 hours, averaged over six months (24 weeks). This means some weeks might have slightly longer hours as long as the average stays within the limit.
• In some industries (e.g., healthcare), exceeding these limits might be possible under specific circumstances, often requiring special permits or agreements with employee unions.
• Working on Sundays and public holidays is generally prohibited, with some exceptions for specific industries like service or emergency response. When work is permitted on these days, it must be compensated with corresponding time off within the following two weeks.

Benefits workers get in Germany

German workers enjoy a comprehensive social safety net and an excellent work-life balance thanks to a combination of mandatory and voluntary benefits. Here’s a breakdown of some key benefits:

• National health insurance (Gesetzliche krankenversicherung): This public health insurance system covers various medical services, with costs shared between employees and employers (typically around 14.6% each).
• National pension (Gesetzliche rentenversicherung): This public pension system replaces income after retirement. Contributions are also split between employees and employers (around 18.6% each).
• Unemployment insurance (Arbeitslosenversicherung) provides financial support to unemployed workers while they search for a new job. Contributions are shared between employees and employers (around 2.5% each).
• Long-term care insurance (Pflegeversicherung): This helps cover the costs of long-term care needs. Contributions are split between employees and employers (around 4% each).
• Occupational accident insurance (Gesetzliche unfallversicherung): This covers work-related accidents and illnesses, including medical treatment, rehabilitation, and income replacement. Employers are generally responsible for the total cost.
• Paid leave: There’s a minimum of 20 days annual vacation (based on a five-day workweek)
• Public holidays: Germany has several national public holidays yearly, with some variations by state.
• Sick leave: Employees receive full pay for up to six weeks of illness.
• Parental leave: Both parents are entitled to parental leave benefits, with mothers receiving at least 14 weeks of maternity leave at full pay.

Depending on the employer, additional benefits may include:

• Private health insurance
• Additional old-age provision (Zusätzliche Altersvorsorge)
• Overtime pay
• Severance pay
• Company car
• Gym membership or wellness programs
• Flexible working

» Explore all you need to know about supplemental employee benefits.

Paid and sick leave in Germany

• Annual vacation: German employees are legally entitled to a minimum of 20 days’ paid holiday per year, based on a five-day workweek. Some companies even offer 25-30 vacation days. Vacation time accrues over the year and can typically be carried over to the following year under certain conditions.
• Public holidays: Germany has several national public holidays yearly, with some variations by state. The number of public holidays can range from 9 to 13, depending on location. Employees are entitled to paid time off on these days.
• Sick leave: If employees get ill and cannot work in Germany, they can receive their full salary for up to six weeks (42 days). The employer pays this, not health insurance. After six weeks of paid sick leave, the employee may be eligible for sick pay (Krankengeld) from their statutory health insurance company. This typically covers 70% of their gross salary (up to a certain maximum) and can last 78 weeks over three years.

» Discover the best solution for global compliance.

Onboarding workers in Germany

Before the first day:

• Draft an employment contract (Arbeitsvertrag) that complies with German labor laws, detailing the job title, compensation, working hours, and probationary period.
• Register the new employee with the relevant social security organizations, including statutory pension insurance (Rentenversicherung) and statutory health insurance (Krankenversicherung).
• Set up the employee’s payroll system, ensuring accurate income tax calculation (Lohnsteuer) and social security contributions (Sozialversicherungsbeiträge).

The first day:

• Offer a thorough orientation program that covers company policies, procedures, and the employee’s rights and responsibilities under German employment laws.
• Introduce the new employee to their team members, supervisor, and key colleagues to create a welcoming and inclusive work environment.
• Assist the employee in setting up their workstation, ensuring they have the necessary equipment, software, and access to company systems and resources.

The first week:

• Organize training sessions or workshops to help employees understand their job duties, company products or services, and industry-specific knowledge.
• Clarify the employee’s performance objectives, expectations, and evaluation criteria for their role and the probationary period.
• Inform them about employee benefits, including paid leave entitlements, company pension schemes, and additional perks or benefits the employer provides.

Beyond the first week:

• Regularly check in with the new employee to evaluate their progress, resolve issues, and give constructive feedback.
• Promote involvement in team-building activities or social events to help them feel a sense of belonging and camaraderie within the organization.
• Provide professional development opportunities, such as training programs or workshops, to support their growth and career advancement within the company.

» Learn the difference between remote hiring and overseas expansion hiring.

Hire in Germany and grow your business

International workforce expansion can be streamlined through Papaya Global’s versatile system. The platform caters to payroll needs, employer of record, and contractor solutions backed by in-country regulatory specialists in Germany. This comprehensive solution simplifies global team management across all locations and job types.

Partnering with Papaya ensures accurate worker classification, benefits compliance, and proper tax remittance, leveraging their expertise in German labor laws. By handling employment contracts, registrations, payroll payments, and contributions, Papaya’s EOR solution simplifies hiring, allowing employers to focus on building their teams and driving business growth.

» Pay employees in over 160 countries with Papaya’s PayrollPlus service.

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