Germany’s strong economy makes it an attractive place for expanding your business. You can expect to face some challenges, from finding the right people and testing the market. However, you must also keep in mind that you also need to navigate its complex payroll regulations.
Before you start hiring in Germany, it's essential to understand the country's employment and labor laws. You’ll want to familiarize yourself with rules around minimum wage, employee benefits, and taxes to ensure compliance. Staying compliant will help your business thrive in this market.
Here’s what you need to know about running payroll in Germany.
Types of employment contracts in Germany
When hiring in Germany, you need to know the different types of employment contracts available. Each contract type serves a specific purpose and comes with its own set of rules and requirements. Knowing which contract suits your needs will help you manage your workforce and stay compliant with German labor laws.
Fixed-term contract (Befristeter Arbeitsvertrag)
A fixed-term contract comes with a specific end date in mind. You would use this type of contract for temporary projects or short-term roles. The contract concludes when the agreed-upon date arrives, or the project is completed. It provides a lot of flexibility to businesses dealing with fluctuating workloads.
Indefinite-term contract (Unbefristeter Arbeitsvertrag)
The indefinite-term contract is the most commonly used employment agreement in Germany. This contract type does not have a fixed end date and remains valid until either the employer or the employee decides to terminate it. This offers stability for employees and is ideal for long-term positions within the company.
Part-time contract (Teilzeitvertrag)
A part-time contract specifies that the employee will work fewer hours than someone in a full-time position. This contract is suitable for roles that do not require a standard 40-hour workweek. It allows both flexibility for the employer and work-life balance for the employee.
Minijob (Mini-Job)
A Minijob is a special type of part-time contract in Germany with a maximum monthly income limit, currently set at €520. Minijobbers benefit from reduced social security contributions. This makes it a cost-effective option for both employers and employees. This contract is common for entry-level, seasonal, or supplementary jobs.
Termination rules and regulations
In Germany, you can terminate an employee for poor performance, but the terms must be clearly stated in the employment contract. Both parties need to agree to these conditions upfront. While mutual consent is preferred, advance notice is usually required. If a conflict arises, you should turn to labor courts to handle these disputes.
Minimum wage in Germany
Germany has a national minimum wage set at €12.57 per hour in 2024, which translates to approximately €2,109.60 per month. Violating this can result in steep fines depending on the offense. This applies even to younger employees, interns, or long-term unemployed workers.
Taxes in Germany
Understanding the tax structure in Germany is crucial for businesses operating in the country. Different types of income, including earnings from capital assets, are subject to taxation, which can significantly impact your financial planning and overall profitability.
Tax on capital assets
Germany has a tax on income from capital assets, which varies from 0% to 40%, depending on the type of assets and other factors. This is automatically deducted during payout periods.
Church tax
Employees in Germany are required to pay a church tax, which is deducted from their salaries. The rate ranges from 8% to 9% of an employee’s income and varies by religious denomination.
Employee benefits tax
In Germany, the employee benefits tax (Arbeitnehmerfinanzierte Sozialleistungen) applies to various perks you might offer your employees. This includes perks such as company cars, housing allowances, meal vouchers, or health insurance. Generally, the tax rate for these benefits is set at 30%. However, you can explore specific exemptions or reductions based on the type of benefit and the employee’s situation.
Work injury insurance for employees
Employers in Germany must provide work injury insurance (Arbeitnehmerversicherung) to protect their employees. This covers medical expenses, rehabilitation costs, and lost wages. It is paid to the employee if they suffer a work-related injury or illness.
Work injury insurance is mandatory for all employers. There are no extra costs for employees—it's fully covered by the employer's social security contributions. Employers must also prioritize accident prevention by having safety measures in the workplace.
Working hours and overtime in Germany
In Germany, the standard workweek is typically 40 hours, with daily working hours capped between 8 to 10 hours. Employers must adhere to these limits to ensure a balanced work-life schedule for their employees.
When it comes to overtime, employees are entitled to additional pay for any hours worked beyond their regular schedule. This overtime pay is often calculated at a premium rate, usually 1.5 to 2 times the regular hourly wage. However, there are limits on the amount of overtime an employee can work within a week or a year to prevent excessive work hours.
Flexible working arrangements are becoming more common in Germany. Many companies offer flexitime, allowing employees to adjust their hours within certain limits to suit their needs. Others may implement a compressed workweek, where employees work longer hours over fewer days. Remote work is also gaining popularity, providing employees with even more flexibility.
Payroll period
German law requires the payroll period to be clearly outlined in the employment contract. Payment must occur at least once per month, and delays can lead to penalties.
Insurance for retiring employees
You can offer voluntary retirement plans to your employees. These are separate from the government’s social pension scheme. This is entirely up to you, and there are no mandates around providing these benefits.
Unemployment insurance in Germany
You’ll need to understand how unemployment and health-related insurance work in Germany as well. You want to ensure your employees are covered.
Unemployment insurance provides benefits to workers who lose their jobs. The eligibility is based on their employment history and the reason for unemployment. The length of these benefits can vary, and job centers play a key role in supporting unemployed individuals through job searches and training programs. This is important to know so you can guide your employees if they ever face this situation.
Health insurance is mandatory for all residents in Germany, and you have two options: public or private health insurance. Contributions are deducted from your employee’s salary, and you, as the employer, match the amount. This coverage extends to a wide range of medical expenses, including doctor’s visits, hospital stays, and prescription drugs.
Health insurance rates generally range between 14.5% and 15.5% for employees and around 14.5% for you as the employer. Unemployment insurance costs are approximately 2.4% for employees and 3.4% for employers. This means you’ll need to budget for these costs as part of your payroll expenses.
Leaves and vacations
When hiring employees in Germany, you should understand the country's leave and vacation policies. These are important to ensure compliance and meet employee expectations.
Annual leave
German employees are generally entitled to a minimum of 20 days of paid annual leave per year. However, additional days may be granted in specific cases, such as compensation for working on public holidays. While unused leave can sometimes be carried over to the following year, this is subject to certain conditions.
Sick leave
Employees in Germany have the right to paid sick leave, typically up to six weeks per year, provided they present a medical certificate. If an employee’s illness extends beyond this initial period, the sick leave can sometimes continue. As an employer, it’s essential to have clear policies in place for handling sick leave and certifications to maintain compliance.
Parental leave
Maternity leave in Germany allows mothers up to 14 months of paid leave, covering both prenatal and postnatal periods. Fathers are also eligible for at least two weeks of paternity leave. Additionally, parental leave can be shared between both parents. It offers flexibility for families and requires you to be prepared for longer absences when hiring.
Other leaves
Employees are entitled to paid time off on public holidays, which vary depending on the region. There are also provisions for education leave in some cases, allowing employees to take time off for further training. Additionally, employees summoned for jury duty are entitled to unpaid leave.
Income tax reporting
Employers are responsible for remitting payroll taxes to local tax offices every month. The reporting requirements may vary depending on the size of your business and the residency status of your employees.
Managing payroll in Germany
Running payroll in Germany may seem overwhelming at first, but understanding these key areas can help you stay compliant. If you need further assistance, Rivermate is here to help you navigate payroll with ease.
FAQs:
What is the minimum wage in Germany?
The minimum wage in Germany for 2024 is €12.57 per hour. This translates to approximately €2,109.60 per month for a full-time employee working 40 hours per week.
Are employers required to offer fringe benefits in Germany?
No, offering fringe benefits like profit-sharing or company cars is optional in Germany, as they are not mandated by labor law.
Do employers have to pay church tax for employees?
Yes, employees in Germany are required to pay a church tax, which is typically between 8% and 9% of their salary, depending on the federal state.
