Guide to Hiring Employees in Germany
Are you considering hiring employees on a fulltime or part-time basis in Germany?
Hiring employees requires some red tape and we’ll cover the areas you need to be aware of below. Besides entering into an employment contract, as an employer you have to register for, and pay, social security, income tax and statutory working accident insurance.
Entering into and Terminating an Employment Contract in Germany
The employment contract is an important document for you and your employee so it’s crucial that you follow the rules set out for this by the labour law in Germany. You can find plenty of templates online, however not all are updated with the latest regulations, or contain an English version of the legal text to make it easier for non-German speakers to understand. One good example of a bi-lingual employment contract template can be found here.
The items that need discussing and agreeing on are:
- Role / Responsibility / Title of the employee
- Salary. The minimum salary is currently set at € 9,82/hour
- Start date of employment
- Weekly working time. The maximum regular working time is 40 hours. Maximum regular working time per day is 8 hours, maximum working time in exceptional cases is 10 hours. Overtime has to be paid extra or “refunded” as additional time off.
- Place of work
- Paid vacation days. The minimum is 20 days per year for a five days’ working week
- Probation period. Maximum is 6 months
The termination period is generally four weeks to the 15th or end of the month. After 2 years of employment, the termination period is automatically increased to one (1) month to the end of the month, and after five years to two (2) months to the end of the month. During the probation period, the termination period is two (2) weeks straight. You can only extend these periods but not shorten them. So from the point of view of the employer it is usually best to agree on the maximum probation period, but besides that stick with the statutory periods.
A termination notice must be in written form (wet signature = actual paper document signed by hand) and signed by a Managing Director, authorized signatory (Prokurist) or head of HR at the company. Anyone else needs a written power of attorney (again: wet signature = actual paper document signed by hand) by one of these people to sign a termination notice. Confirmation of receipt by the employee is strongly recommended.
If your business employs more than ten employees, protection against termination applies, i.e. you need a “legitimate reason” to terminate someone, based on either behavior, personal or business reasons. In this case you may contact a lawyer before issuing a termination notice as this is a tricky situation and terminations often end up in court.
Social Security Payments for Employees in Germany
To pay social security contributions you need a Betriebsnummer (business number). You have to apply for it at Bundesagentur für Arbeit (Federal Labor Agency) and you can do it online here.
Once you received your business number and hired your first employees, you have to pay social security payments to the health insurance of the employee (e.g. DAK, AOK, TK, etc.). If the employee has not determined otherwise, the fallback is AOK (Allgemeine Ortskrankenkasse, General Local Insurance). This is the public general health insurance controlled by the state which also takes care of collecting all other social security payments. They got an English hotline (0800 7242372).
Social security payments are:
- statutory health insurance (KV, Krankenversicherung). Employees can be exempted from mandatory health insurance and instead sign up with a private health insurance. In this case, they usually still receive subsidies from the employer which are not collected by AOK, but paid directly to the employee.
- statutory pension fund (RV, Rentenversicherung). Regarding exemption, the same rules as for RV apply.
- nursing care insurance (PflV, Pflegeversicherung)
- unemployment insurance (AV, Arbeitslosenversicherung)
Calculating how much you need to pay is complicated and it’s near impossible to figure this out yourself. You are required to forward this information electronically to AOK or DAK (or any other health insurance selected by the employee) on a monthly basis, so it’s highly recommended to use a software tool for this purpose.
There are two options to handle social security payments:
- You can use a payroll tool (e.g. SageOne or other similar tools). The charges start about € 5 per month/employee but it depends a lot on your volume and service tier. You still need basic knowledge of the social security system to use the tool.
- You hand over the entire social security issue to your accounting service provider and let them handle it for you. They usually offer this as an additional service alongside regular bookkeeping. Pricing is about € 15-30 per month/employee but it can vary a lot so do shop around.
Paying Salary Tax for Employees in Germany
In Germany, employers are obliged to pay salary tax on behalf of their employees. This is different from your own income tax/corporate tax. This is done by deducting the salary tax the employee would have to pay from their salary, and paying it directly to the Finanzamt (Financial Authority) in charge. The percentage to deduct depends mainly on the amount of salary, the marital status and the number of kids. You can find our detailed article covering salary tax calculations here.
Similar to social security payments, you need to forward the calculation to the Finanzamt electronically. Options are:
- You use the official portal of the tax authorities, called ELSTER.
- You use a payroll tool which is connected to ELSTER.
- You hand payroll over to your accountant (recommended).
Statutory Working Accident Insurance
You are also obliged to register for statutory working accident insurance. For most businesses, the VBG is in charge (Verwaltungs-Berufsgenossenschaft, Administrative Profession Cooperative). You can register online here.
The contribution depends on the salary and the “risk class” of the job. The annual contribution is about 1.3% of the annual salary on average, but less than 1% for low-risk office positions.
For jobs with a monthly salary of up to € 450 (planned to be increased to € 520 in 2022) there is a simplified system for the employer called Mini Job. Basically, there is no nursing care insurance, unemployment insurance and no income tax deductions for the employee. Instead, the employer pays a contribution to the health insurance provider. On the other hand, the employee is not insured in the social security system. There is a Mini Job Zentrale where you can register Mini Job employees.
The employer still needs a business number (Betriebsnummer, see above) and a working accident insurance. Not every job can be a Mini Job either. You still need software tools to transmit the necessary data. In the end the administrative burden for the employer is not much lower than a regular employee, so may still opt in to have your tax adviser handle it for you. Usually, this kind of employment is only used for cleaning staff or sales persons working one day per week, as even with the minimum wage only ca. 45 hours of work per month are permitted.
Time-Limited Contracts in Germany
If you’re looking to use a time-limited contract for your new employee, you have to do this with a “wet signature” (both parties have to sign a paper by hand), otherwise the time limitation is invalid and the employee is hired on an unlimited basis.
Maximum limitation for this type of contract is two years. You can extend this period only if you have a “legitimate reason” which can be reviewed by the courts.
With the amount of administrative burden to hire employees, many businesses opt it to work with contractors and freelancers. Read our guide to hiring freelancers in Germany here.