Germany is a major global economy with a rich history of driving creativity and producing innovative technologies. It’s home to an excellent education system and can provide international companies with skilled workers who have expertise in various important industries.
The country also has a strategic location that can help American companies access new European markets and access additional funding or investment opportunities.
Hiring in Germany is a great option for companies who want to grow and expand their talent pool. However, there are some major challenges international companies may face when hiring, such as knowing important labor laws and German employment laws, like the required notice period.
An employer of record can help you streamline the entire process. Are you a US company that wants to hire German talent? Here’s everything you’ll need to know.
Why Should You Hire Employees in Germany?
Access to a Skilled Workforce
Hiring in Germany allows you to recruit highly skilled workers with strengths in a range of important sectors, including manufacturing, automotive, mechanical engineering, energy, and finance. Germany also has one of the best school systems in the world, ranking 3rd globally in 2023.
Germany is home to major schools such as the University of Munich, Humboldt University of Berlin, and more. This ensures that German workers are well-educated and have specialized skill sets that can help you grow your company in new markets.
Innovation
Germany has a unique culture that promotes research and development, along with a history of innovation. The country’s major investments in the education system and top-tier research facilities allow students to generate and explore new ideas. In 2022, Germany ranked 8th on the Global Innovation Index.
Companies hiring in Germany can also benefit from the German government’s commitment to R&D. This includes several initiatives such as tax incentives for companies investing in research, funding programs for startups, research grants for universities, and more. Organizations such as the Fraunhofer Institutes also promote creativity and provide resources like mentorship programs and access to greater funding.
The Opportunity for Market Growth
Germany has one of the largest economies in the world, which can provide an American business with many opportunities for growth and a large consumer base. The country has the 4th largest economy in the world in terms of GDP, and it’s the largest market in the European Union.
Challenges of Hiring in Germany
Recruiting skilled German workers can help your business increase productivity, generate new ideas, and allow you to build a presence in one of the world’s leading economies. There are also some potential challenges an American company might face when hiring in Germany.
Legal Complexity
The country has extensive labor laws that guarantee certain employee rights, including collective employment laws that cover all employees and individual employment laws for employer-employee relationships. Employers in Germany must abide by the rules and regulations to avoid penalties.
German labor laws are also drastically different from the laws in the United States. For example, collective bargaining agreements impact certain terms of employment such as wages and the required notice period. Germany has strong anti-discrimination protections at all levels. This includes the General Equal Treatment Act.
Taxation
In addition to potential challenges in understanding the complex legal system, American companies may have difficulties navigating the German tax system. Taxation amounts are determined by the federal government, states, and other municipalities. This means companies may have to spend significant time and effort to ensure compliance with the required regulations.
Employers hiring in Germany must also keep detailed payroll records and reports for at least six years, along with bookkeeping records for at least ten years. There are also different types of taxes you need to be aware of, such as income tax and solidarity tax.
Cost of Market Entry
The relatively high cost of establishing business operations can be another barrier US companies hiring in Germany may face. This can include registering a property for your business, hiring staff in a competitive market, and providing supplementary benefits.
Setting up a legal entity in Germany can also be a painstaking and extensive process, and international companies will need to prepare for continuous administrative costs. Partnering with an Employer Of Record (EOR) in Germany can help you abide by the complicated local labor laws.
Employment Contracts in Germany
In Germany, an employment contract is needed to hire employees or independent contractors legally. Written contracts are the standard and should include:
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The name and address of the employer and employee
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Start date
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End date (if applicable)
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Probation period, notice period, and termination
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Address of work
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A description of the job’s responsibilities
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Compensation and other statutory benefits
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Working hours
There are a few different types of employment contracts you can use when hiring in Germany:
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Permanent Contract (Unbefristeter Arbeitsvertrag): This employment agreement is used to hire employees on a permanent basis. Typically, the contract has up to a six-month probationary clause. Employees are entitled to statutory benefits and have job protections after the probationary period is finished. Termination requires a notice period and a valid reason.
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Fixed-term Contract (Befristeter Arbeitsvertrag): This employment agreement is used to hire workers on a temporary basis, and a set end date must be stated in the contract. They can be used for seasonal work or to cover another employee on leave. These contracts can be up to two years long.
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Minijob Contract: This refers to an employment agreement for marginal workers who do not earn more than €520 per month or are only employed for a temporary period under 70 working days per year.
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Freelancer contracts: Freelancers are independent contractors who are hired to complete a project or for a set amount of time. Contractors can use a contract for services (Dienstvertrag), which details obligations, the length of the agreement, and other important terms. Contractors can also use a contract for specific work (Werkvertrag), which is used to complete a specific project for a single payment.
Hiring remote contractors from around the world can provide American businesses with a wider talent pool and a more diverse workplace culture. However, US companies hiring in Germany need to ensure that employees and contractors are properly classified to avoid noncompliance. Both types of workers are entitled to different rights, benefits, freedoms, and responsibilities. Employment agreements should be drafted to abide by foreign employment laws and not those of the US.
What Do You Need to Know When Hiring in Germany?
Hiring in Germany can be a relatively complicated process because of the administrative and bureaucratic requirements for businesses. There are different aspects of the hiring process an American company will need to know to legally hire employees, such as the required notice period in Germany. US companies will also be responsible for some of the associated employment costs of recruiting skilled German talent.
Compensation
German workers are entitled to a statutory minimum wage. In 2024, the national minimum wage will be increased to €12.41 per hour. However, the actual amount companies will pay tends to be based on the industry and the employee’s qualifications, level of experience, and skill set. In 2022, the average salary in Germany was roughly €49,260 per year.
Working Hours
US companies hiring in Germany need to ensure that workers do not exceed the maximum amount of working hours. Work days in Germany last for 8 hours, and the standard work week is 40 hours.
Germany has no local employment law that grants employees overtime pay. Employees are only required to work overtime if there’s a clause in the employment contract or collective bargaining agreement. Workers cannot work more than 48 hours a week.
Overtime limits in Germany are:
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25% of the employee’s basic wage for night work
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50% of their basic wage for Sunday work
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125% of their basic wage for working on holidays
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150% of their basic wage for working on Christmas Eve, Christmas Day, Boxing Day, or May 1.
Generally, workers get an additional 10% or 20% of their wage for overtime work depending on the CBA.
Notice Period
Germany does not have at-will employment like the United States. This means that employers must provide notice and a valid reason before terminating an employment agreement. The statutory notice period in Germany depends on the length of the employee’s tenure with your company.
If you wish to terminate an employee in Germany you will need to provide a notice period of
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4 weeks if the worker has been employed for less than two years
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1 month if the worker has been employed for two to five years
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2 months for employees with five to eight years of service
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3 months for employees with eight to ten years of service
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4 months for employees between 10 and 12 years
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5 months for employees between 12 and 15 years
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6 months for employees between 15 and 20 years
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7 months for employees who have been employed for over 20 years
Employees in the probationary period are also entitled to receive 2 weeks’ notice before being dismissed. A probationary period can last up to six months.
Termination and Severance
Employers in Germany must adhere to the minimum statutory notice period when dismissing an employee. Companies with more than ten employees must provide a valid reason for termination. Employees can receive general protections for most situations or special protections for workers who are more likely to be let go, such as workers with disabilities.
Potential reasons for dismissal can include:
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Personal reasons (long-term illness, mutual consent to terminate the agreement, imprisonment)
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Conduct reasons (theft, refusal to work, fraud)
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Redundancy reasons (economic downturn, the position no longer exists)
If a severe breach of the arrangement happens, the company can terminate the employee without notice.
US companies hiring in Germany are also not legally required to provide severance pay. However, many companies do provide severance pay for redundancy dismissals to avoid potential legal fees and processes, which is typically around 50% of the employee’s yearly wage.
Payroll
Payroll is required to provide compensation to your employees for their services, and companies must send out paychecks on a monthly cycle. Companies are also responsible for various tax deductions and must withhold the required amount for social security programs. An employer of record can handle all the complicated aspects of paying your employees for you.
Employers are required to withhold certain amounts from each employee:
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9.3% for the Pension Fund
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7.3% for Health Insurance
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1.525% for Nursing Care Insurance
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1.25% for Unemployment Insurance
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1.18% for Accident Insurance
Employees are also responsible for other contributions to social security programs. Income tax in Germany is calculated on a progressive scale depending on the worker’s income.
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0% for incomes below €10,908
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14% to 42% for incomes between €10,909 and €62,809
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42% for incomes between €62,810 and €277,825
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45% for incomes over €277,826
Annual Leave
German workers are entitled to various forms of leave throughout the year as per local employment laws.
When hiring in Germany, it’s important to know that the amount of time off can depend on how frequently an employee works. Permanent workers in Germany are entitled to up to 20 days of paid time off if they work a 5-day week and up to 24 days for employees who work 6-day weeks. Implementing best practices can help international companies track PTO for global teams.
New mothers in Germany are entitled to up to 14 weeks of maternity leave, and the leave can begin up to six weeks before the expected date of birth. Germany also has a generous parental leave policy, and parents may take unpaid parental leave up until the child is three years old.
German workers may also take up to 6 weeks for sick leave.
How Can a US Company Hire in Germany?
US companies who want to expand into a crucial European market might be wondering what needs to be done to legally hire employees. International companies have two options: open your local entity, or partner with a professional employer organization like an employer of record in Germany to handle all the complex HR issues that may arise.
Setting Up a Local Entity
Companies can open a subsidiary branch in Germany to legally hire skilled German workers. In this case, the employer is responsible for handling all tax deductions and remaining compliant with the local labor laws and applicable CBA terms.
Businesses must register as a certain type of company. Employers have a few options to choose from:
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Limited Liability Company: these include one or more shareholders and require a certain amount of share capital. This is the most common type of incorporation in Germany.
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Limited Liability Entrepreneurial Company: this type of business has less of a requirement for share capital but more strict requirements to generate yearly earnings.
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Stock corporation: these companies have a high minimum share capital requirement and are typically used to address a larger number of shareholders.
Setting up your own local entity can be expensive, complicated, and require a lot of bureaucratic documentation.
Partner with an Employer of Record
American companies can also engage an EOR in Germany instead of handling the complicated incorporation process. Your EOR acts as the legal employer for your international staff, saving you time and money. An Employer of Record also handles all compliance issues for you and can help ensure you follow local laws and regulations when expanding your staff.
Many EORs provide comprehensive service packages and can take care of payroll, benefits administration, paid time off, recordkeeping, and more. It’s also an excellent option for companies who don’t want to hire large amounts of individuals from a specific country. It can also help facilitate more rapid market entry and help accelerate a company’s growth.
Why Borderless?
Borderless is an employer of record provider that offers an extensive range of services and local expertise to help keep you compliant throughout the entire hiring process. Book a demo today to see what we can do and how we can connect you with talent from over 170 different countries worldwide.
Disclaimer
Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
