Global Payroll and Benefits

How to report and administer payroll in Germany as a distributed company

Hiring in Germany? Start here.
February 28, 2022
Oyster Team
How to report and administer payroll in Germany as a distributed company

Germany is an attractive country for multinational companies to expand to and hire from. It’s centrally located in Europe, has the largest labor pool in the European Union (with over 41 million people as of 2020), and has high rates of education.

Germany also has a reputation for its efficiency, and this is reflected within its work culture. German employees often demonstrate independence, punctuality, and diligence—traits which are commonly sought after in employees. Nonetheless, any employer looking to hire in Germany will first need to navigate the different requirements and regulations. 

In this article, you’ll gain a better understanding of the labor laws governing employment regulations so that your company can effectively report and administer payroll in Germany.

Understand German employment law before getting started

Before getting started, first you need to determine if you are required to start a business entity in Germany. There are several pathways a company can take to avoid the paperwork and cost involved with starting a business entity abroad, including working through a global employment organization; collaborating with a supplier, joint venture, or partner; or hiring independent contractors. 

These alternatives may or may not work for you, depending on your specific company needs and the country you are looking to hire in. Depending on the situation, your company may be required to set up a legal entity in the foreign country to run payroll and meet withholding requirements. 

German Employment Law encompases many policies that directly impact the payroll process for companies with German employees. These policies comprehensively cover wage and paid time off regulations. As an employer, having a thorough understanding of these requirements will help to ensure that hiring and paying your first German employee is a smooth process. 

Employee regulations to understand when processing payroll in Germany

In Germany, employees are well protected by labor laws and regulations that set expectations for wages and paid time off. For example, in Germany must be paid at least monthly and are typically paid out on the 25th of the month. The exact pay date details should be included in the employment agreement that is provided at the time of hire. Below are some other requirements that employers should be aware of: 

13th salary payment and supplemental pay

The 13th salary payment is a year-end bonus that is customarily paid out to employees who have worked for the 12 months of the year. The payment is equal to one month of wages and is typically included in the December paycheck. Although this payment is not required, employers should factor it in to promote good will and to remain competitive. 

Employers may also elect to offer additional pay for any circumstances that require employees to work outside of regular conditions. For example, employees may receive supplemental pay for completing a difficult job or for working outside of regular business hours, such as on the weekend or at night.

Working hours

A work week in Germany can’t exceed 48 hours. However, most work weeks don’t exceed 40 hours. Employees are entitled to breaks during their working hours based on the length of their work day. Those who work 6-9 hours per day are required to receive a 30 minute break, while those who work more than 9 hours are required to receive a 45 minute break. 

Calendar image that outlines 40 hour work week

Sick leave and paid time off

Regulations require that employers provide sick pay to any employee who has worked for at least four weeks. Employees must notify their employer immediately of any illness and may be required to submit medical proof if they need to take more than three consecutive days of leave. 

For the first six weeks, employees receive 100% of their salary for any sick leave. Following this period, employees can receive insurance benefits that meet 70% of their salary for up to 18 months. 

Graphic that lists German holidays

Employment law also dictates that German employees receive at least 24 working days off per year. Many employers go above the minimum and offer up to 30 days of vacation per year. Employees must work for the company for six months to receive the full vacation entitlement. Any time off that is unused, due to personal or business reasons, at the end of the year may be carried over until March 31 of the following year. Typically, time off is only paid out in cases where the employee faces termination. These limitations encourage German employees to take advantage of their vacation days.

In addition, there are 10 federal German public holidays:

  • New Years Day
  • Good Friday
  • Easter Sunday
  • Easter Monday
  • Labor Day
  • Ascension Day
  • Whit Monday
  • German Unity Day
  • Christmas Day

German Unity Day is the only paid public holiday. Additionally, there are regional public holidays that certain federal states will observe. Working on Sundays and Public Holidays is generally prohibited, with some exceptions. 

Maternity and parental leave

Germany’s Maternity Protection Act requires that employers provide six weeks of maternity leave before delivery and 8 weeks after. Under certain medical circumstances, leave may be granted earlier before the delivery. During the period of maternity leave, the employee is entitled to receive their full salary from health insurance and can not be fired. 

Both fathers and mothers are eligible for parental leave within the first three years of a child’s life. After providing at least 7 weeks’ notice, employees on parental leave may work on a part-time basis at which point, the working hour maximum drops to 30 hours per week. 

During parental leave, employees may receive state benefits of up to 67% of their income for 14 months. It’s not mandatory for employers to pay salaries or wages during this time. Parents may also choose to defer up to 24 months of parental leave to use at a later point until the child is eight years old. 

Termination and severance

Any employee that has been with a company for over 6 months is covered by unfair dismissal protections. This means that employees can only be fired for reasons related to misconduct or redundancy. Employers are not allowed to terminate employees during maternity or parental leave. 

Payroll taxes in Germany

Federal tax requirements are subject to changes annually on January 1, therefore, it is important for employers to keep up with the latest tax rates. 

Income tax

It is the responsibility of the employer to collect and pay the employee’s income tax. Employers must be aware of the employee's family/children and tax exemptions in order to accurately calculate how much should be withheld per pay period. Tax rates are based on income levels and can range from 14% to 45%. Employers should understand their payment and reporting obligations to avoid penalties.

Social taxes

There are four mandatory social insurance categories that employers need to be aware of: pension, unemployment, health, and nursing care. The contributions toward social insurance are withheld from each paycheck at variable rates that are set by the law. Typically, 40% of an employee’s gross income will go toward social insurance. Both employers and employees contribute to these social insurance schemes equally.

Graphic that says 40% of an employee's gross income will go toward social insurance

Those that earn less than the social security income ceiling receive their health insurance through a public health insurance provider by law. Those who earn more than the social security income ceiling may opt in to the public plan or take out private health insurance. 

Accident insurance

Accident insurance protects employees from work-related injuries and occupational disease. The insurance covers medical care, rehabilitation, and financial compensation. Employers must pay a 1.19% contribution for statutory accident insurance. 

Insolvency benefit

Employees are entitled to three months of compensation if the company closes down or is unable to cover its debts. Private employers are expected to contribute a percentage of their total payroll to the fund on a monthly basis. 

Solidarity tax

German employees are also required to pay a solidarity surcharge on their income tax. This surcharge was established in 1991 to fund German reunification. Employers are responsible for withholding the surcharge from the paychecks to submit to the tax office by the 10th of the following month. Late payments may result in a penalty fee of up to 10% of the tax amount in addition to interest.

Why understanding payroll in Germany is important for distributed companies

Integrate with payment systems to offer efficient payment options

Most salary payments to your German employees are sent under the File Transfer and Access Management (FTAM) system via electronic bank transfers. Any payments for health and social insurance are also transferred through the FTAM system. While it is not required, employers should consider setting up a German bank account to take advantage of the FTAM system and streamline payments. 

Stay compliant when hiring internationally

As an employer hiring globally, it is important to understand the federal regulations and requirements to avoid legal issues and fines. Companies that can demonstrate an awareness of the payroll requirements signal to prospective employees that they are legally sound and secure. 

Create an inclusive work experience

Labor laws and regulations are created to protect employees from discrimination and exploitation. Employers that abide by the payroll requirements demonstrate a willingness to protect their employees in cases of hardship by providing social insurance and a commitment to wellbeing through vacation days and supplemental pay. 

Conclusion

Germany has put in place a lot of regulations to protect employees. Having an understanding of what is required and what is culturally expected will ensure that you, as an employer, are able to competitively attract German employees.  

Adopting German standards in terms of paid time off, maternity and parental leave, and sick leave can also help you develop a progressive benefits package for the whole company. Employers should consider how they can provide equitable benefits when hiring across different countries. 

Looking for more resources to help you build your global team? Check out our Global Hiring Guides for everything you need to know to get started!

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, hire, pay, manage, develop and take care of a thriving global workforce. It lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world with reliable, compliant payroll, and great local benefits and perks.

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