Germany, which boasts the largest economy in the European Union, is a home to booming sectors such as tech, banking, and healthcare. As the world’s fourth largest economy, Germany is a hub for some of the world’s top talent, with multinational firms, tech companies, and startups setting their sights on building local HQs in Berlin, Frankfurt, and other cities.
To get started as a foreign employer or business hoping to hire talent in Germany, there are two main options available: 1) open an entity or 2) partner with an Employer of Record (EOR) service like Via.
This article gives an overview for employers and employees in Germany that want to understand the options for establishing an employer-of-record in Germany, including what employees should look for in German employment contracts.
The terms PEO and EOR are often used interchangeably, even though there are key differences between the employment models.
In Germany, global PEO services–or entering into a co-employment relationship with a third-party HR service provider–requires significant paperwork from the company. The PEO will still need to have a legal AUG license or temporary agent license. German employment laws are strict. If the PEO service does not follow the correct legal protocol as a temporary agent, then the parent company will still be liable.
As an alternative, companies can partner with a global third-party EOR (employer-of-record) service for their expansion. An EOR provider owns its local entities, which makes it easier for companies to run HR processes such as hiring, benefits, and payroll. It’s also a good option for companies looking to hire a small team in Germany, or businesses seeking a low-risk approach for testing out the new market. An EOR complies with local labor laws and make expanding your business is straightforward.
Capital city: Berlin
Largest city by population: Berlin
Currency: Euro (EUR)
Population: 83.24 million
Germany GDP: 3.06 trillion (USD)
Payroll frequency: Monthly, around the 25th of each month
Federal Minimum wage: 9.5 euros per hour
Employers of record must ensure that employees receive the proper paid time off.
For paid leave in Germany, there is a minimum of 24 days of paid time off per year that is regulated by the Holiday Act Collective Agreement. For certain industries, the number may be increased to 30 days. In high-risk industries, this number can be negotiated even higher based on the collective bargaining agreements set forth at the start of employment.
For local holidays, there is a wide range of recognized holidays at the state, city, and even town level. At the federal level, there are 9 public holidays that employees are required to have off per year:
1st of May
Day of German Unity
25th of December
26th of December
For employees who have worked for a company for more than 4 weeks, sick days are paid at 100% of their income for up to 6 weeks.
Once the 6 week mark hits, the employees health insurance fund through the social security system kicks in and pays between 70%-90% of the regular salary, based on the fund level. Sick days can happen for up to 78 weeks over a 3-year period. But, the sick leave can only be stretched out if it was due to the same illness documented on the first day of symptoms.
To ensure there is no mix-up for sick payment, you must inform your employer at the onset of illness regarding the estimated amount of time that you believe you will be out. Once the illness hits the 3-day mark, you must submit a doctor’s note to your employer for approval and payment.
Laws in Germany strongly protect new mothers. For new mothers, there is a mandatory period of 14 weeks of paid leave. With approval from the employer, maternity leave can be extended for 18 weeks.
There are two periods for maternity leave. There is the prenatal period that requires new mothers to take a minimum of 6 weeks off before their due date. Then, there is the postnatal period which requires mothers to take a remaining 8 weeks of time off after the birth of their child.
Maternity leave is paid through the public health insurance fund and is equivalent to the sum of the net wages for the previous 3 months before pregnancy. The public health insurance fund pays at a maximum of 13 (EUR) per day. If the daily net wages of the last 3 months before the pregnancy are higher, the employer is required to pay the difference.
New mothers and fathers are allowed to take unpaid parental leave. However, the request for parental leave must be submitted no later than 7 days in advance to the employer.
Parental leave can be for up to 36 months and shared between both parents. The first 12 months of parental leave can only be taken in the first 3 years of the child’s birth. To take the rest of the leave, permission of the employer is required. Once granted, the rest of the leave can be used anywhere between the child’s 2nd and 7th birthday.
Parents can also choose to work part-time for 30 hours per week, if they have permission from their employer during the parental leave time frame.
For any other type of leave, there must be a specific agreement between the employee and employer in the employment contract. Other leave may cover family care time, bereavement, and marriage.
The employer of record must draft the contract in German, so knowing the language is a necessity for any company wishing to hire within the country. Germany has extremely strict laws for the framework of the employment contract, so having a good working knowledge of local employment laws or a legal advisor is a must when drafting contracts.
Further, employment contract laws are still applicable if no specific terms have been agreed on by both parties in the contract. If the terms agreed upon do not comply with the legal framework, the contract may not be valid.
Here is everything you need to include in the employment contract:
The employees full name and address as well as the employers address
The start and end date of employment contract (in the case of temporary employment)
Description of work and responsibilities
Length of probation period
Salary and benefits that is agreed upon by both parties
Leave entitlement, whether it be monthly or yearly
Given all the information that needs to be included in these labor contracts, partnering with an EOR specialist makes sense in order to comply with German employment laws. When using an EOR service like Via, we take the stress off of you by ensuring that your team’s needs are met and that your business practices remain compliant with German laws. Plus, our employment contracts include clauses for IP/intellectual property so that you can ensure your trade secrets are protected across borders.
It is standard practice to include a probationary period of 6 months in Germany. During the probationary period, employment can be terminated with at least 2 weeks notice by both parties without either providing an explanation.
These contracts contain a specific end date. This means that neither the employee nor the employer can end the contract before the end date. However, a follow-up contract with the intent of continuation of work is allowed if more work needs to be done.
A work week for a full-time position is normally five 8-hour days, or 40 hours total. Generally speaking, the max amount of hours an employee is permitted to work by law is 8 hours per day.
There may be special circumstances for specific fields like healthcare or for managerial positions, where the amount of hours may be extended, but this must all be stated in the employment contract.
Overtime is not mandated by the government, so there are no specific overtime regulations for employees. However, overtime or extra work hours should be agreed upon in the employment contract. This number may vary based on the size of the company and the industry. The contract will normally state that if overtime work is required, that employees will be compensated with their regular salary.
Unless otherwise stated in the employment contract, you can terminate your employment after your probation period is up. Employees need to normally give 4 weeks notice, usually at the 15th or the end of the month, regardless of how long they have been employed for a company. The employment contract should give more specific details about what notice period to give to employees for termination. Different periods of notice apply during the probation period and should be agreed upon by employee and employer.
Employers must adhere to different notice periods than employees. You can only terminate an employee with specific reason and cause. Employers must provide their employees with a reason for termination, or else it can be difficult to legally terminate them. The longer an employee has served a company, the more notice they should receive for termination.
Unlike many other countries, German law does not have any mandated severance payments that employers are required to give. Employees are only entitled to severance payments under a social plan with a working council (usually only the case in mass layoffs) or under a collective bargaining agreement.
However, to avoid future court cases from employees, many employers will agree in the employment contract to give their employees a severance payment. The severance payment is usually around 50% of the monthly salary for each year of the employee’s service. Severance will vary depending on why the employee was dismissed.
For both small startups and large businesses, employers want to hire talent in Germany. However, the process can be daunting, especially without using a global PEO or EOR service like Via.
In Germany, PEO services are basically illegal, as the third-party PEO needs to acquire a temporary agency license, and this process is timely and costly.
Becoming an employer-of-record in Germany, on the other hand, requires a lot of knowledge about employment laws. To ensure that you’re maintaining compliance with payroll and benefits, you will either need to outsource your payroll to a global EOR service like Via, or build your own HR team by establishing an in-country subsidiary.
For companies who plan to hire a large number of employees in a foreign country, opening an entity with a strong HR and legal team might make sense. Most of the time, however, using a third-party EOR service like Via is the simplest choice.
Third-party PEO services in Germany need to operate under an AUG labor leasing license. PEO services only hire temporary employees and are regulated by the German leasing authorities.
Through the AUG license, third-party PEO services can only pay and employ the same employee for a maximum of 18 continuous months. Once the 18 months are up, there are a few options for employees who wish to stay with the parent company employer. The employee can either transfer over to a sister-company of the parent company, or the employee must sign a termination agreement with the PEO service that has a 3 month “cool off” period before they can be re-hired.
PEO services normally only hold over employees during this period for parent companies to establish a subsidiary or entity within the country. If you do not want to open a subsidiary and would rather begin hiring immediately, using an EOR service like Via is your quickest and safest option.
When using an EOR service like Via, you do not need to open a bank account or take legal responsibility for complying with governmental institutions in Germany. Via takes care of that paperwork for you, including opening a bank account and registering with all of the necessary government institutions.
When trying to build a small but strategic team in Germany, using an EOR service expedites the process. Via allows you to hire and onboard employees without needing to become an expert on tax and hiring regulations. For businesses that are looking to hire in sectors like tech, business, or finance, partnering with an EOR service provider can be a good way to test out a new market and recruit top talent.
Many companies want to hire within Germany but do not have the in-depth knowledge of beginning the process. Via makes hiring German talent and building your global team seamless. Via helps you manage local HR processes for direct employment such as work visas & permits, benefits, payroll, background checks, and more. Our team of local labor lawyers and on-the-ground experts ensure that your company remains compliant with local laws and regulations while expanding your organization. As your employer-or-record in Germany, we assume full responsibility for employment liability, so that you can focus on what matters: recruiting and managing your team.
With Via’s transparent pricing, you can pay full-time employees or contractors in Germany with no hidden set-up fees, no foreign exchange or transaction fees, and no minimums–start with 1 employee and scale up at your own pace.