Hiring in Germany: 10 Must-Know Compliance Facts 

The rise of remote work and the gig economy allows us to tap into the larger talent pool worldwide for the skills your organization needs.

With a highly educated workforce that excels in STEM fields, Germany is an excellent destination for finding remote talent in finance, insurance, management, business services, and information technology.

In fact, Germany ranks fifth in the top 10 most popular countries for remote jobs. 

In this guide, I’ve compiled what you need to know about hiring and paying remote employees in Germany. If you’re considering hiring remote talent in Germany, understanding these essential facts will help you ease the employment process and ensure compliance. 

Check out compliance guides for the other two countries that also make the top ten: Hiring in Poland & Hiring in the Philippines. 

Let’s dive in!

#1. Labor Laws in Germany: Federal, State, Trade Union

German employment laws are set by the federal government and are generally uniform across all states, though states participate in the law-making process. 

Germany does not have a single labor code like some other countries. 

The German Civil Code (Bürgerliches Gesetzbuch - BGB) includes general provisions on employment contracts, while other employment regulations are mandated in different federal acts, for example, Working Hours Act (Arbeitszeitgesetz - ArbZG), Minimum Wage Act (Mindestlohngesetz - MiLoG), Parental Leave Act (Bundeselterngeld- und Elternzeitgesetz - BEEG), and Protection Against Dismissal Act (Kündigungsschutzgesetz - KSchG).

It’s worth noting that trade unions in Germany also substantially impact the labor market through collective bargaining, co-determination, legal and political advocacy, and workplace representation. 

That said, managing employment regulations in Germany is quite complicated. That’s why even though there's a few options to hire foreign employees, it’s better to have a global employment partner like EOR services who knows every nitty-gritty well to help you navigate the process and stay compliant all the way through.

#2. Minimum Wage and Overtime

The minimum wage in Germany is regulated by the federal government and is adjusted periodically. As of January 1, 2024, the gross minimum wage is €12.41 per hour. This applies universally across the country, ensuring everyone earns a decent baseline wage, regardless of job or location.

In Germany, salaries must be paid in Euros by default. But you can pay remote employees in German in USD if both of you agree to it in the employment contract. The payroll cycle is typically monthly by the 25th. 

The standard workweek is typically 40 hours, capped at 48 hours per week. The daily working limit is eight hours, but it can be extended to 10 hours if, over a six-month period, the average remains eight hours per day. And employees must have at least 11 consecutive hours of rest between working days.

This flexibility allows for some leeway in managing peak workloads but also necessitates good time tracking among remote teams to avoid any legal issues.

Related Read: 17 Best Time Management Tools For Hybrid and Remote Teams (2024)

Overtime compensation often depends on your employment contract, any collective agreements in place, or your company's policies. Generally, though, it's usually between 125% to 150% of your regular hourly wage. Alternatively, you might get some extra time off instead of extra pay.

Breaks are also mandated: employees working between six to nine hours must take at least a 30-minute break, and those working over nine hours are entitled to a 45-minute break. These breaks are non-negotiable and cannot be moved to the end of the workday to shorten working hours​.

#3. Customary Year-End Bonus

A year-end bonus, commonly known as "Weihnachtsgeld," is not required by law but is a customary practice in Germany.

Year-end bonuses are usually paid out in November or December and can be a fixed amount or a percentage of the employee’s annual salary. The exact amount and eligibility criteria can vary widely. Some companies base the bonus on the company's performance, while others might consider individual performance or tenure.

Year-end bonuses are subject to income tax and social security contributions, which should be factored into the overall compensation package offered to your remote employees in Germany.

#4. Income Tax in Germany

Germany employs a progressive income tax system, ranging from 0% to 45%. German tax law also allows married couples to use the income splitting method, which averages their combined income and applies progressive tax rates more favorably. 

• 0% for income up to €11,604 (€23,208 for married couples).
• 14-42% (varies based on regions) for income between €11,604 and €66,760 (€23,208 to €133,520 for married couples). 
• 42% for income between €66,760and €277,825 (€133,520 to €555,650 for married couples).
• 45% for income above €277,825 (€555,650 for married couples).

An additional solidarity surcharge of 5.5% is levied on the income tax amount. This surcharge primarily affects higher income brackets and aims to support economic development in former East Germany.

Additionally, members of officially recognized churches pay an extra 8% or 9% church tax on top of their income tax, depending on their state of residence.

#5. Tax Deductions in Germany

German social security system includes health insurance, pension insurance, unemployment insurance, and long-term care insurance. 

Contributions are shared equally between the employer and employee, with each paying approximately half. The total social security contribution rate is around 40% of the employee's gross salary. 

Health Insurance

Germany offers both statutory and private health insurance options. 

Employees whose gross salary is below a certain threshold (2024: €66,600 annually) must join a statutory health insurance fund. 

Employers contribute 7.3% of the gross salary to statutory health insurance, while employees also contribute 7.3%.

For employees who opt for private health insurance, employer contributions remain equivalent to what would have been paid for statutory insurance​.

Pension Insurance

Both employers and employees each contribute 9.3% of the gross salary to the pension insurance scheme. 

This contribution is crucial as it ensures that employees receive retirement benefits, providing financial security in their later years. The German pension system is designed to be sustainable and robust, supporting retirees through these mandatory contributions from both parties​.

Unemployment Insurance

This contribution provides financial support to employees in the event of job loss, ensuring they have a safety net while they seek new employment.  

Employers and employees each contribute 1.2% of the gross salary to this insurance. 

Long-Term Care Insurance

Long-term care insurance contributions are set at 3.05% of the gross salary, shared equally between the employer and employee.

For employees without children, the contribution rate is slightly higher at 3.3%. 

This insurance is designed to cover costs associated with long-term care needs, such as personal care services, home nursing care, residential care, day care services, and respite care, ensuring that employees have financial support if they require these services in the future.

#6. Employment Contract for German-based Remote Employees

Employment contracts in Germany must be in written form in German, with bilingual versions provided if needed.

Verbal agreements, while possible, must be documented in writing within one month of the employee starting work. 

The contract must detail working hours, rest breaks, compensation, scope of work, probation period, holiday entitlement, and other benefits and agreements. Please note that German labor law is strict on “transparent and predictable” working conditions in employment contracts.

While most employment contracts in Germany can be signed electronically in accordance with the EU's eIDAS regulation, certain situations still require a wet signature, such as termination documents or post-contractual non-competition clauses.

#7. Non-Compete Agreements

Non-compete agreements (NCAs) must be in writing and signed with a wet ink signature as required by German law (Section 74 of the German Commercial Code, HGB). This old-school requirement ensures the agreement's validity.

The NCA must include a compensation clause, offering at least 50% of the employee's last contractual salary, including bonuses and benefits. This compensation must be paid throughout the non-compete period.

Restrictions in the NCA must be reasonable in terms of duration (typically up to two years), geographical scope, and specific activities restricted. Overly broad restrictions can render the agreement invalid​.

You can waive the NCA at any time during the employment relationship. However, even after the waiver, the obligation to pay compensation continues for 12 months from the date of the waiver. 

Restrictions in the NCA must be reasonable in terms of duration (typically up to two years), geographical scope, and specific activities restricted. Overly broad restrictions can render the agreement invalid​.

#8. Probation Period for German-based Remote Employees

In Germany, the maximum length for a probation period is six months, as stipulated by Section 622(3) of the German Civil Code (BGB). 

During this period, either party can terminate the employment contract with a two-week reduced notice period. This allows both the company and the employee to evaluate their fit for the role and organization​.

It is important to clearly state the probation period in the employment contract. If the contract does not specify a probation period, the employee is considered to be on a standard employment contract without probationary terms.

While the maximum probation period is six months, some collective bargaining agreements may specify different terms. So, it’s important to verify any industry-specific regulations that might apply. 

During the probation period, German employees have the same rights as regular employees, including entitlement to paid leave and protection under German labor laws, except for the shortened notice period for termination.

#9. Termination and Offboarding in Germany

In Germany, the concept of at-will employment does not exist. 

Employment contracts are bound by strict legal frameworks that protect both the employer and the employee. Termination can only occur under specific conditions and usually requires a notice period. Terminations without notice are only permissible in cases of severe misconduct.

The notice period varies by tenure:

• Up to 2 years of service: four weeks of notice in advance
• 2-4 years: one month of notice in advance
• 5-7 years: two months of notice in advance
• 8-9 years: three months of notice in advance
• 10-11 years: four months of notice in advance
• 12-14 years: five months of notice in advance
• 15-19 years: six months of notice in advance
• Above 20 years: seven months of notice in advance

Beyond the probation period, you must justify terminations. Employees are protected by the German Termination Protection Act after six months of employment.

An employee can be terminated for one of the following reasons:

• Voluntarily by the employee
• By mutual agreement
• Conduct-related dismissal for breaching employment terms
• By the expiration of the contract

If the termination reason is performance-related, you need to document it, provide formal warnings, allow time for improvement, and justify the termination based on reasonable expectations and efforts to support the employee.

Severance pay is not legally required in Germany but is commonly negotiated to avoid court disputes. It is customary after six months of employment. 

Typical severance packages are around 50% of the monthly salary per year of service and also commonly cap at a maximum of six months' salary.

#10. Leave Entitlements for German Employees

In Germany, employees are entitled to a minimum of 20 working days of paid annual leave for a five-day workweek and 24 days for a six-day workweek.

However, the common practice is 25 and 30 days of leave, reflecting the work-life balance priority there.

Unused annual leave can generally be carried over into the next calendar year but must be used by March 31 of that year.

There are 9 public holidays with 4 additional regional holidays in Germany.

• New Year's Day - January 1
• Epiphany - January 6 (celebrated in Baden-Württemberg, Bavaria, Saxony-Anhalt)
• Good Friday - Friday before Easter Sunday
• Easter Monday - Monday after Easter Sunday
• Labour Day - May 1
• Ascension Day - 40 days after Easter
• Whit Monday - 50 days after Easter
• Corpus Christi - 60 days after Easter (celebrated in Baden-Württemberg, Bavaria, Hesse, North Rhine-Westphalia, Rhineland-Palatinate, Saarland)
• Assumption Day - August 15 (celebrated in Bavaria, Saarland)
• German Unity Day - October 3
• Reformation Day - October 31 (celebrated in Brandenburg, Mecklenburg-Vorpommern, Saxony, Saxony-Anhalt, Thuringia)
• Christmas Day - December 25
• St. Stephen's Day - December 26

Sick Leave

Under the Continued Remuneration Act, employees who work for at least four weeks are entitled to six weeks of statutory sick pay. 

During this period, they receive their full salary. If the illness extends beyond six weeks, the employee's health insurance provides a sickness benefit, which is 70% of the gross salary but not more than 90% of the net salary​.

Maternity Leave

Pregnant employees are entitled to six weeks of leave before the expected due date and eight weeks after childbirth (extended to 12 weeks in case of premature or multiple births). 

During maternity leave, German employees receive maternity pay equivalent to their average salary for the three months before the leave. The company and health insurance companies share the cost of this pay​.

Paternity Leave

Starting in 2024, Germany will implement a two-week paid paternity leave as part of the European Union's directive to promote gender equality and support family life. 

This new regulation will allow fathers or equivalent parents to take paid leave regardless of their previous length of service, aiming to involve them more in child care and education​.

During paternity leave, the employee receives a "partnership wage," which is paid by the company and based on the average salary of the last three calendar months before the leave. Employers can then recover this cost through the U2 levy procedure.

It is available to the other parent, a partner living in the same household, or a person nominated by the mother​.

Parental Leave

Parents are entitled to up to three years of parental leave per child. During this time, they can claim a government parental allowance, which amounts to 65-67% of the average monthly net income before the birth, with a minimum of €300 and a maximum of €1,800 per month. 

Parental leave can be taken by both parents together or separately and can be split into multiple periods until the child turns eight.

Final Thoughts

Germany is a great place to grow your remote workforce thanks to its infrastructure, skilled workforce, and favorable conditions for remote work culture.

Understanding German employment laws, currency and taxation, payroll deductions, contract details, and employee benefits is crucial for businesses to effectively navigate the complexities of hiring. I hope this roundup of 10 facts gives you a better glimpse into these aspects!

Remember, you don’t have to do this all alone! 

If you’re not ready to set up a subsidiary in Germany and handle employment-related administrative tasks on your own, partnering with an Employer of Record is the simplest way to hire international employees and manage compliance aspects there. For example, Deel provides a comprehensive solution for global hiring, payroll, and compliance that is trusted by many remote-first companies like Coinbase, Dropbox, and Shopify. (See our detailed review of Deel here.)

Here is my curated list of the Best Employer of Record Services in 2024 and guide to choose the right EOR partner. 

Disclaimer: This article is here to provide some helpful information, but it is not a substitute for professional tax, accounting, or legal advice. Be sure to consult with your tax, accounting, and legal advisors before engaging in any related activities or transactions.