Strategically located for foreign investment and one of the largest economies in Europe, Germany is a great option for a multinational company looking to expand into the region. In fact, Germany was ranked number 22 on the World Bank´s Ease of Doing Business index. The country has also experienced significant economic growth and has one of the lowest unemployment rates on the continent. With a robust economy ranging from aerospace to healthcare, one thing remains generally constant throughout the industries – payroll regulations. Here are a few things to consider regarding payroll processing in Germany.
Collective Bargaining Agreements and Work Contracts
Payroll policies are based on German employment law. For example, German law indicates protects an employee’s right to join work union, council or other collective bargaining agreement. Whether an employee is a part of a collective bargaining agreement or not, work contracts are obligatory for all employees upon hiring.
Wages and Benefits
A typical German workweek is 40 hours but cannot exceed 48 hours and overtime cannot exceed 12 hours a week. The German minimum wage in 2020 is €9,35 per hour, with few exceptions in the case of students, minors, and individuals who have been unemployed for more than six months. The minimum wage will rise in the coming years. In addition to the statutory minimum wage, there are several industry minimum wages. These are negotiated by trade unions and employers in a collective agreement and declared generally binding by politicians. Industry minimum wages apply to all companies in the industry – even those that are not bound by collective agreements. Non-compliance with this nationally mandated minimum wage can result in fines up to €500,000. Additionally, payment frequency should in general not exceed once a month.
Vacations, Leaves, and Breaks
Employers are obligated to provide leave for vacations, maternity and paternity leave, as well as sick leave, and employees have the right to take a thirty-minute break after four hours if working more than six consecutive hours. After nine hours, a 45-minute break is obligatory.
In case of illness, employees may stay at home for up to three calendar days without a medical certificate. However, on the fourth day of illness at the latest, the employer must have a medical certificate of incapacity to work. Employers may, however, request the certificate at the beginning of the illness. In case of illness, the employee receives 100% of his or her salary for 6 weeks from the employer. After 6 weeks, the statutory health insurance fund continues to pay between 70% of the gross salary and 90% of the net salary. It is also possible that companies have an internal agreement in exceptional cases and the duration of the continuation of payment is longer.
Taxes and Social Security
All employees are subject to federal income taxes, which are withheld on behalf of the employee. These taxes range from 14% to 45% for any wages exceeding €9.408 per annum. In some cases, those making €9.408 or below are eligible for certain tax exemptions.
German social security tax responsibilities are dually shared by employees and employers. This includes health, pension, and long-term care insurance. Whoever is a member of a church also pays church tax (8-9%). The amount of church tax depends on the salary and region where the employee works. Employers are obliged to withhold 5.5% solidarity surcharge of employees’ wages for various social programs. The solidarity surcharge, which has existed since reunification 30 years ago, will be largely abolished from 2021.
It is also important to note that employers must pay taxes on any non-statutory employee benefits including, but not transportation, food stipends, liability insurance, and retirement funds. These non-statutory benefit taxes are a flat tax of 15% or 15 % of the market value of the benefit if the value exceeds €44.
Voluntary and Involuntary Terminations
As they are necessary upon hire, the employee-employer relations are defined entirely by the employment agreement upon hire. These obligations include employee termination, which can be terminated by one party or by mutual agreement. The most common employee-employer relationship termination is via advanced notice and in cases of conflict German labor courts are employed, though most dismissal cases are not contested.
Payroll experts with local knowledge and experience are perfect to contract when hiring after moving into a new market. With their expertise and local knowledge, they will make sure you and your business are always in compliance with local regulations.
Do you need more information?
Tyler M. Forbes
International Payroll Dept
International Desk Germany
All information contained in this publication is up to date on 2020. This content has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this chart without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this content, and, to the extent permitted by law, AUXADI does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this chart or for any decision based on it.