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 2021 is EUR 9,50 (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 50% 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 working in Germany are subject to income taxation in Germany. Employers with a registered office or place of business in Germany are obliged to withhold wage tax from the salary of employees working in Germany and to pay it on behalf of the employee to the tax office.
This wage tax is subsequently deductible against the employee’s income tax liability mentioned above. The income tax range is from 14% to 45% for any salaries exceeding EUR 9.744 (in 2021) per annum. In some cases, those making €9.744 or below are eligible for certain tax exemptions.
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. The solidarity surcharge, which has existed since reunification 30 years ago, will be largely abolished from 2021.
The employer may provide additional benefits in kind up to EUR 44 per month and employee tax-free. If the benefit per employee exceeds the EUR 44 limit, the employer may tax this benefit in kind with a flat-rate tax.
There are also other options for providing benefits in kind to employees. For example, company events, for which there is an allowance of EUR 110 per employee and company event. The allowance can be claimed twice per year per employee. If the value of the company event exceeds EUR 110 per employee, the excess can be taxed at a flat rate of 25%.
German social security tax responsibilities are dually shared by employees and employers. This includes health, pension, unemployment and long-term care insurance.
In addition to the previously mentioned four insurances, the employer must mandatorily take out further insurances. These are the so called “Umlage U1” to cover loss of earnings in the event of illness, “U2” to cover loss of earnings in the event of maternity leave, “U3” insolvency cover and statutory accident insurance.
The additional costs that the employer has to bear for the employers share of social security contributions can be roughly calculated with 20% (in addition to the employee’s gross salary).
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.
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