Understanding Payroll in Germany: What Global Companies Need to Know
If your multinational organization is expanding into the German market, you’re in luck: Germany is widely regarded as one of the world’s most welcoming environments for overseas businesses. For proof, just ask the 22,000 foreign enterprises that have established businesses in Germany (and that employ more than 2.7 million people).
As Europe’s largest and strongest economy, Germany is a far more stable location for new business than many other EU nations (especially amid political volatility across the continent). In addition to offering employers access to its large and well-educated population, Germany makes it relatively easy for organizations to set up a location inside its borders. Structural reform and changes to the corporate tax rate have delivered excellent economic conditions for international businesses.
Germany’s economy is built on research, innovation, exports and its ability to attract foreign direct investment (FDI) from around the world. However, that reliance on exports has led to a significant slowdown of late.
Brexit, trade conflicts and what Berlin’s economy ministry described as “very weak” industrial production contributed to Germany’s annual GDP growth rate falling to just 0.6% in 2019, its worst performance since 2013. Measured quarterly, the growth rate declined throughout the year, hitting zero by Q4. Additionally, at the time of writing, the economic fallout of the COVID-19 pandemic had yet to be fully realised. But as is the case with most Western economies, it is likely to push Germany into recession.
Despite this, Germany poses many advantages to expanding global businesses. But there are a number of complex rules and nuances involved in launching and executing German payroll as part of a broader global payroll compliance strategy. To ensure your organization sees success with payroll in Germany (both now, and in the future), here are a few important things you need to know.
To launch a business located in Germany, a company must complete all applicable registrations to the country’s tax and social security authorities. That includes applying for an employer number – an eight-digit identifier for the name, address, and economy class of the company – that is necessary in order to hire employees and register them for social and health insurance. The company must also apply for a dedicated tax number and for statutory accident insurance (also known as ‘Berufsgenossenschaft’).
It can take up to six weeks for all such registration information to be fully processed. During that time, organizations should set up bank accounts. While it is not mandatory to pay employees from an in-country account, it is advisable for employers to have at least one German account where government entities can send any reimbursement payments. In agreement with their local work councils and local or global payroll providers, organizations must also determine the timing, place, and form of payments and payslips.
The key to successful operations in Germany is understanding the nuances of the country’s Employment Law, which defines many policies regarding payroll. For instance, the law dictates that all employees have the option to join a union, work council, or collective labor agreement, which may decide issues relating to working decisions, working times, and wages.
As of January 1st 2020, Germany’s minimum wage is €9.35 per hour, though there are some exceptions to the rule based on employees’ age, status, or any applicable collective agreements. Trainees, those in entry-level qualifications, or those working as part of an apprenticeship or university course may also be exempt on a case-by-case basis.
Contracts are regarded as partly invalid in cases where less than the minimum wage is paid. Employers may be subject to a claim for the difference, as well as a fine of up to €500,000. Subcontractors are also able to claim against both their direct employer and the main contracting company.
Germany’s Employment Law also covers the legal entitlement to time off, which is at least 24 working days per year, and its maximum of 48 working hours per week.
Employers must also be aware of the regulations regarding payment of salaries and wages, which are governed by Germany’s Civil Code, its Industrial Code, and various collective agreements.Payments to employees and third parties usually take the form of electronic bank transfers under the country’s standard File Transfer and Access Management (FTAM) protocol. Once an employer approves a given payroll, it can authorize its bank to release payments to all employees and make any other required contributions, such as payments to health insurance companies.
Germany has a wide variety of bonus, profit-sharing and incentive schemes that can be awarded to employees. Particular schemes to be aware of include:
- The ‘13th month’ or ‘13th salary’ payment: certain collective agreements allow German employees who have worked all 12 months of the year to receive full payment of a month’s wages as a year-end bonus (or a pro-rated amount for less than a year’s work).
- Supplemental pay: this can be granted in addition for various reasons, such as compensating for difficult job circumstances, work at weekends or at unsociable hours, or even a bonus when an employee goes on vacation.
Proper income tax collection is crucial to executing payroll in Germany. As a rule, it is the employer’s responsibility to calculate the income tax amount for each employee based on his or her specific tax class and supply the withheld amount to authorities.
For example, employees considered high earners (those with a yearly salary of €265,327 for a single person or €530,654 for a married couple) are required to pay the highest tax rate of 45 percent. In addition, a Solidarity Surcharge Tax Rate or “Solidaritaetszuschlag” of 5.5% is levied on the income tax amount. This tax is levied to help support the debts, pension commitments and recovering infrastructure of the former East Germany.
The employer must withhold the appropriate amount from high-earning employees’ gross payments each month, then submit payment to the appropriate tax office by the 10th of the following month. The penalty for a late submission is a maximum 10% of the assessed tax, and interest due for a late payment is 6% per annum.
Non-residents who are working in Germany are only subject to income tax there if their income is closely relevant to Germany. Real estate or having a permanent establishment in Germany is a good example of this. Germany has tax treaties with around 90 countries to prevent employees being taxed on the same income by two different countries.
Social Insurance Contributions
Employers must also contend with Germany’s social security system and its mandatory insurance principle. This dictates that membership in and contributions to Germany’s statutory social insurance schemes are obligatory by law. Employers and employees alike must contribute to the different schemes.
Companies in Germany must withhold a percentage of employees’ total monthly earnings across four insurance categories. These typically total around 40% of an employee’s gross income, but employers normally contribute half. The amounts must be paid to the proper authorities by the third-to-last working day of each month. (Note: A 1.19% contribution for statutory accident insurance is paid solely by the employer.)
The categories are:
- Health Insurance: The basic contribution rate for public health insurance is 14.6% of the employee’s gross income, shared equally between employer and employee. Employees earning a gross wage of up to €60,750 per year are compulsorily insured by one of the public health insurance providers; those above that threshold can choose from public or private insurers.
- Pension Insurance: Pension insurance is compulsory for employees. The premium is 18.7 percent of the gross wage and is divided equally between employee and employer. Pensions are paid from age 65 (although this is gradually being increased to 67) and the maximum payout is 67% of average net income during the employee’s working life.
- Unemployment Insurance: Mandatory unemployment insurance is 2.5% of the gross wage, split equally between the employer and employee.
- Nursing Care Insurance: The contribution for nursing care insurance is 2.55% of the gross wage. Employers and employees each pay half of the contribution rate. Childless employees pay an extra 0.25% on top of their own contribution.
Sick Pay & Maternity Leave Considerations
In addition, Germany’s Employment Law dictates the rules regarding continued remuneration in case of sickness. According to the regulations, employees who have been working for the employer for at least four weeks are eligible for sick pay. This is as long as they inform the employer immediately about the sickness, provide a medical attestation if their sickness lasts more than three consecutive days, and their last absence due to the same sickness was at least three months previously.
Sick pay must be paid at 100% of salary or wages for the first six weeks. Thereafter, employees receive statutory or private insurance benefits at 70% of normal pay for up to 18 months. For an employee to receive another six weeks of full sick pay due to the same issue, at least six months must have passed since the end of the previous break, or at least a year must have passed since the beginning of the previous break.
Similar rules govern maternity leave and associated payment. According to Germany’s Maternity Protection Act, employers are required to give employees maternity leave and continued remuneration for six weeks before delivery and eight weeks afterwards (12 weeks following premature births or multiple births). This leave can be invoked earlier in a pregnancy if a medical certificate states the health of mother or child would be endangered by working.
In addition, employees who educate and take care of their own children can qualify for parental leave, during which employers cannot serve notice of termination. This can be taken by fathers or mothers for the first three years of their child’s life and reduces their working hours to a maximum of 30 hours a week (giving seven weeks’ notice when applying to their employer). Additionally, each parent can defer up to 24 months of the three-year periods and use them at any point until the child turns eight (giving 13 weeks’ notice when applying to their employer).
Employers are not obliged to pay salary or wages to employees on parental leave, but employees may be eligible for state parental benefits. This consists of 67% average income for up to 14 months after birth, calculated from earnings in the 12 months prior to birth. This benefit is capped at a maximum of €1800 per month. No individual parent can receive more than 12 payments, except single parents on limited incomes.
|German Public Holiday||Date in Calendar|
|New Years Day||January 1st|
|Good Friday||Friday before Easter Sunday|
|Easter Sunday||Easter Sunday|
|Easter Monday||Monday after Easter Sunday|
|Labor Day||May 1st|
|Forty days after Easter|
|Seventh Monday after Easter|
|German Unity Day||October 3rd|
|Christmas Day||December 25th|
|St. Stephen's Day||