Understanding Payroll in Germany: What Global Companies Need to Know
Jan 12, 2017
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.
Yet while Germany poses many advantages to expanding global businesses, 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 to know.
To launch a business location 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.
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.
Effective January 1, 2017, the law also defines the minimum wage as €8.84 per hour – though there are some exceptions to the rule based on employees’ age, status, or any applicable collective agreements. 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.
When it comes to bonuses, organizations should be mindful of ‘13th month’ or ‘thirteenth salary’ payments: Under certain collective agreements, German employees who have worked all 12 months of the year are entitled 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). Many German employers also issue 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 €250,731 for a single person or €501,462 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.) 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.
Social Insurance Contributions
Employers must also contend with Germany’s social security system and its mandatory insurance principle, which 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 for pension insurance, unemployment insurance, and nursing care insurance, respectively. The amounts – which depend on income – are split between employer and employee as follows and 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.)
- 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 €57,600 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.
- Unemployment Insurance: Mandatory unemployment insurance is 3.0 percent of the gross wage, split equally between the employer and employee.
- Nursing Care Insurance: The contribution for nursing care insurance is 2.55 percent of the gross wage. Employer and employee both pay half of the contribution rate, with childless employees paying an extra 0.25 percent on top of their 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, as long as they inform the employer immediately about the sickness, provide a medical attestation if their sickness lasts more than three days, and their last absence due to the same sickness dates back at least three months.
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). In addition, employees who educate and take care of their own children can qualify for ‘parental time’ – in which their working time is reduced to 15 to 30 hours per week – up to the end of the child’s third year. During this parental time, the employer is not permitted to give the employee notice of termination.
|Date||Germany's Public Holiday Schedule|
|January 1st||New Years Day|
|Friday before Easter Sunday||Good Friday|
|Monday after Easter Sunday||Easter Monday|
|May 1st||Labor Day|
|40 Days after Easter||Ascension Day|
|7th Monday after Easter||Whit Monday|
|October 3rd||Germany Unity Day|
|December 25th||Christmas Day|
|December 26th||St. Stephens Day|
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.