3 Ways To Hire And Pay International Employees in Germany

Expanding your business by hiring international employees can bring significant benefits, such as diverse skills and new market insights. With the largest economy in Europe, Germany’s workforce is highly appealing given the country’s vast pool of highly educated workers.

If you're considering employing someone in Germany from another country, you need a good understanding of local employment practices to stay compliant.

This guide details the three main methods you can use to hire and pay international employees, how to navigate legal compliance, and key employment facts in the country.

1. Hire Independent Contractors

Hiring independent contractors is best suited for businesses with short-term projects or specific tasks that need specialized skills. 

Understanding Contractors in Germany

Hiring German employees as contractors might seem like a way to bypass administrative hurdles, but if a contractor is performing as an employee, this approach carries significant risks. Misclassification can lead to severe fines and even criminal liability.

The distinction primarily revolves around autonomy. Contractors have the freedom to control how they perform their work, while employees follow the employer's instructions.

German labor laws emphasize the actual working relationship over the title given. If a contractor operates like an employee, they are legally considered an employee and entitled to protections such as unfair dismissal, paid leave, and other benefits.

Pros:

• Flexibility in hiring.
• Cost-effective for short-term engagements.
• No need to provide benefits or comply with full-time employment regulations.

Cons:

• Risk of misclassification if contractors are treated like full-time employees.
• Limited control over the contractor’s work.

Payment Process: Contractors typically invoice for their services, and payments are processed directly to them. It's crucial to ensure that contracts clearly define the scope of work and payment terms to avoid legal issues.

2. Set Up a Legal Entity in Germany

Setting up a legal entity in Germany is suitable for businesses planning to hire multiple employees and establish a long-term local presence in the country. This approach provides full control over hiring and managing employees internally.

However, this traditional method is often expensive and time-consuming, making it less practical for companies seeking quick and flexible solutions for hiring in Germany.

Establishing a New Company in Germany

Creating a presence in the German market requires establishing a legal structure. Foreign companies typically choose between forming a local subsidiary or registering a branch office.

A subsidiary is an independent company, usually in the form of a private limited liability company (Gesellschaft mit beschränkter Haftung – GmbH). The GmbH structure is popular due to its separate limited liability.

Branch offices are part of the foreign head office's organization and can be either autonomous or dependent, based on their level of independence from the main company.

Pros:

• Full control over operations and employees.
• Direct compliance with local employment laws.

Cons:

• High cost and time-consuming process.
• Complexities in managing local compliance and administrative requirements.
• Difficulties in closing entities if the business decides to exit the market.

Payment Process: Managing payroll for employees involves registering for payroll taxes and social security contributions, adhering to local tax laws, and setting up a comprehensive payroll system.

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3. Use Employer of Record (EOR) Services

A quicker and more adaptable alternative to setting up an entity is partnering with an Employer of Record (EOR). Partnering with an EOR provider is ideal for businesses looking to experiment in new markets, make initial hires, and navigate local compliance with ease.

What is an Employer of Record?

An EOR acts as the employer on behalf of a business, without the need to set up a local entity. As your legal entity, EOR handles the hiring and payment of your German workforce while ensuring compliance with local employment laws. They manage onboarding, payroll, benefits, and risk mitigation, allowing you to focus on day-to-day employee management.

Benefits of Using an EOR

Partnering with an EOR allows you to swiftly establish a remote workforce in Germany and test the market before committing to long-term expansion. This approach is cost-effective and avoids the complexities of entity establishment.

Pros:

• Simplifies compliance with local labor laws.
• Reduces administrative burden.
• Provides support with payroll, benefits administration, and employment contracts.

Cons:

• Less control over daily employee management.
• Potentially higher ongoing costs compared to direct hiring.

Payment Process: EORs manage the entire payroll process, ensuring that employees are paid accurately and on time, while also handling all statutory benefits and tax contributions.

Transitioning From Using An EOR To An Owned Entity

Even if you plan to eventually establish your own entity in Germany, starting with an EOR can be advantageous. You can hire employees through the EOR immediately and transfer them to your own entity once it’s established. This approach helps navigate the complexities of German registration laws and accelerates your hiring process on a budget. 

Unlike many other EOR providers, Playroll supports the flexible transfer of employment arrangements to client entities.

Navigating Legal Compliance in Germany

When hiring in Germany, it's essential to understand and comply with several key legal requirements:

Employment Contracts

German law requires that employment contracts specify job roles, working hours, and compensation. Fixed-term contracts are limited to two years, while indefinite-term contracts are also common.

Taxation and Social Security

Employers must register for payroll taxes and social security contributions, which include 9.3% for pension insurance, 1.3% for unemployment insurance, 7.3% for health insurance, and contributions to long-term care insurance. These are mandatory for all employees.

Local Labor Laws

Compliance with local labor laws is crucial to avoid legal penalties. This includes understanding visa regulations, termination laws, and employee rights. For instance, standard working hours are eight hours per day with a 30-minute break, and employees are entitled to at least 20 days of paid leave per year. Partnering with an EOR can help navigate these complexities efficiently.

Visas and residence permits

Hiring foreign workers in Germany might require familiarization with different types of German work visa and residence permits. Check out our essential breakdown to what's required of employers.

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Employment Practices in Germany

To remain competitive when hiring in Germany, it's important to research compensation benchmarks and benefits. Some key elements of local employment law include:

• Minimum Wage: As of 2024, the minimum wage in Germany is €12.41 per hour.
• Working Hours: Standard working hours are eight hours a day with a typical break period of 30 minutes to one hour.
• Paid Time Off: Employees are entitled to a minimum of 20 days of paid leave per calendar year.
• Maternity and Paternity Leave: Maternity leave includes six weeks before and eight weeks after birth, while parental leave allows up to 12 months of unpaid leave.
• Social Security Contributions: Mandatory contributions for health insurance, pension, unemployment, and long-term care insurance.
• 13th & 14th Month Salaries: While not mandatory, many companies offer these additional salaries as bonuses to attract and retain talent.

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What's the True Cost of Employment in Germany?

Use Playroll’s Employee Cost Calculator to accurately benchmark salaries and understand the full costs of hiring international employees in Germany, with a detailed breakdown of statutory benefits and employer taxes. 

Calculate Now

Future Trends for Remote Workers in Germany

In the changing post-pandemic work environment, employees are making their preferences unmistakably clear: offer work-from-home options or risk losing top talent.

A recent survey reveals that a significant 47% of German employees would contemplate resigning if their remote work privileges were revoked. This highlights the role of flexible work arrangements in the modern job market, where the advantages like reduced commuting and improved work-life balance are greatly appreciated.

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Choosing the right approach to hiring and paying international employees in Germany depends on your business needs and resources. Whether you hire independent contractors, set up a legal entity, or use an EOR service, understanding the local employment landscape is crucial for success. It’s easy to get overwhelmed when navigating the finer details of local employment law – but it doesn’t have to be complicated.

Playroll is an Employer Of Record service that can support your business to seamlessly hire, pay and manage international employees in 180+ countries, including Germany – with a team of experts on-hand to handle compliance with all local employment laws. Playroll also offers visa support services in the country. 

Check out Playroll’s global hiring guide for more details on employment in Germany.