international employment law firm alliance L&E Global

Starting a business in Germany

1. Introduction

When setting up a business in Germany, the relatively high standard of employee rights provided by the German labour and employment law needs to be taken into consideration. From our experience, foreign companies considering an expansion to Germany are often surprised and somewhat discouraged when they learn more about the German labour and employment law system. We are aware of the fact that it is challenging to ensure compliance with the unfamiliar legal requirements of another country. However, with the right know-how and expert support, many difficulties can be avoided or at least moderated. Therefore, we provide a brief summary below on the essential labour and employment law as well as corporate law requirements, which aims to offer your company a first overview of the legal framework for opening up shop in Germany.

Pusch Wahlig Workplace Law is a firm of highly qualified labour and employment law specialists with offices in Berlin, Düsseldorf, Frankfurt, Munich, Hamburg and Cologne. Our team advises companies, which operate nationally and internationally, in all matters of collective and individual employment law. We share a passion and enthusiasm for employment law and an on-going commitment to strive for the best possible solutions for our clients.

Regarding the corporate law portion of this summary, we co-operated with YPOG, an excellent law firm specialising in tax and corporate law, with offices in Berlin, Hamburg and Cologne.

2. Labour and Employment Law Requirements

a) Employer Policy Requirements

In general, employers in Germany are not required by legislation to create and implement employment policies and/or employment handbooks as German employment law is already governed by many separate laws and to a large extent by case-law. There is no unified law regulating the relationship between employer and employee, but rather separate laws for particular issues – i.e. the Federal Vacation Act (BUrlG), the Hours of Employment Act (ArbZG) or the Maternity Protection Act (MuSchG). Most provisions in German employment law require interpretation when applied to a specific case. The labour courts perform such interpretation and sometimes even establish general principles not expressly included in statutory law. Case-law is therefore of very high importance. As German employment law mainly serves the purpose of protecting the employees, the interpretation of the labour courts is mostly employee-friendly.

Irrespective of this, many employers decide to implement policies such as –

  • Bonus policy outlining the terms and conditions for the bonus payment;
  • Guidelines on the use of IT tools (computer and mobile phone use, internet use, social media, physical tools, etc.);
  • Guidelines on data protection;
  • Guidelines on the use of company cars if applicable;
  • Reimbursement of travel and other business expenses policy;
  • Anti-discrimination and anti-harassment policies, including the process for responding to complaints
  • Code of Conduct.

– to reduce the risk of employment-related claims and enhance the employer’s ability to take necessary disciplinary and performance-related action. It is important that any internal policies are not in conflict with German law.

b) Employee Training Requirements

German-based employers are not statutorily obliged to provide specific training to their employees. However, regular training to manage employee relations and create awareness for certain topics (e.g. regarding general conduct or anti-harassment/anti-discrimination) or to reinforce the rights and responsibilities related to the individual employee’s position (e.g. HR or management positions) is strongly recommended and usually taken out from third party providers.

c) Employment Agreements

The general terms and conditions of employment are regulated to a large extent by statutory law, collective bargaining agreements concluded with the unions and agreements with the employee representatives at company level (works council), if in place. As a general rule, the employment contract may not deviate from these provisions to the detriment of the employee. The most important statutory minimum working conditions applicable to employment relationships in Germany are the following:

  • Employees in Germany are entitled to a minimum of 20 working days of paid leave per calendar year, based on a five-day workweek. However, most employees are usually granted 25 to 30 days of holiday per calendar year, depending on seniority and the type of business.
  • The statutory maximum working time is 8 hours per day from Monday to Saturday. Working on Sundays and public holidays is generally forbidden. However, under certain prerequisites the regular daily working time may be extended to up to 10 hours. Furthermore, an uninterrupted rest period of 11 hours after daily work must be guaranteed. The law allows for certain deviations through collective bargaining agreements.
  • As a general rule, remuneration is determined by mutual agreement. However, since 1 January 2015 a minimum wage is in force. It currently amounts to 10.45 EUR gross per hour and is reviewed every two years. The next increase of the minimum wage to an amount of 12.00 EUR gross per hour takes effect on 1 October 2022. The minimum wage generally applies to all employees in all sectors of business, with some exceptions, e.g. for employees under 18, trainees and interns.

The employer is obliged to provide the main contractual terms in writing to the employee – (non-qualified) electronic form does not suffice. Most of the main contractual terms must be provided to the employee on the first day of the employment relationship, others within seven days or within one month after the agreed start of the employment relationship. Violations of the obligation to provide the employee with the main contractual terms – if the employer does not provide evidence of the main contractual terms or does not do so correctly, completely, in the prescribed manner or in good time – might be sanctioned with a fine. Therefore, employment contracts in written form, i.e. wet ink are very common and certainly recommended. In some cases, a wet ink contract is mandatory, for example for fixed-term contracts.

When the employment contract is pre-formulated by the employer and not negotiated with the employee clause by clause on an individual basis, the contractual provisions are subject to court review, if challenged by the employee. In particular, clauses that are considered an unreasonable disadvantage to the employee will be considered null and void.

3. Corporate Law Requirements

a) Compliance for Incorporation

German corporate law knows a variety of business forms that founders can choose from. Generally, these business forms are divided into partnerships and companies. The most popular company form in Germany is the private company with limited liability (Gesellschaft mit beschränkter Haftung – GmbH). There is also a variety of partnerships, especially including the limited partnership (Kommanditgesellschaft – KG). No other business forms than the ones provided by law can be created.

A GmbH is relatively easy to set up and offers limited liability for the shareholders. Additionally, the administration, later restructuring and the disposition of shares are comparatively straightforward. The GmbH has full legal capacity, meaning it can hold rights and obligations and can sue and be sued in court. For tax matters, the GmbH is a taxable entity as opposed to partnerships, which are tax-transparent and where the individual partners are tax subjects. Another important difference to partnerships is that a GmbH allows for a third-party managing director of the company.

A GmbH can be founded by one or more persons, regardless of whether they are domestic or foreign, natural persons or legal entities. The company formation requires a notarised conclusion of the articles of association. Governmental permissions are not necessary unless the intended activity of the GmbH itself requires regulatory approval. The articles of association need to be signed by all shareholders and include at least the following: company name and principal office, objects of the company, nominal capital and number of shares each shareholder assumes.

b) Post Incorporation Registrations

A newly founded GmbH needs to be registered with the German commercial register. This is a constituent element of the formation. The registration can only be made if at least half of the required nominal capital of EUR 25,000 is provided. Mandatory registration information include: (i) the articles of association; (ii) a list of shareholders (including name, date of birth, address, and the amount of shares assumed); (iii) documentation of the appointment of managing directors; (iv) information on the power of representation. The registration with the commercial register usually takes place within one to three weeks after the application.

4. Payroll and Benefits Providers

The employer is obliged to pay contributions to social security in addition to the employee’s gross salary and is responsible for deducting the income tax from the gross salary. Therefore, all employees must be registered with social security and the tax authorities. The employer must further pay contributions to the statutory accident insurance.

Larger companies often have their own payroll accounting and benefit administration. However, it is also possible to outsource payroll and benefit responsibilities to third party companies in order to reduce the administrative burden connected with accounting and benefit administration. We are happy to recommend payroll providers to support your company.

Any questions

Ask our member firm Pusch Wahlig Workplace Law in Germany