Cost Of An Employee In Germany - Understanding The Payroll System In Germany

Having one of the world’s best environments for overseas businesses, Germany has over 22,000 foreign established businesses in Germany which employ more than 2.7 million people. Germany is by far the most stable location for new business in EU.

Germany offers an access to its large and well-educated population to a lot of businesses which makes the process of Company Formation in Germany a lucrative option. However, there are number of complicated processes involved in executing and launching a German payroll system. Here are a few things that you can keep in mind in order to ensure a successful payroll system in Germany:

 

Getting Started

In order to start a new business in Germany, a company has to register itself under the tax and social security authorities. This includes requesting an employer number which is an eight-digit identifier for the name, address, and economic class of the company. The employer number is a must in order to hire employees and registering them for social and health insurance. You also need to apply for a dedicated tax number as well as statutory accident insurance. The whole process can take up to 6 weeks to complete. Meanwhile, you can complete other chores like setting up a bank account etc.

Employment Law

Germany’s Employment Law defines many policies regarding the payroll. It dictates that every employee should have the option to join a union, collective labor agreement, or work council, which would play an important role in issues relating to shift timings, wages etc. (but only if you have a certain number of employees in Germany). As of January 1, 2017, the law defines the minimum Cost of Employee in Germany as €8.84 per hour subjecting to certain exceptions based on employees’ age, status etc.

Employee Payments

The payment of wages and salaries are governed by Germany’s Industrial Code, its Civil Code, and number of other collective agreements. Payments to the employees or the concerned third parties are done in the form of electronic bank transfers in accordance with Germany’s standard File Transfer and Access Management (FTAM) protocol. Once the payroll is approved by the employer, the bank is authorized to release all the concerned payments to its employees.

As far as bonuses are concerned, organizations need to be aware of ‘thirteenth salary’ payments. This implies that the German employees, who have worked all 12 months of the year, have a right to receive one month’s wages as a bonus (often split, half being paid in May and half in November). This is not a legal requirement however and many companies are moving away from this.

 

Tax Collection

One of the most important jobswhen it comes to payroll is to calculate the income tax due for each employee and to pay the withheld amount to authorities. The employer must withhold the calculated amount from employees’ gross payments each month and then submit that payment to the appropriate tax office by the 10th of the following month. Failure to do this will result in you being charged with a penalty.

Social Insurance Contributions - It is the duty of every company to withhold an appropriate percentage of employees’ total monthly earnings for unemployment insurance, pension insurance, and nursing care insurance, respectively. The amount varies depending on the income of each employee and is split between employer and employee.

Health Insurance - As per law, the health insurance is 14.6% of the employee’s gross income which needs to be shared equally between the employer and the employee.

 

Unemployment Insurance - This is mandatory and is 3.0 percent of the gross wage which is split equally between the employer and employee.

Maternity Leave and Sick Pay Considerations - As per the regulations, any employee who has been working for at least four weeks will get sick pay, as long as they inform their employer of the sickness immediately and provide a medical attestation if in case the sickness lasts for more than three days. The maternity leave consists of six weeks before the delivery and eight weeks afterwards. In case of premature births or multiple births it is 12 weeks after birth.