Corporate Setup

Foreign companies expanding into the German market usually aim to achieve a fast market entry and to minimize the financial risk while developing their business in Germany. Before the actual hiring process begins, one of the first questions foreign clients often ask is about the best corporate setup for a successful market entry in Germany.

Employer of Record (“EOR”)

The so-called EOR model is promoted by many international providers as a way to enter the market quickly and minimize the administrative burden compared to direct employment. Although using an Employer of Record can be an attractive option under certain circumstances, the EOR model does not work as smoothly in Germany as in other jurisdictions. Under German law, the EOR model is considered an employee leasing arrangement, which is subject to strict formal requirements under the German Employee Leasing Act (Arbeitnehmerüberlassungsgesetz - AÜG).

Furthermore, the EOR model gives rise to IP/confidentiality and non-compete issues that regularly require an additional agreement between the foreign company and the employee.

No legal requirement to set up a German entity

In Germany, foreign companies are not required to set up a German legal entity to hire employees. Foreign companies may rather hire employees in Germany with their foreign entity. They can easily register employees with the German payroll system and ideally involve a local payroll service provider. This is often the preferable option to explore the German market.

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Employee vs. freelancer

For many companies, working with independent freelancers or contractors is an increasingly popular alternative to hiring employees. As flexible professionals, freelancers cover short-term peaks in workload without the company having to comply with strict employee protection regulations (e.g., rules on fixed-term contracts, protection against unfair dismissal, holiday entitlement, etc.) or worry about social security contributions and income tax. However, freelancers are often misclassified and actually qualify as employees. Such false self-employment (also known as bogus self-employment – Scheinselbstständigkeit) may have significant negative consequences for the (then) employer.

False self-employment (Scheinselbstständigkeit)

Under German law, a "false self-employment" (Scheinselbstständigkeit) occurs when an individual works as a freelancer or contractor but, in reality, is more akin to an employee regarding their work conditions and relationship with the company.

Employee or Freelancer?

The term "employee" is subject to different definitions under employment law, social security law and income tax law, though these definitions largely coincide. The main feature of an employment relationship subject to social security contributions is personal dependency. This is deemed to be the case if the employee is integrated into the company and is subject to the employer's right to issue instructions with regard to the time, duration, place and manner in which the work is performed.

Whether someone is considered as self-employed freelancer or an employee must be determined by an overall assessment  taking into account various criteria, including, among others:

• Integration into the company: If the individual is integrated into the company structure, follows company rules, and is managed similarly to an employee, this suggests a potential false self-employment.
• Dependency: If the person primarily works for one company, lacks autonomy in decision-making, or relies significantly on one client for their income, it might indicate an employment relationship.
• Control and supervision: When the client company directs the work, determines the working hours, provides tools or instructions, and has significant control over the work process, it resembles an employment relationship.
• Business risk and independence: True freelancers usually bear business risks, invest in their equipment, have multiple clients, and decide on their work processes independently. If these aspects are absent, it might suggest false self-employment.
• Substitution and delegation: A self-employed individual typically has the right to delegate or substitute their work to others. If this is restricted or controlled by the client company, it indicates a dependency similar to an employee.

These factors, among others, help to determine if someone is misclassified as self-employed rather than an employee. If a false self-employment is identified, the consequences might include retroactive social security contributions, tax adjustments, and potential legal action to reclassify the relationship as an employment contract.

Consequences of false self-employment

False self-employment, i.e., incorrectly classifying an employee as a freelancer or a contractor, can have considerable effects on the company. Potential consequences of false self-employment are ranging from (retroactive) liability for taxes and social security contributions to reputation damage and even criminal liability of the responsible managing directors. Media reporting on investigations by public prosecutors or customs authorities also typically results in considerable reputational damage for the company concerned.

How to avoid the risk of false self-employment

There are various ways to avoid the risk of false self-employment.

Businesses should thoroughly consider the rationale behind choosing self-employment over an employment relationship. If the preference for self-employment arises from the obligations and restrictions linked to an employment relationship, such as statutory protection against unfair dismissal, an alternative could be considering a fixed-term employment contract.

The drafting of the contract is essential but equally important is the actual execution and implementation of the working relationship. It's crucial to ensure that the freelancer maintains a level of independence from the client's organization and isn't subjected to detailed instructions regarding the location, timing, or methods of performing the work. This autonomy is a key factor in maintaining a true self-employment status.

Furthermore, both the company and the contractors have the option to seek a status determination at the clearing office of the German Federal Pension Insurance (Deutsche Rentenversicherung Bund) through the optional status determination procedure. This process involves the authority making a decision regarding the classification as either an employment relationship or an independent activity. The resulting decision is binding and provides legal certainty for the company.
 

Background checks and pre-employment screening

About one third of German companies use background checks or pre-employment screenings as part of their personnel selection process. Particularly when filling a position of trust or one with considerable security risks, employers often try to learn more about the applicant’s qualifications, interests as well as security specific or personal (e.g. health) risks before making a decision.

Background checks are subject to data protection rules

Background checks are subject to strict data protection requirements and are only permitted to the extent that the:

• The employee's right to privacy is not unreasonably impaired.
• Employer has a reasonable and legitimate interest in obtaining the requested information (e.g. to clarify discrepancies in an applicant's CV).

This depends on the requirements of the specific position for which the candidate has applied.

Internet search

Employers often search for background information about a job applicant in internet search engines (such as Google) as well as various social networks (such as Facebook, LinkedIn, Xing, etc.).

From a data protection perspective, only those - publicly accessible - personal data may be processed that are necessary for the decision on the establishment of an employment relationship or for its implementation (e.g., training, professional experience, and qualification). Employers may therefore in particular access the information made available by applicants precisely for this purpose in career networks. Private information, such as ideology or sexual orientation, which is often carelessly shared, e.g., on Facebook, may not be used by employers.

Checking with (former) employers

Obtaining information from the previous employer may also be legally permissible, at least with regard to the contents of the copies of references submitted by the applicant during the application procedure. In any case, it is advisable to request additional information from the former employer only with prior consent of the applicant.

Information from authorities

Employers are not allowed to make direct enquiries with SCHUFA. Without the permission of the person in question, the employer has no right to view the credit rating data. However, he or she can obtain the information by requesting an applicant to submit a personal report of their SCHUFA. It is important to note, this is only permissible for employment relationships with a special position of trust.

The request to submit a police certificate of good conduct (polizeiliches Führungszeugnis) is generally not permissible. A certificate of good conduct provides information about entries in the Federal Central Register, without regard to sector- or employment-specific relevant criminal offences. However, employers are permitted to request information from applicants about criminal offences that are directly related to the job.
 

Offer Letter vs. Employment Contract

Offer letters are becoming increasingly popular in Germany. An offer letter typically outlines the basic terms of employment, including the position, start date, salary, and any initial conditions. It provides a preliminary overview of the job offer, allowing the candidate to accept or negotiate before the detailed contract is drafted. Especially in a highly competitive market, it is a well-tested tool for companies to quickly make a binding offer to employees. Especially at the end of the month, employees can terminate their current employment relationship in a relaxed manner with an offer letter in hand.

However, under the German Verification Act (Nachweisgesetz or “NachwG”), employees are entitled to a written summary of key terms and conditions before their first working day. This requirement ensures transparency and clarity regarding crucial aspects of employment.

However, beyond this summary, employers are advised to prepare a comprehensive employment contract. This detailed contract serves multiple purposes:

• Enforcing Additional Obligations: An employment contract allows employers to impose obligations on employees that exceed statutory requirements. For instance, it can include post-termination non-compete clauses to restrict the employee's activities in the market after leaving the company.
• Sector-Specific Clauses: Tailoring the contract allows inclusion of sector-specific clauses such as intellectual property (IP) rights and confidentiality agreements. These are particularly crucial in industries where protecting sensitive information or proprietary knowledge is vital.

By crafting a well-drafted and tailored employment contract, employers can safeguard their interests and establish clear boundaries and expectations for employees. This contract goes beyond statutory obligations, offering additional protection and guidance for both parties involved in the employment

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General Overview

With the exception of fixed-term employment relationships and non-competition clauses (which must be in writing), verbal agreements are also valid, but are not recommended. According to the (tightened) Verification Act (Nachweisgesetz), employers must provide their employees with a written and wet-signed summary of the respective essential employment conditions. The written record must contain in particular:

Requirements under the Verification Act (Nachweisgesetz)

• The name and address of the contracting parties.
• The date of commencement of the employment relationship.
• In the case of fixed-term employment relationships, the end date or the expected duration of the employment relationship.
• The usual place of work.
• A brief job description.
• If agreed, the duration of the probationary period.
• The composition and amount of remuneration, including overtime pay, allowances, supplements, bonuses and special payments as well as other remuneration components, which must be stated separately in each case, as well as their due dates and payment modalities.
• The agreed working hours, the agreed rest breaks and rest periods and, in the case of agreed shift work, the shift system, the shift rhythm and the conditions for shift changes.
• If agreed, the possibility of ordering overtime and its conditions.
• Annual leave.
• Any entitlement to further training offered by the employer.
• If the employer promises the employee a company pension scheme via a pension provider, the name and address of this provider.
• The procedure that the employer and employee must follow when terminating the employment relationship, at least the written form and the deadlines for terminating the employment relationship as well as the deadline for filing an action for unfair dismissal.
• Reference to the collective agreements, works or service agreements applicable to the employment relationship as well as regulations of commissions with equal representation that determine the working conditions for church employers in accordance with church law.

Employers' Must-Have: Tailored, Well-Drafted Employment Contract

In practice, this legal requirement can be met by concluding comprehensive written employment contracts that contain the necessary information. A detailed employment contract avoids ambiguities regarding the employee's entitlements. For example, it should be explicitly stated under which conditions the employee is entitled to variable remuneration, whether and to what extent overtime will be remunerated, and so forth.

Moreover, by way of a well drafted and tailor made employment contracts, employers can impose obligations on the employee that go beyond the statutory obligations or deviate from employee friendly employment law to a certain extent. For example, employment contracts may provide for post-contractual non-competition clauses, non-solicitation clauses or strict confidentiality obligations.

Employment contracts often contain additional provisions, such as

• Non-compete clauses
• Confidentiality clauses
• The flexibility to assign other comparable tasks
• Provisions on the return of company property
• Time limits for asserting rights arising from the employment relationship

Post contractual non-compete clause

During the term of employment, the duty of loyalty prohibits the employee from, among other things, exercising or engaging in any activity, which competes with that of the employer. However, upon termination of employment, the employee is generally free to work in any activity, even a competing one, unless the employee is subject to  an employment-based non-competition agreement.

Under German law, a post-contractual non-compete restriction can only be stipulated effectively if it does not lead to an unreasonable impediment regarding the respective employee’s future business activities. For example, a post-contractual non-compete covenant can only be agreed for a maximum period of up to two years after the termination of the employment relationship. In addition, must specify the company’s area of operation in terms of business and geographical scope. Most important, the post-contractual non-compete covenant is only valid and enforceable if a compensation payment of at least 50% of the formerly received contractual remuneration is agreed. Besides the base salary, all variable payments and also any benefits in kind (e.g. a company car) have to be taken into account. Payments are usually made in monthly instalments during the period of the post-contractual non-compete covenant.
 

Confidentiality Clause

The confidentiality regarding trade and business secrets can be contractually agreed upon by the employer and employee. While the duty of confidentiality inherently arises from the employment relationship throughout its duration, it is prudent to expressly outline this duty within a separate agreement for unequivocal clarity and reinforcement.

A specific confidentiality agreement is particularly necessary if the confidentiality obligation is to continue beyond the end of the employment relationship. Such post-contractual confidentiality agreements are generally permissible.

However, the content requirements for post-contractual confidentiality agreements are high, as an employee may enter into competition with his former employer at any time after leaving the employment relationship and use the knowledge acquired for this purpose. An exception to this applies if a post-contractual non-competition clause has been effectively agreed between the contracting parties.

A post-contractual confidentiality obligation requires that

• the trade and business secrets subject to confidentiality are specifically defined and
• the employer has an  interest in maintaining confidentiality

If the employer extends confidentiality to all business transactions in an undifferentiated manner, the employee is prohibited from exploiting any knowledge acquired during the employment relationship. Such an unrestricted confidentiality obligation crosses the boundary to the post-contractual non-competition clause, which can only be agreed under the conditions. If these requirements are not met, general post-contractual non-disclosure agreements are invalid and therefore ineffective.
 

Assignment of other tasks

The employment contract may provide that the employer is entitled to assign other tasks to the employee, including unilaterally relocating the employee.

The assignment of other tasks or relocation must, however, be made on the basis of reasonable judgement, which means that the interests of the employer and the employee must be taken into account.
 

Fixed-term employment contract

Fixed-term employment contracts are becoming increasingly popular in Germany. Employers use them for flexible personnel planning, as extended probationary periods and and often also to comply with internal staffing guidelines.

Fixed-term contracts are subject to the restrictions of the German Part-Time and Fixed-term Employment Act (Teilzeit- und Befristungsgesetz “TzBfG”).

A distinction is made between fixed-term employment if there is a justification or “valid reason” (mit Sachgrund) limitation in time and fixed-term employment without such a “valid reason” (ohne Sachgrund).

• A “valid reason” is, for example, a temporary increase in the volume of work or the temporary replacement of an employee who is absent (e.g., due to illness or parental leave). For employment contracts with "valid reason" there is no legally defined maximum duration, as the aim is to cover the employer's temporary needs so long as they exist.
• If there is no "valid reason", the employer may extend the fixed-term contract no more than three times and the fixed-term employment may not exceed a total duration of two years. In addition, a fixed-term without "valid reason" is not permissible if a fixed-term or permanent employment relationship has already existed with the same employer.

Fixed-term employment agreements must be agreed on in writing (wet ink) and must be signed before the commencement of employment, otherwise they are deemed to be for an indefinite period.
 

Part-time employment contract

Part-time work is also governed by the German Part-Time and Fixed-term Employment Act (Teilzeit- und Befristungsgesetz - TzBfG).

Employees are entitled to request a reduction to their contractually agreed working hours if they have worked with the company for more than six months and if the company usually employs more than 15 employees.

This request must be filed three months prior to the requested start of the reduced working hours. The employer and employee must negotiate and agree on the reduction of working hours. If no agreement can be achieved the employer can reject the employee’s request for part-time work if there is a valid operational reason. Such a reason may exist if the part-time work significantly interferes with the organization of the enterprise, the work process or safety aspects, or if it causes disproportionate costs for the employer. The rejection must be served at least one month before the start date of the reduced working hours, otherwise, the request will be considered approved, i.e. the request for part-time work is automatically implemented and cannot be unilaterally changed by the employer.
 

Working Time Act

The Working Time Act (Arbeitszeitgesetz) is a protective law in favor of employees. It aims to keep employees healthy and productive in the long term. In addition to general rules on working time, breaks, rest periods, night work and weekend work, the law allows for a number of exceptions. collective bargaining agreements, works council agreements or sector-specific approvals from the supervisory authority create leeway for deviating solutions. Employers who want to successfully introduce a new working time model should know the basic legal regulations in the Working Time Act.

Daily working hours

Daily working hours must not exceed eight hours per working day and based on six working days per week (Monday to Saturday), employees must not work more than 48 hours per week (Working Hours Act (Arbeitszeitgesetz)).

However, this can be extended to up to ten hours per working day, if within six months or 24 weeks, the average working time does not exceed eight hours per day.

The works council has a right of co-determination with regard to the beginning and end of daily working time, including breaks, and the distribution of working time over the individual days of the week.

Rest breaks during the working day

Employees who work longer than 6 hours a day must take a break of at least 30 minutes. Those who work longer than 9 hours a day must take a break of at least 45 minutes. A longer break is possible. Breaks may not be at the beginning and not at the end of working time and may be split into breaks of at least 15 minutes.

The German Working Time Act and collective bargaining agreements provide for several sector -specific exemption which allow to adapt the arrangement of breaks to the specific nature of the employees’ activities.

Rest periods between working days

There must be at least 11 hours of uninterrupted rest between the end of a daily working period and the start of a new daily working period. Except in shift work, this means: There is an 11-hour rest period between the end of work in the evening and the start of work in the morning.

If work is resumed during this rest period (for example, by telephone calls, sending mail, etc.) the 11-hour rest period starts again from the beginning.

Working on weekends and public holidays

Saturdays are considered normal working days under the Working Time Act. Working on Sundays and public holidays is generally prohibited. There are exceptions for employees in certain areas (e.g. emergency and rescue services, catering and hotels, etc.). However, work on Sundays must be compensated by corresponding time off within the following two weeks or eight weeks in the case of work on public holidays.

Collective agreements provide for several exceptions and the supervisory authorities may grant exceptions to the general ban on working on Sundays and public holidays in certain sectors.

Violations of the Working Time Act

Violations of the Working Hours Act can be fined up to EUR 15,000. Severe violations can even constitute a criminal offence. There is no possibility of opting out of the working time restrictions. However, the Working Hours Act does not apply to executive employees (leitende Angestellte).

Recording of Working Time

On 18 April 2023, the Federal Ministry of Labour and Social Affairs published a long awaited draft bill that aims to implement the obligation to record working hours, which has already been established by the European Court of Justice and the Federal Labour Court, into the German Working Hours Act.

According to the Federal Labour Court, employers must record the beginning and end and therefore the duration of their employees' daily working hours, including overtime. The European Court of Justice (ECJ) ruled in 2019 that an objective, reliable and accessible time recording system is required. According to the European Court of Justice (ECJ, judgement of 15 May 2019 - C-55/18), this is the only way to safeguard employees' rights to comply with the statutory maximum working hours and rest periods. These rights arise from the requirements of European law. However, some assumed that this judgement would only be binding if the German legislator amended the law accordingly. The Federal Labour Court takes a different view: Such an obligation already arises from sec. 3 para. 2 No. 1 of the German Occupational Health and Safety Act (Arbeitsschutzgesetz). Thus, employers are already obliged to record working hours comprehensively.
 

Minimum Wage

Since 1 January 2024, a statutory minimum wage of EUR 12.41 per hour applies to all employees in all sectors of the economy. Employees under the age of 18, trainees and interns are exempt from this regulation. Employers who violate the obligation to pay minimum wages can be fined up to EUR 500,000. The minimum wage will increase to EUR 12.82 per hour from 1 January 2025.

The Vocational Training Act provides for a statutory minimum remuneration of EUR 620 per month in the first year of training. In addition, the minimum monthly remuneration increases by 18 % in the second year of training and by up to 40 % in the fourth year of training.
 

Annual Leave and Public Holidays

Every employee is entitled to annual leave of 20 days, based on a 5-day-week pursuant to the Federal Vacation Act (Bundesurlaubsgesetz). This means that an employee can claim an annual leave of four weeks in a calendar year. However, most employers grant a longer annual leave which normally varies between 25 and 30 days per year.

A full vacation claim is acquired only once the employment relationship has existed for six months. Employees must take their annual vacation during the calendar year and employers must generally grant employees vacation unless there are conflicting business reasons

Sick Pay

Employees who are unable to work due to illness or injury and have at least four weeks’ continuous employment are entitled to full pay during the first six weeks of each period of illness. Thereafter, the employee is entitled to sick pay from the state health insurance fund.
 

Under German employment law, employees enjoy strong protection against termination. Protection against termination is divided into general protection against termination under the Act on Protection against Dismissal (Kündigungsschutzgesetz) and special protection against termination. The latter applies to certain groups of employees, such as severely disabled employees, and women during pregnancy and four months after childbirth. In addition, there are some formal requirements that employers must observe. In the following, we provide a basic overview of the dismissal process in Germany.

Ordinary termination observing the notice period vs. termination for good cause

German employment law makes a distinction between ordinary termination observing the applicable notice period [ordentliche Kündigung], whereby the employment relationship terminates upon expiry of the notice period, and termination for good cause (außerordentliche Kündigung). Termination for cause requires a severe breach of duty and leads to an immediate termination of the employment relationship. In both cases, termination at the employer's initiative is (strictly) limited by law.

Termination for good cause

A termination without notice for good cause ends the employment immediately and there is no notice period to be observed. In case of a severe breach of contract by the employee, the employment can be terminated for cause with immediate effect without observing a notice period. The employer has to provide a reason which makes it, in good faith, unacceptable to continue the employment relationship until the end of the notice period, or in the case of a fixed-term contract of employment, the contractual date for its expiration.

Good cause within the meaning of sec. 626 of the German Civil Code might be, for example:

• criminal acts, e.g., theft,
• sexual harassment,
• unlawful competitive activity,
• working time fraud, or
• continued refusal to work.

In addition, the employer must provide notice of the termination of employment within 2 weeks of becoming aware of the relevant circumstances justifying said termination with immediate effect.

Termination observing the applicable notice period (ordinary termination)

In the case of an ordinary termination the employer must observe the applicable notice period and – if general protection against unfair dismissal applies – he needs a specific reason to justify the termination.

During an agreed probationary period of up to six months German employment law provides for a minimum notice period of two weeks. If no probationary period has been agreed and for the time following an agreed probationary period, the statutory minimum notice period is four weeks to the 15th or the end of a calendar month. However, for a termination by the employer this timeframe gradually increases with the years of service from one month to the end of a calendar month to up to seven months after 20 years of service.

The statutory notice periods are staggered as follows, depending on the length of employment:
 

In practice, employer and employee regularly agree on a longer notice period. However, the notice period to be observed by the employee may not exceed the one for termination by the employer.

Unlike in other jurisdictions, German employment law does not recognize the concept of “pay in lieu of notice”. The employer must instead abide by the statutory or contractually agreed notice period. The employees receive their regular salary during this time.

General Protection against dismissal

Under the German Dismissal Protection Act, the freedom of the employer to dismiss an employee is substantially restricted. If an employer employs more than 10 employees and if the relevant employee has been employed for more than six months, the employer may ordinarily give notice to terminate only if the termination is justified by

• reasons relating to the employee’s person (e.g., long-term illness or repeated short-term illnesses causing business disruption or unreasonably high sick-pay costs), or
• reasons relating to the employee’s conduct (e.g., breach of contract, in spite of a prior warning relating to a similar breach) or
• by urgent operational reasons and business reasons (e.g., restructuring, shutdown of business). Urgent operational requirements exist where:
  • the employee’s position has been cancelled as result of a sound management decision,
  • the employee cannot continue to be employed at another vacant position within the company, and 
  • the employer has carried out a “social selection” and duly considered the four social criteria:
    • seniority,
    • age,
    • obligations to support defendants and
    • recognized severe disability of the employee.

The employer must be able to explain and justify the weighting of the four criteria mentioned above or any additional criteria used to arrive at a specific decision. However, if the employer and the works council manage to agree on a list of the workers to be dismissed, then social justification is presupposed and can only be challenged in court on the grounds of gross misjudgment. Generally speaking, the implied social basis of the mechanism tends to protect more vulnerable employees.
 

Special Protection against termination

There are quite a few groups of employees enjoying special protection against dismissal. For example, the dismissal of a female employee is prohibited during pregnancy and the four-month period after childbirth if the employer, when giving notice, was aware of the pregnancy or childbirth or if the company is informed thereof within two weeks of receipt of the notice by the employee. Severely disabled employees and those with equivalent status may be dismissed only after prior approval by the integration office. Works council members must not be given notice during their term in office unless reasons for extraordinary termination exist and the works council or, in lieu of it, the labour court, has approved such termination.

There are quite a few categories of employees benefitting from special protection against dismissal, in particular:

• Works council members (§ 15 Act Against Unfair Dismissal).
• Election committees and candidates for works council elections (§ 15 Act Against Unfair Dismissal).
• Members of the Staff Council, election committees and election candidates for this purpose (Personnel Representation Act).
• Members of youth and trainee representations (according to works constitution or staff representation law).
• Severely disabled persons only with the consent of the Integration Office (§ 168 Ninth Book of the Social Security Code).
• Representative for severely disabled persons (§ 179 Ninth Book of the Social Security Code).
• Company data protection officer(s) (§ 6 Federal Data Protection Act).
• Pregnant women and mothers up to four months after delivery (§ 17 Maternity Protection Act).
• Persons on parental leave (§ 18 Parental Allowance and Parental Leave Act).
• Persons on care time (§ 5 Care Time Act).
• Vocational trainees after the probationary period (§ 22 Vocational Training Act).

Works council’s rights

If a works council has been established, the works council needs to be consulted before any dismissal as otherwise the dismissal is void. The employer must inform the works council of all reasons for the dismissal. A dismissal that is made without (properly) consulting the works council is invalid.
 

In companies with more than 20 employees, an existing works council must also be involved in the event of a reorganization of the business (e.g. closure of operation or in the event of a mass dismissal). A social plan must be concluded with the works council; however, the obligation to conclude a social plan does not exist during the first four years after the establishment of the company. If the reorganization of the business consists solely of the dismissal of employees, the works council can only enforce a social plan if certain thresholds are exceeded:

Form requirements

To be legally effective, the termination notice must be signed by a person who is authorized to represent the company by its sole signature (e.g., managing director, CEO) or whose authority to give notice is generally known within the company. Under German law, the employee would be entitled to reject the notice letter if it is only signed by someone who is not entitled to represent the company, unless a valid original power of attorney is handed out to the employee together with the notice letter.

The company’s representative must sign the printout (hardcopy) of the notice letter (wet-signature, no scanned signature, no stamp, no copy or DocuSign, etc.). Notice of termination must be given in written form, and must include an actual, hand-written signature, as opposed to a digital one.

Claim for unfair dismissal

If the employee believes that a dismissal is invalid, he or she can file an action for unfair dismissal within three weeks of receiving the letter of dismissal. If the labour court decides that a dismissal is effective, the employment relationship ends after the applicable notice period has expired. Unlike in other legal systems, an effective dismissal ends the employment relationship without the employer being obliged to pay severance pay, unless it is part of a collective restructuring measure that is covered by a social plan agreed with the works council.

Termination Agreement and Severance Payment

Invalid terminations by the employer will result in reinstatement by the labour court unless the parties agree on a mutual termination agreement that usually provides for a severance payment to settle a termination dispute. In Germany, most protection against dismissal disputes end with a mutual termination agreement that provides a severance payment or the extension of the actual applicable notice period. This is due to the high requirements for valid terminations by the employer and the fact that the German labour courts make very employee-friendly decisions.

Many employees bring a claim for unfair dismissal even in the case of a valid termination to exert some pressure on the employer to make a severance payment. This practice results from the fact that many employees in Germany have legal expense insurance that covers their legal fees. Even if the termination is valid, employers often enter into a mutual termination agreement that provides for severance pay or an extended notice period to avoid time-consuming and costly litigation.

As a rule of thumb, factor x usually ranges between 0.5 and 1.5, depending on the circumstances of the individual case, the employee’ s role and the business sector, but can be lower or higher, depending on the employee’s chances of success in a (possible) lawsuit.
 

Companies carry out restructuring to avoid future crises, overcome existing ones or generally improve their competitiveness. In almost all cases, the necessary restructuring measures also affect ongoing employment relationships. During a crisis, measures to reduce the workforce are often inevitable. In most of the cases the restructuring of companies fulfills the criteria of a so-called “operational change” according to the German Works Councils Constitution Act (Betriebsverfassungsgesetz – BetrVG). Operational change is the pivotal legal concept, which comes very close to a comprehensive definition of restructuring.

When restructuring projects involve changes in the workforce, it is essential for management to consider the requirements of labor and employment law from the outset.

Operational Change

According to the German Works Councils Constitution Act operational changes include:

• reduction of operations or closure of the entire or important departments of the operation,
• relocation of the entire operation or of important parts of the operation,
• mergers or split-ups of operations,
• fundamental modification of the operational organization, the purpose of the operation or the operational facilities,
• introduction of fundamentally new working methods and production processes.

The legal concept of ‘operational change’ applies only in companies that regularly employ more than 20 employees and where a works council exists, which then has rights of information, consultation and negotiation as follows:

The works council must be informed and consulted about operational changes at an early stage.

If an operational change is to be implemented, the employer and the works council must negotiate a reconciliation of interests (Interessenausgleich) and conclude a social plan (Sozialplan). In principle, the employer may not implement any measures in this regard if the works council has not been properly informed about the measures under consideration.

The works council must be informed on collective redundancies, incorporated in the German legislation on employment protection.

Unlike, for example, in France, the employer is not obliged to justify his/her decision to restructure in economic terms, nor is the regional impact of restructuring defined as a concern to be dealt with. In other words, the employer’s decision to abandon a product line, to automate a production process or to shut down a plant – to give only some examples of operational changes – are considered a management prerogative.

Reconciliation of Interests

A reconciliation of interests is an agreement between the employer and the works council on whether, when and how a change in operations proposed by the employer can be implemented. The reconciliation of interests is intended to ensure that disadvantages for the employees affected by the change in operations do not arise in the first place or are at least kept within reasonable limits.

Although the reconciliation of interests and social plan (i.e., agreement between the employer and the works council on the compensation or mitigation of the economic disadvantages) are legally independent of each other, they are usually negotiated in parallel. Concessions by the works council in the reconciliation of interests often come with demands for a higher social plan budget and vice versa

While the social plan can be enforced by the works council even against the employer’s will, the conclusion of a reconciliation of interests cannot be enforced by the works council. However, the employer must negotiate "genuinely" with the works council, which, according to case law, also includes at least appealing to the conciliation committee, i.e., an internal mediation committee made up of an equal number of members from the employer side and the works council side. If the employer fails to comply, several labor courts and regional labor courts grant the works council a claim for injunctive relief to refrain from the operational change. In addition, the employer is subject to economic pressure because he must expect claims for compensation when implementing an operational change "without having attempted" (section 113 (3) of the German Works Councils Constitution Act) to reach an agreement with the works council through a reconciliation of interests (so-called compensation for disadvantages (Nachteilsausgleich) within the meaning of section 113 of the German Works Councils Constitution Act).

The works council can significantly delay the implementation of the operational change. Companies should be prepared for all conceivable delaying tactics and take these into account in the time and action plan from the outset.

Social Plan

A social plan is the agreement between the employer and the works council on the compensation or mitigation of the economic disadvantages suffered by the employees as a result of the proposed operational change. In contrast to the reconciliation of interests, the social plan can be enforced in co-determination proceedings.

In practice, the following rule applies: the faster the reconciliation of interests is to be agreed upon, the more generous the social plan must be.

The core element of social plans are severance payments as a compensation for the job loss. In addition, social plans provide for other cash benefits such as relocation allowances, additional payments for severely disabled employees and for employees with dependent children, hardship funds, retention bonuses and volunteer programs. Social plans have become increasingly innovative in the way that provisions for re-training and outplacement services often complement severance payments.

Collective Dismissal / Mass Layoff

A collective dismissal or mass layoff under German employment law occurs when a large number of employees are dismissed within 30 calendar days. The minimum number of dismissals required for a mass dismissal depends on the size of the business and is specified in section 17 of the Dismissal Protection Act.

In such scenario, the employer is obliged to

• inform the works council “in due time” about the proposed dismissals, and
• inform the employment agency before dismissing the employees.

Failure to give notification or giving incorrect notification may result in the invalidity of the dismissals.

Collective dismissals qualify as an operation change within the meaning of sec. 111 of the German Work Constitution Act, so that the reconciliation of interests procedure applies. If certain additional criteria are met, the employer must enter into a social plan relating to the collective dismissals.

If the number of redundancies in a workforce reduction exceeds the statutory thresholds within 30 calendar days, the regulations on the mass redundancy procedure must be included in the restructuring process.

Short-time work (Kurzarbeit) and staff reductions

Short-time working is intended to provide temporary economic relief for the company by reducing personnel costs. At the same time, the jobs of the employees affected are to be retained for the duration of the short-time work. Short-time work is therefore necessarily only considered in the event of a temporary shortfall in work. In contrast, terminations for operational reasons may have to be considered if the shortfall in work is likely to be permanent.
 

Business sales and restructuring or outsourcing measures e.g., when unprofitable (parts of) operations are sold or spun off into so-called shared service centers or subsidiaries to improve profitability, often qualify as a transfer of business (Betriebsübergang) according to the German TUPE provision in sec. 613a of the German Civil Code (Bürgerliches Gesetzbuch – BGB).

Transfer of Business

A transfer of business occurs when an economic entity is transferred by a legal transaction and this economic entity is continued by the new owner of the business. Such continuation exists if the business in question is transferred as a "going concern", which depends on the specific facts related to the transfer, for example:

• Type of business,
• whether the tangible assets, such as buildings and movable property, are transferred,
• the value of the intangible assets at the time of the transfer,
• whether the majority of the employees are taken over by the new employer (if the transferee acquires only a part of the transferor's entire business)
• whether the customers of the business are transferred
• the degree of similarity between the activities carried on before and after the transfer; and
• the period of time, if any, during which those activities were suspended.

The legal analysis of whether the transfer of assets constitutes an economic unit which is continued by the new owner is highly dependent on individual circumstances.

613a of the German Civil Code does generally not apply to:

• Share deals,
• transfers of assets that do not form an "economic entity" or where such economic is not continued by the new owner,
• transfers exclusively by way of an act of public authority.

Automatic Transfer of Employment Relationships

If a business transfer occurs, he employees dedicated to the business will automatically transfer to the transferee. The employment is transferred by virtue of law to the transferee “as is”, i.e., including all employment terms, regardless of their legal basis. As a rule, this means that the employment relationship continues with the same rights and obligations as before the transfer of the business.

Works agreements of the transferor can be transformed into individual rights if no works agreements are applicable to the new employer. These can only be amended by mutual agreement with the employees one year after the transfer of the business. If the new employer has works agreements that cover the same matters as the transferor's works agreements, the transferor's works agreements will be replaced by the new employer's works agreements.

The effects of the transfer of the business on the collective labour agreements must be examined very carefully. The same collective agreements of the transferor continue to apply if the new employer is a member of the same employers' association. If the new employer does not apply a collective agreement, the rights from the transferor's collective agreement are "converted" into individual employee rights. These converted rights can only be changed by mutual agreement with the employees one year after the transfer of the business.

If the business or part of the business to be transferred is continued by the new employer as an independent business, the works agreements may continue to apply at a collective level (i.e. they also apply to new hires).

Protection against Dismissal

Sec. 613a (4) BGB prohibits the termination of employment due to the transfer of business, but explicitly allows the termination of employment (in connection with the transfer) for other legitimate reasons. This means that all employees of the transferred business or part of the business are transferred and the transferor may not terminate the employment relationship in order to allow the transferee to take over only certain employees or to employ them under changed conditions. However, both the transferor and the transferee may terminate the employment relationship for other legitimate reasons under the German Protection Against Dismissal Act.
 

Employers’ obligation to inform Employees

Pursuant to section 613a (5) BGB, the employees affected by the transfer of business must be informed comprehensively about the following aspects of the transfer prior to the transfer:

• the time or the envisaged time of the transfer,
• the reason for the transfer,
• the legal, economic and social effects of the transfer on the employees and
• the envisaged measures towards the employees.
• Employees’ right to object to the transfer of employment

Employees’ right to object to the automatic transfer

Employees have the right to object to the automatic transfer of their employment relationship within one month of receipt of detailed information about the planned transfer. The one-month period for objection only begins to run if the information provided to the employee is correct, complete and accurate. Otherwise, the employee can object to the transfer of their employment relationship even years after the transfer of the business under certain conditions.

If they object, their employment relationship will not transfer to the transferee and they will remain employed by the transferor. However, the transferor may terminate an employee's employment for operational reasons if the employee's job in the company has been eliminated as a result of the transfer and there is no possibility of placing the employee in another vacant job.

Under the General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz, AGG) employers are obliged to refrain from discrimination and, in addition, the employer has several organizational obligations to protect his employees from discrimination at the workplace.

Employers’ Obligations

Employers are expressly prohibited from discriminating against job applicants and all employees on the basis of

• gender,
• race or ethnic origin,
• religion or belief,
• age,
• disability, or
• sexual orientation.

Employers must observe the ban on discrimination when publishing job advertisements and also during the application procedure.

A job advertisement seeking a “friendly young waitress” demonstrates two forms of discrimination: the term “young” is a form of discrimination on grounds of age, while the female form “waitress” can be equated with discrimination on grounds of sex.

In a job interview, it would be unfair to ask a female applicant about her plans for a family.

However, the employees - women and men - are also entitled to be protected against discrimination in existing employment relationships.

For example, promoting employees automatically once they have reached a certain age constitutes discrimination against younger employees.

Employers must ensure that discrimination does not take place. In addition, they are obliged to take measures against employees who discriminate against other colleagues. The possible measures for this purpose range from a transfer to another post to a reprimand up to a termination of employment.

Forms of discrimination

In Section 3, the General Equal Treatment Act specifies different forms of discrimination.

Direct discrimination: A person is treated less favorably than another in a comparable situation on any of the grounds referred to under Section 1 AGG.

Examples are, for instance, job advertisements with discriminating age limits, dismissal of a woman because of pregnancy (gender) or the refusal of membership at a gym on the grounds of ethnic origin.

Indirect discrimination: Discrimination against a person does not appear to occur on the grounds stated under sec. 1 General Equal Treatment Act, e.g, gender, race or age, but on grounds of a seemingly neutral criterion. Initially, they apply to everybody in the same way, however, as regards their effect, they are more discriminating for certain groups than for others.

For example, a job advertisement is indirectly discriminating if it requires German as mother tongue for the work in a market garden. This occupation requires a relatively low level of linguistic competence. However, such a requirement excludes those who do not have German as their mother tongue, e.g., people who have come to a country as immigrants.

Harassment: If a person’s dignity is violated, if that person is degraded or offended on the grounds referred to under section 1 of the General Equal Treatment Act, this shall be deemed to be discrimination under the AGG. A specific form of harassment is sexual harassment caused by unwanted conduct of a sexual nature, including inappropriate sexual allusions, staring (at somebody), suggestive comments, the spreading of pornographic material, and physical sexual assaults.

Bullying as a very frequent form of harassment increasingly takes place in the work environment. Bullying is defined as actions violating a person’s dignity and lasting for a prolonged period of time, taking place in a targeted manner and systematic way and being geared towards an infringement of personality rights of the bullied person.

Eventually, there can also be victimization in the work environment if a person complains about discrimination and is therefore discriminated against again - e.g. by transferring the person to a worse workplace.

Justified Difference of Treatment

Difference of treatment in an employment context is permissible within very narrow limits, provided that the characteristics required are genuine and nearly essential for performing the task.

An example would be an association which offers advice to migrant women from specific countries. To establish trust, it is useful to have women of the same culture providing the advice. As such, here it would be permissible only to hire women with a specific ethnic background, as gender and ethnic origin are legitimately relevant occupational requirements in this case.

Remedies

If the Anti-discrimination Act has been violated, the affected employee has a claim for compensation against the employer under section 15 AGG (in the case of financial damages) and, under certain conditions, also a claim for damages for pain and suffering (in the case of immaterial damages). For example, in the case of non-employment, a claim for compensation of up to three months' salary can be demanded (section 15(2) AGG).

It is important to note that the discriminated applicant or employee has no right to be hired, reinstated or promoted.

Even if colleagues or non-employees have violated the prohibition of discrimination, the employer may be liable for these actions according to the principles of organizational fault if you have not taken measures to protect against discrimination.

German employment law provides a complex system of employee representation. Employee representation at the operational level is guaranteed by the works council. Works councils guarantee employees far-reaching rights of participation and co-determination in social, personnel and economic matters and are the primary partners of employers in negotiating restructuring. Works councils are an integral part of the employment law framework in Germany and a source of constant concern for (foreign) HR managers.

Establishment of works councils

In Germany, the employer is not obliged to establish a works council. A works council is only established by election on the initiative of the employees or a trade union represented in the operation. The size of the works council depends on the number of employees in the operation and can consist of up to 35 members.

However, the employer may not prevent the election of a works council - interference may even have criminal consequences.

A works council can be elected in any operation [Betrieb] that employs at least five employees over the age of 18, including three employees who are eligible to vote for a works council. If there are several operations in a company, a group works council must be set up which is responsible for all matters relating to the company as a whole or at least two operations.

All employees (regardless of trade union membership) who have been employed in the company for six months are eligible for election to the works council. Managing directors, board members and senior executives are not eligible to vote, do not count towards the threshold and are not represented by the works council. The works council is elected in a formalized election procedure by direct and secret ballot. The law provides for a complex election procedure.

Once in place, regular works council elections take place every four years.

Works council rights

The Works Constitution Act (Betriebsverfassungsgesetz – BetrVG) provides works councils with a broad range of participation rights in a variety of

• personnel matters (recruitment, transfers, dismissal),
• social matters (working time, remuneration schemes, use of IT systems) and
• economic matters (operational changes, e.g., reduction of operations or closure of the entire or important departments of the operation, mergers with other operations or split-up of operations).

The works council’s rights are of varying intensity, i.e. information and consultation rights, veto and co-determination rights.

Degree of works council involvement

Social matters

With regards to social matters, the works council has a comprehensive co-determination right.

Amongst others, social matters include:

• Company rules: e.g., code of conduct, smoking ban, dress code,
• start and end of daily working hours and breaks,
• temporary reduction or extension of working time, e.g., overtime,
• introduction of general guidelines for holidays,
• introduction and use of technical equipment and software,
• issues relating to the company wage structure, in particular the distribution of bonuses, premiums and other performance-related benefits.

The employer must obtain the consent of the works council before implementing a decision concerning a social matter. If no agreement can be reached between the employer and the works council, a so-called conciliation body must be put in place. If no agreement is reached even after further negotiations before the conciliation board, this conciliation board will make a final decision regarding the social matter.

Personnel Matters

The works council has the right to be involved in personnel matters, e.g., personnel planning, the introduction of employee questionnaires, selection guidelines etc. The employer is obligated to inform the works council before hiring or transferring an employee and to submit the necessary documents to the works council. If the works council refuses its consent to the aforementioned personnel measures, the employer is obligated to obtain such consent to the personnel measures in court.

The process of obtaining the consent to personnel matters in court can be not only very costly but also very time-consuming.

The works council must be consulted in detail prior to each individual dismissal and can object to it for certain reasons. However, the works council’s objection has no influence on the effectiveness of the notice of termination. A dismissal made without (proper) consultation of the works council is invalid.

Economic Matters / Operational changes

In companies that regularly employ more than 20 employees who are eligible to vote, the works council has to be informed and consulted at an early stage of the employer´s deliberations on operational changes. The employer and works council have to negotiate a reconciliation of interests (Interessenausgleich) and to agree on a social plan (Sozialplan).

Operational changes which require works council negotiation prior to implementing the measure include:

• reduction of operations or closure of the entire operation or important departments thereof,
• relocation of the entire operation or of important parts of the operation,
• mergers with other operations or splits of operations,
• fundamental modification of the operational organization, the purpose of the operation or the operational facilities,
• introduction of fundamentally new working methods and production processes.

Works council agreements (Betriebsvereinbarungen)

The works council and the employer usually conclude Works council agreements on various working conditions, such as regulations on the start and end of daily working hours (not the duration as such), vacation periods, internal guidelines for social behavior, safety issues such as accident prevention, monitoring measures, as well as general remuneration structures other than individual salary, etc. Works council agreements may not cover matters that are already regulated by law or collective bargaining agreements.

Works council agreements with the works council cannot be concluded if the matter is already regulated by law or collective agreement.

Works council agreements have a direct impact on the employment relationships of individual employees, as works agreements are binding on all employees, except for executive level and managing directors.

Costs of the works council

As a rule, the employer bears the costs resulting from the work of the works council. The employer must, amongst other things, provide the works council with offices and equipment as necessary for the performance of the works council’s duties. Since works council members must receive comprehensive training on their rights and obligations, the employer is also obligated to pay the necessary training expenses. Such expenses are not insignificant because each member is entitled to comprehensive training on works council constitution law. If the works council considers the legal advice of a lawyer to be necessary, the employer must also bear these costs. The same applies for all legal disputes with the works council in court. Moreover, the employer is obligated to pay the works council members the customary remuneration during the time in which the works council work is completed.

Protection of works council members

Members of the works council enjoy special protection against dismissal and can only be given notice for good cause, i.e., if the employee has seriously violated obligations under the employment contract. In practice, these requirements will only be met in a few rare cases. Even where cause exists, the works council's or the labor court's prior consent is required.
 

Trade unions are organized by sector, rather than on the basis of political orientation or white/blue collar status. Other than works councils, trade unions are rarely involved in a company’s day-to-day issues. However, Trade unions in Germany have a history reaching back to the German revolution in 1848, and still play an important role in German economy and society: Approximately 80% of all employment relationships are subject to collective bargaining agreements.

Trade Unions

The main function of trade unions is to negotiate and conclude collective bargaining agreements with employers' associations. They bargain over pay and working conditions (including, for example, notice periods and employment protection for employees with long service), and they may initiate the election of works councils. Trade unions do not have co-determination rights within a company. However, they support the works council and individual employees, e.g., by providing legal advice. Their advice to and support for works councils are crucial when it comes to negotiations on restructuring.

Collective Bargaining Agreements

According to section 1 of the German Collective Bargaining Act (TVG), a collective bargaining agreement is a written contract between one or more employers or employers' associations and one or more trade unions. Collective bargaining agreements contains provisions on the content, conclusion and termination of employment relationships as well as on operational and works constitutional issues. Collective agreements set minimum working conditions, so that more favorable provisions for employees can be regulated in the employment contracts.

The provisions set forth in a collective bargaining agreement apply directly and in mandatory form to an employee if they are a member of a trade union and the employers themselves have concluded a collective bargaining agreement with said union or are a member of an employers’ association which concludes collective bargaining agreements in their name. In addition, the application of a collective bargaining agreement or individual provisions of a collective bargaining agreement can be agreed between the employer and the employee in the employment contract. In practice, where collective bargaining agreements are implemented, employees who are not organized in trade unions are usually treated in the same way as unionized employees.

Social security in Germany is largely organized in the form of a contributions system in which the risks are borne collectively by all insured persons. Irrespective of their individual income and contributions, all insurants are largely and comprehensively protected against various life risks. The vast majority of the German population is insured under the social insurance system, either on a voluntary or compulsory basis.

The mandatory Social Security System in Germany consists of five branches:

• Health insurance
• Nursing care insurance
• Pension insurance
• Unemployment insurance
• Accident insurance

Social security contributions for health, nursing, unemployment and pension insurance are roughly shared equally by employer and employee. The costs for accident insurance are exclusively borne by the employer. In total, the employer's share of social insurance contributions amount to approximately 22 percent of the employee's gross wage, with the employee additionally adding about the same amount.