Benefits and Compensation in Germany

German employees are among the most skilled and educated workforces to hire globally, especially in science and technology, innovation, and the automobile industry. 

Therefore this calls for providing the proper compensation structure that would fit the employee's requirements and your budget for hiring, providing the right benefits and compensation structure. The German compensation and employment

Although hiring in Germany is relatively easy, ensuring you structure the right kind of benefits and compensation package in Germany.  

What are employee benefits?

Employee benefits are the non-financial component employers provide as part of an employee's compensation package. Certain employee benefits are 

  • ~Required by law (such as social security, statutory leaves, state/federal insurance, and pensions), or 
  • ~The employers provide voluntarily (such as fringe benefits, long-term incentives, supplementary benefits, and performance-based incentives).

Employee benefits are a part of a compensation package and are essential for an employee. A good benefits package contributes to a work-life balance and increases their value in their work life. Although, employers that provide a benefit and compensation package to their employees help retain the right talent that allows overall business growth. 

This article will cover all aspects of compensation and benefits packages in Germany to make an informed decision when providing a compensation package that fits your budget and business requirements.

Compensation Laws in Germany

All employees in Germany are protected under the German employment or compensation policies. The primary law governing the pay and compensation structure is the National Labor Law. 

The National Labor Law also covers foreign employees and expats working in Germany.

Employers and foreign businesses must ensure they follow the provisions laid down by the National Labor Law — 

  • ~As the Minimum Wage Act laid out, the minimum salary is EUR 471.36 per week (or EUR 9.82 per hour). However, the minimum salaries are assessed every two years. 

An employer may attract penalties up to EUR 500,000 for violating the Minimum Wage Act.

  • ~As laid out by the Working Hours Act, an employer's maximum hours to ask an employee to work is 8 hours a day for a six-day workweek. The number of hours in a workweek cannot exceed 48 hours.
  • ~Although there are no provisions for overtime pay in Germany, it is determined by employers and work councils. The works council mandates all employers to keep a record of 
  • ~~Overtime hours 
  • ~~Hours worked by an employee during the workweek, and 
  • ~~Hours worked on Sundays and holidays.
  • ~It is permissible for the employer to extend the working hours more than ten hours a day under the collective bargaining agreement. However, extending more than the statutory limits under the German employment law is not permissible. 

Violating the Working Time Act can attract penalties of up to EUR 15,000 and constitute a criminal offense; however, the Working Time Act does not apply to managing employees (leitende Angestellte).

  • ~An employer must provide an employment contract within 30 days of hiring an employee.
  • ~Although it is not mandatory to provide severance pay in Germany, employees are entitled to severance pay via a social plan provided by the works council. The works council provides the severance pay in cases of — 
  • ~~A mass layoff, or 
  • ~~A collective bargaining agreement
  • ~The notice period when terminating employees depends upon the years of service with an employer. The notice periods for employees are as below —
Years of Employment Notice Period
Less than two years up to 20 years Four weeks
Above 20 years Seven months

The employer must provide four weeks’ notice in case of termination of employees. 

The provision set above by the labor law helps employers create an ideal compensation structure in Germany. This ensures that the interests of the employer and the employee are safeguarded.

How to Design An Employee Benefits Program For Employees in Germany?

While all employers must provide statutory benefits as laid out by the German employment laws, other benefits such as voluntary or supplementary benefits can be determined by the employer. This makes managing and providing employee benefits a crucial and costly process for most employers in Germany.

Therefore, ensuring you have a well-laid-out compensation and benefits plan in Germany is essential. Below are simplified steps to design an employee benefits plan for your employees in Germany.

Step 1: Identifying your benefits objectives and budget

Identifying your budget and benefits objectives is the first and the most crucial step in laying out a benefits program for your employees.  This ensures that you align your company’s goals and budgets with the benefits you want to consider for your employees. 

Step 2: Conducting your employees’ need assessment

Conducting a need assessment from your employees on their benefits expectations is crucial. The need assessment determines an ideal benefits design and selection. The benefits survey will give insights on 

  • ~Competitor's benefits practices 
  • ~Tax regulations and laws on benefits, and 
  • ~Employee benefit needs

If a current benefits plan exists, you can analyze employees' benefits.

Conducting a survey and analyzing the existing benefit plans on the current workforce demographics can assist in determining the benefit requirements of categories of employees in your organization. 

You can then compile the need assessment results and compare them with your existing benefits plan and any available options. Ideally, this will help you provide the best benefits program to your employees while keeping your objectives and budget.

Step 3: Formulating an ideal benefits plan 

After you analyze the gab analysis, and the needs assessment, as an employer, you will need to formulate a new design for a benefits design plan. You can do this by taking into consideration many factors, such as 

  • ~The budget
  • ~Eliminating the underutilized benefits from the existing benefits plan
  • ~Administration costs to run the new benefits plan
  • ~Any contributions that an employee must make
  • ~Would you need an in-house administrator, or would you require an external third party to help

Although factors may differ in different organizations, you must consider these factors to ensure you formulate an ideal plan that works for your organization.

Step 4: Communicating your benefits plan to your employees

Communication about the new benefits plan is critical. This is when an employee will understand the reasons for formulating a new benefits plan and how many of your employees are willing to buy in. 

If your employees do not buy-in, all the efforts that you put in may remain futile. 

If the employees buy into your new benefits program, it will be a great communication strategy for you to let them know that their feedback played a role in building their new benefits plan.

You must ensure that you are - 

  • ~Creating awareness about all aspects of your new benefits plan 
  • ~The reasoning at a high level for why the benefits are being offered 
  • ~Encouraging employees to use the benefits you are providing wisely

Step 5: Ensuring a periodic evaluation of your employee benefit plan

Reviewing your benefits plan periodically is also essential. This is because, with such a dynamic employee market, the requirements of employees constantly change. Updating and revising your benefits plan in an active market is essential to ensure you retain the right talent.

What are the Mandatory Benefits Employers offer in Germany?

The statutory benefits that an employer must offer as a part of employee benefits in Germany include — 

Leave benefits in Germany.

There are certain statutory leaves that an employer must provide their employees —

  • ~Annual leave —
  • ~~5-day workweek – 20 days
  • ~~6-day workweek – 24 days
  • ~Public holidays* — 10 days (the public holiday
  • ~Sick leaves — 42 days
  • ~Maternity leaves — 
  • ~~Normal delivery: 14 weeks (or 98 days) – 6 weeks (42 days) before childbirth and eight weeks (56 days) after childbirth
  • ~~Complicated delivery or multiple deliveries — additional 12 weeks
  • ~Care leaves — 10 days

* Public holidays in Germany vary from one state to another, although the statutory minimum is 10. For example, Berlin has 12 public holidays. 

German maternity and parental benefits

All German employees are entitled to maternity benefits, maternity leave, and maternity pay. The maternity benefits in Germany are —

  • ~15 weeks of paid maternity leave wherein eligible employees can take 
  • ~~Six weeks before childbirth, and
  • ~~Eight weeks after childbirth
  • ~In case of complicated delivery or multiple deliveries, an employee is entitled to additional maternity leave of 12 weeks.
  • ~The employee on maternity leave is entitled to full pay up to EUR 13 per day. The maternity pay is paid by the Federal Insurance Office or statutory health insurance. The maternity pay depends on whether or not the employee is a member of the statutory health insurance.

The maternity pay offered by the Federal Insurance Office to the extent of the average net pay of the last three months.  If the amount exceeds the maternity allowance mentioned, the employer must pay the difference amount to the employee. However, an employer can recover certain amounts from the authorities.

  • ~The maternity pay is calculated as the employee’s average salary three months before the maternity leave was granted. The compensation provided by the health insurance fund (insurer) is capped at €13 per calendar day.

A few key points as laid out in the German labor law for employees on parental leave include  

  • ~Parental leaves in Germany are provided to both parents. 
  • ~The leave entitlement in such cases is till the child reaches three years of age. 
  • ~Parental leave can be taken by both parents simultaneously or in turns. 
  • ~Employees taking parental leave must give advance notice of 7 weeks. 
  • ~The pay during parental leave is 60-67% of the average earnings in the last year. The parental pay has a maximum capping of €1,800 per month with a minimum of €300.
  • ~Employees that do not qualify for parental leave benefits include — 
  • ~~Employees with an annual income exceeding €500,000, and 
  • ~~Single parents with an annual income exceeding €250,000 
  • ~Although there are no provisions in the German labor laws, employers commonly provide paternity leave of 1 - 2 days as paid time off to their employees. 

Retirement pensions in Germany

All employers must contribute toward station pensions as a part of retirement benefits for their employees. The gross amount monthly under retirement pension is €1,154 based on contributions for 45 years and an employee’s gross annual income. The maximum gross retirement pension in Germany is €3,000.

Germany follows a pay-as-you-go system for contributions toward the retirement funds. The retirement age for female employees working in Germany is 63 years, and for male employees is 65 years; however, early retirement is possible with a reduced pension rate of 0.3% per month. 

Unemployment insurance in Germany

Employers must ensure that employees working a minimum of 18 hours a week are insured against unemployment. The benefits of unemployment insurance are 

  • ~60% of the employee's net salary per month in the past one year (or 12 months), or 
  • ~67% in case the employee has dependent children

The unemployment insurance benefits in Germany are paid between 6 months to 18 months. Post 18 months, the benefits are paid for a reduced rate of €374 per month. Employees are paid an additional allowance if they have a child — the additional allowance for children.

The unemployment insurance benefits are tax-free.

The benefits from the unemployment insurance funds depend upon two factors — 

  • ~On the claimant/insured’s age
  • ~Contributions length

Healthcare benefits in Germany

It is mandatory for all employees residing and working in Germany to have health insurance. The German health insurance covers services that include dental, vision, pre and antenatal, and pediatric care. 

Dependent children under 25 and unemployed spouses are co-insured at no additional cost. 

The employee and the employer equally contribute to health insurance in Germany.

Long-term nursing care in Germany

Long-term nursing care as an employee benefit in Germany is mandatory. The benefits of long-term nursing care include — 

  • ~Long-term inpatient care
  • ~Care at home for patients

Workers' compensation in Germany

All employers must register their employees with Social Accident Insurance, i.e., German workers’ compensation. This is also mandatory for businesses that do not have a branch or a registered office in Germany. 

The Social Accident Insurance covers all work-related accidents that include - 

  • ~Accidents on business trips
  • ~On-the-job accidents 
  • ~Occupational illnesses, and
  • ~Accidents while commuting to and from work

The employer must take additional insurance for employees traveling on business trips for an indefinite period.

Employee Benefits for Expatriates

The German compensation and benefits policies ensure that the foreign employees are also covered under the German social security. 

As per the German law on benefits and compensation, local and foreign employees must make contributions toward four areas that include 

  • ~Health insurance 
  • ~Unemployment insurance 
  • ~Pension funds
  • ~Invalidity insurance, and 
  • ~Nursing care. 
  • ~Occupational accident insurance

Contributions for expatriates in Germany are similar to a resident employee in Germany. The contributions include — 

Funds Employer Contributions Employee Contributions
Statutory insurance system

(gesetzliche Krankenversicherung - GVK)

7.3% 7.3%

(applicable for employees with a maximum ceiling of EUR 4.837,50 in 2022)

Pension insurance

(Rentenversicherung - RV)

9.35% 9.35%
Long-term care insurance

(Pflegeversicherung)

3.05% 3.05%

An additional 0.35% if an individual does not have children.

Unemployment care insurance

(Arbeitlosenversicherung)

1.2% 1.2%

A maximum ceiling of EUR 7.050 and EUR 6.750 in West Germany and East Germany, respectively.

Occupational accident insurance

(Unfallversicherung)

1.1% Covered by the employer

Employers may also pay fringe benefits, voluntary contributions, or supplementary benefits for expatriate employees; however, employers must mention this in the employment contract.

How Are Employee Benefits Taxed in Germany?

The German authorities do not tax certain benefits provided to employees. To ensure you can get tax exemptions for certain benefits, you must ensure that documents, such as invoices, are available. A few benefits that are not taxed include —

  • ~Relocation expenses provided to employees 
  • ~Actual expenses up to € 1,000 are exempt 

Employers in Germany are required to pay taxes that range between 15% to 25% for benefits such as 

  • ~Transportation
  • ~Office outings
  • ~Retirement contributions
  • ~Accident insurance

Restrictions for German Benefits and Compensation

One major restriction when you provide employee benefits and compensation in Germany is having an established entity (such as a subsidiary or a head office) pay your German employees or provide them with their benefits. German laws to establish an entity are relatively complex and could take several weeks to months.

Supplemental Benefits for Employees in Germany

The German employment laws are relatively complex when providing additional supplementary employee benefits. In such a case, employment contracts are crucial in collaboration with German employment law attorneys. 

Given the diverse demographics, skilled workforce, and diverse preferences of the German workforce, it is crucial to be aware of these factors when providing supplementary benefits to German employees. Therefore, designing benefits plans that suit your employee's requirements and an employee benefit plan that meet your annual budget exceeds the industry standard. This is especially crucial in industries that have a high demand for talent. 

Commonly provided supplemental benefits in Germany include — 

Additional retirement contributions: It is common for employers in Germany to provide additional contributions toward the retirement funds as laid out by the German government. An average contribution of 2% and 5% of pensionable pay is commonly provided by employers but also depends on the following factors — 

  • ~Company size
  • ~Industry, and 
  • ~Employee hierarchical level

Life insurance: The life insurance benefits in Germany commonly amount to 1x or 2x (pensionable pay or a fixed lump sum amount payable to employee's survivors). As per German labor law, survivors are employees’ dependent parents, spouses, or children. Life insurance benefits are tax-deductible.

Lump-sum disability benefits: Most of the occupational benefits in Germany cover 

  • ~Long-term disability (LTD) benefits cover 2x pensionable pay. LTD is payable (whichever occurs first) – 
  • ~~Till the normal retirement age or death, or 
  • ~~Until recovery
  • ~Temporary disability benefits are an annuity paid to the employee.

The disability benefits are tax-deductible.

Medical insurance: Providing voluntary medical insurance in Germany is common. The primary reason employers in Germany provide additional medical insurance is that employers must pay 100% of employees' salaries for the first four weeks of sick leave as a sickness benefit.

A few commonly provided fringe benefits provided by employers in Germany include —

  • ~Additional annual leave 
  • ~General wellness 
  • ~Company vehicles such as company cars 
  • ~Business travel allowances 
  • ~Gym allowances 
  • ~Lunch allowances or canteen 
  • ~Employee product discounts
  • ~Performance-based incentives
  • ~13th-month pay that is commonly provided in November
  • ~Childcare allowances

How can Multiplier Help with Benefits Management in Germany?

Germany has extensive laws on employee benefits and compensation. Alongside the German compensation policies, the country is known to have an extremely skilled and educated pool of talent. Therefore, providing employee benefits to German employees is crucial.

This is where Multiplier as a platform can help. You can provide employee benefits such as insurance, ESOPs, and many more while complying with Germany's compensation and benefits policy.

Talk to us to learn more!

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