Managing employees in Germany – What US inhouse counsel and multinationals should know

7 minute read | May.03.2024

Managing workforce in the relatively strict and extensive jungle of Germany's employment law provisions can be difficult, especially for multinationals and US inhouse counsel who are used to at-will terminations and are not familiar with the concept of works council do-determination. There are some key issues and principles from recruiting to post-contractual restrictions everyone dealing with Germany-based employees should know.

Ensure a Fair Recruitment Process

First, it is essential to ensure a fair and unbiased recruitment process. When hiring new employees, the General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz – AGG) needs to be considered. The AGG prohibits discrimination on the grounds of race or ethnic origin, sex, religion or belief, disability, age or sexual identity. It is therefore highly recommended to already word job ads carefully and neutrally, especially regarding gender and age. Nevertheless, other than in the US, German labor courts are rather reserved when it comes to discrimination claims by employees. If at all, compensation granted in discrimination cases is kept within limits. For example, in the case of non-employment of an employee based on discriminatory grounds, the compensation may not exceed three months' (potential) salary if the individual would not have been hired in a regular selection process. 

On top of this, questions, which are not necessary to the establishment of an employment relationship should be avoided during job interviews (e.g., question regarding religious belief, age, sickness, marital status, pregnancy, origin, etc.). In case questions are asked, which are not essential for the employment, job applicants are granted the "right to lie", which protects them from a later challenge of the employment contract by the employer with reference to the untruthful answer.

Employee or Contractor? – Avoid Misclassification

While hiring a contractor can be an attractive opportunity to grow your business in Germany, there are also high risks involved in case of misclassification of a contractor as an employee. The risks involve the establishment of an employment relationship between the contractor and the company and due to this, the retroactive liability for wage taxes and social security contributions and even potential fines. Thus, it is important to address the question if an individual shall be hired as a contractor intensively before the individual starts to work for you. For this it is not sufficient to simply call the individual a "contractor" or the contract is titled "freelance or consulting agreement". Instead, various classification criteria have been established in legal practice. However, these criteria are not uniformly applied and weighted along different German courts, which adds a particular amount of uncertainty to the classification process. Nevertheless, the most important criteria which speak for employee status are the obligation to follow instructions of the company (e.g., regarding date, time and place of the services provided) and the individual's integration into the company's organization.

An alternative to save employment costs could be the employment of working students (Werkstudenten). Both parties can profit from the so-called "working student privilege" (Werkstudentenprivileg). This means the company does not have to pay and withhold social security contributions (except for pension insurance contributions) for them if they're enrolled at a university and their weekly working time does not exceed 20 hours (or 40 hours during semester breaks).

Be Cautious When Using an EoR or PEO Model

Services offered as EoR (Employer of Record), or PEO (Professional Employer Organization) are generally subject to the agency work regulations in Germany. Agency work is strictly regulated in Germany in the Personnel Leasing Act (Arbeitnehmerüberlassungsgesetz – AÜG) and bears multiple risks in case the provisions are not observed, especially the establishment of an employment relationship with agency workers with all consequences related to this (including back pay of social security contributions and wage taxes). Even if you are of the opinion that the utilized EoR or PEO model does not fall under agency work, it should be professionally examined beforehand, which regulations actually apply. For example, agency work requires sophisticated contractual paperwork, including the designation of the contract as personnel leasing. An agency worker can be assigned to your company for maximum 18 months unless exceptions apply to due to applicable collective bargaining agreements. Another assignment of the same agency worker is only possible after an interruption of at least three months.  

Did You Forget Something in the Employment Contract?

In Germany, the Documentation Act (Nachweisgesetz – NachwG) obligates employers to document the essential employment conditions in a document and to hand it over wet ink signed to the employee. These obligations can be fulfilled by way of the employment contract itself, if the wet ink signed employment contract is handed over to the employee at the latest on the first day of employment whereby a digital version of the employment contract can still be exchanged prior to the start date. Non-compliance with this requirement can result in minor fines of EUR 2,000 per breach but it cannot render the employment contract invalid. Please note that the government is currently submitting a draft law serving the reduction of bureaucracy in Germany. In this context, the government has explicitly promised to cancel the written form requirement of the Documentation Act which will significantly ease the process of employment documentation.

Face the Works Council with Confidence

There is no legal obligation to establish a works council (Betriebsrat), however, a works council can be elected in operations with five or more employees on initiative of the employees. In this respect, it is crucial to note that the prevention of the establishment of a works council is considered a criminal offence in Germany. The Works Constitution Act (Betriebsverfassungsgesetz – BetrVG) provides works councils with information, participation and co-determination rights in relation to employers' decisions on personnel, social, and operational/economic matters. On top of this, elected members of the works council enjoy special protection against dismissal, which includes the approval of the works council.

Dismiss Employees with Caution

German labor law sets a high bar for terminating an employment contract. Besides a mutual agreement, or the expiration of a fixed-term employment contract, an employment relationship can be terminated through a termination notice by either side. The termination notice of the company must be wet inked signed by the company's managing director who has sole power of representation and must be delivered or handed over to the employee with proper proof of receipt. In case of dismissal, the applicable notice period must be observed as payment in lieu of notice is not accepted for unilateral dismissals under German law.

The Dismissal Protection Act (Kündigungsschutzgesetz– KSchG) is effective for employees at an operation with regularly more than ten employees and is triggered after six months of employment. In case of applicability of the KSchG, a dismissal must be socially justified in order to be effective, this means a dismissal must be based on grounds accepted under the KSchG. Such grounds can be of business, person or conduct related nature. Furthermore, for employees with special dismissal protection (for example in case of pregnancy or severe disability of an employee) approvals from the competent authorities need to be obtained before a termination notice can be issued.

Don’t Fear Dismissal Claims

In contrast to employment litigation in other countries like the US, in Germany employment litigation is rather quiet. While any employee can take their employer to court for dismissal, the labor courts in Germany are not oriented towards generating excessive damages, but towards finding a common solution by way of a settlement. However, if no settlement is reached in a dismissal protection lawsuit, a successful dismissal claim usually results in the reinstatement of the terminated employment contract which results in the retroactive payment of unpaid wages to the employee for the time in between and the continuation of the employment relationship.

Consider Post-Contractual Agreements

In order to protect the know-how and business of your company, post contractual non-competition and non-solicitation clauses can be a powerful asset, which are generally permitted in Germany. However, post-contractual non-competition restrictions are only permitted, if the motive for the clause is reasonable and not excessive, the restriction does not extend to more than two years after the employment relationship and if the employee is compensated with at least half of the most recent received renumeration for the duration of the restriction. Therefore, it should always be decided on a case-by-case basis whether such an agreement is desirable and worth the money.