The global economy is witnessing a massive shift in terms of employment. The traditional labor market model is changing, and as companies increase their focus on global expansion, they are increasingly looking to hire foreign employees. However, hiring a German employee can be quite challenging for foreign companies due to the various legal rules that govern the employment relationship in Germany. In this article we will look at some of these rules and how they apply to non-German companies operating here in Germany.
When it comes to employing German employees, the question of whether a foreign company must pay social security contributions and wage tax most frequently arises when the company does not have a physical presence in Germany.
Generally speaking, if a foreign company hires employees in Germany (with the employees working in Germany) and maintains a permanent representation in Germany, it is required to pay contributions to social security and wage tax for its employees according to German tax and social security legislation.
The employment contract of the Permanent Representative and other employees must be in accordance with German labor law. It should be as detailed as possible so written in German and English, so that there is no question about what you expect from your employee. The job description should also be given to the employee before they start work so that they know exactly what their role will be at your company. The salary of an employee is determined by comparing their role with others who have similar responsibilities within the company or industry; this process starts with determining what tasks are required for each position.
If a foreign company is not considered a domestic employer in Germany, their employees have to declare their wage tax in their annual income tax declaration instead of the company withholding it. But if the company operates a permanent establishment in Germany, they are classified as a domestic company and have to withhold wage tax every month. This also means there may be other tax obligations for the company.
Apart from wage tax, employers also need to pay social security contributions for their employees in Germany. This applies to employees even if their employer is based abroad and doesn't have an office in Germany. The foreign company must register the employee with the relevant health insurance company, submit notifications and proof of contributions, and pay the total social security contributions. However, there can be an agreement between the foreign employer and employee where the employee pays the social security contributions instead of the employer, and the employer reimburses the employee.
This obligation is regulated by Article 21 paragraph 1 of Regulation (EC)987/09 in the European Community. But if the employee doesn't pay the social security contributions, the foreign employer can still be held responsible.
Employees working and living in Germany need to be insured with the statutory accident insurance institutions. The employer is responsible for registering and paying the insurance premiums.
However, there are two exceptions to this rule. First, if employees are posted by their employer to work in Germany temporarily from another European country and their stay in Germany is limited from the beginning, they are not covered by the statutory accident insurance. The second exception is if the employee is employed in two or more European countries.
Preparations of employment contracts in accordance with German Labor Law
Registration of the Permanent Representative for Social Security Purposes
Registration of the Employees Working for a Foreign Employer
Obtaining a local Tax Number in Germany
Representation in front of the local authorities
Payroll and Virtual Office services
Keeping employment files in line with local regulations
Managing salaries on behalf of the Foreign Employer
Deregistration of the Foreign Employer or Employee