Germany’s highly-skilled labor pool and culture of innovation may entice you to target the country for hiring while planning international expansion. Before you dive too deep into the process, explore your options. This article discusses three ways to hire employees in Germany.
Germany Hiring Option #1: Independent Contractors
If you’re not ready to establish a subsidiary in Germany, one alternate option is hiring independent contractors. The employment laws and pricey entitlements do not apply to this class of workers, which makes it a less risky option for employers. Read more about Germany’s employment laws for international employers.
Hiring independent contractors are not entirely free from risks; you can have a valid contract, but if the court labels the contractor as an employee, they are subject to statutory rights and protections. If this occurs, you — as the employer — are responsible for back taxes, contributions, and employee benefits, according to Siegwart German American Law firm.
Germany’s resource for foreign employers explains that it is irrelevant whether you establish a service contract, Dienstvertrag, or an independent service contract, Freier Dienstvertrag. The deciding factor is how the employer and worker handle the contents of the contract.
It’s also important to note that you cannot hire an independent contractor that works in a foreign country through a U.S.-based employment contract. This post explains the rules for hiring overseas in detail.
Typically, a worker in Germany is safely classified as an independent contractor if they can answer a definitive “yes” to the following questions:
- Do they control the nature of their work?
- Are they free from supervision, control, and instruction in the process?
- Can they set their hours and overall schedule?
- Do they only receive payment for completed work?
- Do they have other paying clients?
- Do they market their services to the public?
- Are they liable for their business expenses?
An issue with a contractor’s status usually won’t arise until their contract expires. The foreign worker might file a complaint to claim benefits such as severance and holiday pay. Avoid a legal battle by keeping clear records of your working relationship. Unfortunately, it’s left up to the labor courts to determine if they have the rights associated with full employee status.
Germany Hiring Option #2: Subsidiary Company Setup
Deciding to set up a subsidiary in a country is a commitment. You should have a robust global expansion strategy that includes a substantial budget, acute market research, goals, and plans for future growth. The entire process consumes time, money, and energy.
You’ll need a subsidiary if you want to hire German employees in-house. Setting up a subsidiary creates a non-independent company that is separated from your domestic headquarters, but is fully operational in Germany. It usually has a defined management team, assets, and financial sheets.
Hiring in Germany is difficult. Termination restrictions can prevent an employee from leaving a contract for up to six months. This might limit your talent pool. It’s also something you should consider when hiring employees because your at-will contracts do not exist.
You’ll also have to manage tax withholdings for employees, which include income tax, solidarity surcharge, and church tax. German employees are also entitled to benefits including health care and at least 20 paid days to use for vacation.
Once you’re established in Germany and have a system for managing these requirements, you have access to a large pool of highly-skilled, reliable workers.
Germany Hiring Option #3: Use a permanent representative in Germany
The income tax number is required for social security contributions
Every company that has employees in Germany needs an income tax number.
The wage tax number is ultimately a kind of file against which all wage-related social contributions (social insurance, insurance, wage tax, etc.) are registered and documented.
Who receives an income tax number?
German companies and the local permanent representatives of foreign companies receive the income tax number.
As a rule, we would recommend foreign companies to set up a German company, e.g. a GmbH.
In some cases, the foreign company doesn't want that. For this reason, an employee in Germany is appointed as a permanent representative
What is a Permanent Representative?
A permanent representative within the meaning of § 13 AO is a person who takes care of the company's business in the long term and is subject to its material instructions. As a tax consequence, the permanent representative establishes a so-called representative permanent establishment in Germany.
Tasks and responsibilities
In principle, as a permanent representative, you will only receive mail from the offices. This post needs to be processed.
If we are commissioned as a consulting office, we can receive this mail directly to process it.
As long as we are commissioned and all payments are transferred to the offices on time, there is no risk as a permanent representative.
Communication and daily operations
We look after a large number of foreign companies that have appointed a permanent representative in Germany. As a rule, permanent representatives have to fulfill a strategic mandate from a foreign company in Germany. e.g. business development or building your own team.
Since we look after a large number of permanent representatives in Germany, Consultinghouse does not only maintain correspondence with the foreign employer but also with the permanent representatives themselves. For this reason, you are welcome to contact us at any time if you have any questions.