Overview of Employment Law
for Startups in Germany
In the heart of Europe – at the crossroads of East and West Europe – Germany attracts companies with its strong sales markets, well-trained specialists and a modern infrastructure. Many start-ups therefore decide to locate their business in Germany or at least open a branch office in Germany.
Even within the EU, where many laws have been harmonized over the years, there are astonishing differences on the labour law field and if done wrong labour law can be an expensive source of conflict for a company. Therefore, especially start-ups are well advised to become aware of basic principles of German labour law.
International start-ups in an international work environment: Which labour law applies to whom?
In a globalized world of business, international employers are often challenged by the question of which law is applicable to the employment relationships of their employees. For instance, can a company with headquarters in France and employees in Germany simply choose whether French or German labour law is applicable?
According to the ROME-I regulation, the law of the usual place of work has priority in the EU. If the employee performs his work primarily in Germany, German labour law applies to the employment relationship. If the place of work cannot be clearly determined, the place of business of the branch office where the employee is employed is relevant instead.
Employee and employer can also agree on the use of a particular national law. However, since such an agreement may not be used to bypass employee protection regulations, such agreements often have very limited validity.
Common Types of Employment in Germany
- Permanent employment contract (“Unbefristeter Arbeitsvertrag”)
- Fixed-term employment contract (“Befristeter Arbeitsvertrag”)
- Part-time employment contract (“Teilzeitarbeitsvertrag”)
- Marginal employment (“Geringfügige Beschäftigung”/ “Minijob”)
- Contract with freelancers (“Vertrag über freie Mitarbeit”)
- Contract with working students (“Werkstudentenvertrag”)
- Internship contract (“Praktikantenvertrag”)
Time is up – Possibility for start-ups to limit the duration of an employee’s contract
In principle, employment contracts in Germany can be limited in time. They then end with the expiration of the time for which they were agreed upon (time limitation) or with the fulfilment of the purpose (purpose limitation) that was previously determined. There are, however, some things to be considered when it comes to fixed-term employment contracts. Without a legally standardized reason, fixed terms are only possible for a period of two years and may be extended a maximum of three times within these two years. For newly founded start-ups, however, there is an advantage in German labour law! Within the first four years after founding, start-ups may hire employees for a fixed term of up to four years. They may even extend the fixed term several times within this period. This law grants a greater flexibility in employment matters for young companies.
- Limitation possible, generally up to two years maximum
- Exception for Start-ups: Contracts may be limited to four years within the first four years after incorporation
Hire and Fire – The German “Kündigungsschutzgesetz” (Dismissal Protection Act)
Since recruiting decisions are of enormous importance especially for small start-ups, many companies want the maximum possible flexibility for hiring and firing employees. Despite high employee protection standards, German labour law offers some legal possibilities for small companies, to hire employees in an uncomplicated way and to correct – when necessary – these staff decisions again. In order to be able to use these opportunities and to avoid costly mistakes, founders and managing directors should be familiar with the basics of German termination law.
Avoid formal mistakes
Especially start-ups that are new to Germany often make avoidable formal mistakes that cause unnecessary charges. This does not have to be the case if a few basic rules are considered: Foreign companies must know that under German law notices of termination must be in writing. In order to comply with the notice periods, a notice must also be legally delivered. The company has the burden of proof whether the dismissed employee has received the notice or not. If it is not possible to hand over the notice of termination in person, it is therefore advisable to send it by courier. Periods of notice are regulated in German law in § 622 BGB (German civil code) and are graduated in accordance with the length of service. For young start-ups, therefore the one-month notice period (for up to two years of employment) is particularly relevant. However, longer notice periods can be agreed upon. If there is compelling reason for termination, the employment relationship can also be terminated extraordinarily, i.e. without notice. However, extraordinary termination will only be considered in exceptional cases.
- Termination notice must be in writing
- Correct delivery is essential
- Observe notice periods
Probationary period – Will you be mine?
German law initially grants employers and employees six months’ time to get to know each other. During this time, both parties can test the employment relationship and – if it turns out that the employment relationship is not to be carried on as desired – separate again quickly and easily. For this purpose, the parties can agree in the employment contract that a two-week period of notice should apply for the probationary period. Furthermore, the employer can part with the employee in the first six months without giving any reason for termination. A simple letter of notice that the employment relationship should not be continued is then sufficient.
- Contractual agreement of a two-week notice period possible
- No application of the dismissal protection law – termination without reason possible
Lean company – less responsibility – higher flexibility
With a company size of up to ten full-time employees, the strict requirements of the Kündigungsschutzgesetz do not apply. Employees may be dismissed without cause in accordance with the applicable notice periods. Especially small start-ups that are still in the initial phase of their business activities benefit from this exception. This regulation enables them to make personnel decisions in a particularly agile and flexible manner.
Three reasons why: Reasons for dismissal under German labour law
From a company size of more than ten employees, companies are considered to have a higher responsibility for their employee decisions. The employment relationship can only be terminated if there is a reason for termination. In the German Kündigungsschutzgesetz, three reasons are given for which a termination is possible.
1.) Termination for personal reasons
In the case of personal termination, the reason for termination lies in the person of the employee. Due to his personal characteristics and abilities, the fulfilment of the employment contract cannot be achieved. This applies regardless of any fault on the part of the employee. Examples: Permanent or frequent illnesses of the employee, considerable weakness in performance, imprisonment
2.) Termination for behavioural reasons
If the employee behaves contrary to the contract and violates obligations of the employment contract, a dismissal for behavioural reasons may appear justified. It should be noted here that in most cases of breach of contract a warning must first be issued before a dismissal is justified. Only in the case of particularly serious violations that are absolutely unacceptable for the employer, a dismissal without prior warning is possible. Examples: Sexual harassment of colleagues, insulting superiors, refusal to perform work duties, theft of company property, working time fraud
3.) Termination for operational reasons
A dismissal for operational reasons is possible if the employee cannot continue to employ the employer for urgent operational reasons. This is the case, for example, if the employee’s area of work is not required anymore due to a reorientation of the company. In case of a dismissal for operational reasons it is required to carry out a lawful social selection (“Sozialauswahl”). This involves comparing and evaluating the social data (age, length of service, maintenance obligations) of all comparable employees.
Actions against unfair dismissal
If an employee receives a letter of notice, he has three weeks to take legal action. If he does not file an action for protection against the dismissal within this period of time, the dismissal becomes effective. In this context, it is important for the company to be able to prove that the notice of dismissal has been received, as this notice period does not start to run until it has been received.
- Companies with ten or less full-time employees: Notice without reason
- Dismissal due to personal reasons: Negative prognosis
- Behavioural termination: Warning requirement
- Termination for operational reasons: social selection required
Leave and public holidays
As young employees of modern start-ups in particular often seek a balance between work and spare time, leave law is an important issue. In general, a distinction must be made in Germany between public holidays, days of statutory leave and contractually granted days of leave. The number of public holidays varies depending on the federal state the employee is working in. On public holidays there is a general ban on working with continued payment of remuneration.
In addition to public holidays, the German employer is entitled to 20 paid holidays per year (based on a five-day-working week). This cannot be deviated from by contract to the disadvantage of the employees.
It is common practice for employers to grant their employees a contractual holiday entitlement in addition to the legal holiday entitlement. Typically, German employers thus receive between 4 and 10 additional days of holiday per year.
If an employee is absent due to illness, he or she is entitled to continued remuneration for six weeks. These are to be paid by the employer. If the employee is repeatedly unable to work due to another illness, the six-week period starts again. After six weeks, the social insurance institution will pay the wage costs of the sick employee. This is called “Krankengeld” and can be drawn for a maximum of 72 weeks and amounts to a maximum of 90% of the net wage.
If the illness is expected to last longer than three days, the employee must provide a medical certificate. However, the employer may decide that such a certificate should be presented on the first day of illness already.
- Statutory holiday entitlement – 20 days based on a five-day week
- Usually rather 24-25 days of holiday per year
- Sick leave: payment of salary by employer for first six weeks
- further costs after six weeks borne by health insurance