Payroll in Germany: Labor Burden Explained

When employing staff in Germany, it is key to understand all payroll related statutory costs and requirements. In other words, it is more than just wages or salaries that need to be taken into account.

About 21 percent of gross wages are non-wage labor costs, also referred to as labor burden. They consist of social security contributions, allocations and additional allowances. Therefore, they increase the total cost of employment. 

Consequently, they are also referred to as indirect labour costs. The following guide will provide an overview of the detailed labor burden breakdown in Germany. 

Payroll in Germany – Composition of the Labor Burden

Costs for employees must be included in each company’s budget planning. It is important to not only plan with the staff’s gross wages but to also take into account various additional costs such as social contributions and other special allowances. They are all part of a company’s total cost of employment:

Mandatory Contributions

• Social security contributions
• Surcharges
• Continued pay and salary payments

Variable Contributions

• Cost of work clothes
• Removal expenses refunds
• Costs for continuing education and training
• Collectively agreed grants
• Other sector-specific grants

Voluntary Contributions

• Allowances and gratuities
• Grants
• Voluntary social benefits

Employer’s non-wage labor costs: 2017, 2018 and 2019

The statutory social contributions are redefined each year by the legislator. This is how non-wage labor costs for employers have been compiled since 2017.

For each employee, the employer must make contributions to the statutory social security system. Social security contributions and other surchages account for an average of 21 percent of the employee’s gross salary. In addition to the employer’s share, the employee must also contribute to social security. Most of the time, the employer and the employee pay half of the total contributions due. However, the contribution to accident insurance is taken over entirely by the employer.

Remuneration of the statutory Labor Burden

All social security contributions (employer and employee share) are withheld by the employer and transferred directly to the respective insurance institutions. Therefore, they will not be paid out to the employee in the first place. For employees, all deductions are made transparent in the monthly payslip.

Contribution ceilings for social security contributions

Contribution ceilings determine the level of income up to which insurance contributions are paid. In practice, this means that any income above this contribution ceiling is no longer taken into account to calculate the employee’s social security contributions. 

The thresholds are set by the German labor authorities and differ for statutory health and nursing care insurance as well as for pension and unemployment insurance. In addition, due to historical economic differences, the contribution ceilings for the federal states located in the territory of the former German Democratic Republic are different from those states located in West Germany.

Contribution ceilings (2019)

• Statutory health and long-term care insurance: 54.450 euros
• Statutory pension and unemployment insurance:
  • 80.400 euros (western federal states)
  • 73.800 euros (eastern federal states)

The applicable contribution ceilings are redefined each year.

Payroll-related Social Security Contributions in Germany

The contribution to social insurance includes contributions to health insurance, nursing care insurance, pension insurance and unemployment insurance.

Health Insurance

In practice, it is mandatory for every employee to be enrolled in a statutory health insurance fund. As an employer, half of the contribution rate is to be paid while the other half is paid by the employee. 

Note that enrollment in a private health insurance is also allowed above a certain income level. In case an employee is privately insured, the employer regularly pays a tax-free subsidy. This subsidy payment must not exceed the employer’s share that would need to be paid for an employee insured within the statutory health insurance. The exact amount is calculated differently for each private health insurance fund.

Nursing Care Insurance

As a rule of thumb, the employer takes over half of the total contribution. Employees without children (from the age of 23) are charged a higher rate than workers with children. In addition, military and civil servants are exempt from the childless supplement.

Pension Insurance

Pension contributions are used to finance, among other things,  pensions, retirement provisions and rehabilitation benefits. Employers also bear half of the contribution.

Unemployment Insurance

In practice, all employees are enrolled in the compulsory unemployment insurance. However, there are some exceptions:

• Students
• Minijobber
• Military personnel
• Civil servants
• Pensioners

Accident Insurance

In order to cover an employee in the event of an accident or an occupational-related disease, the employee must contribute to accident insurance. 

A Berufsgenossenschaft (commercial trade association) is the respective insurance institution. The membership fee, which is subject to change each year, must be paid by the employer as a whole. The contribution amount is calculated annually and retroactively. It depends on the following factors:

• Gross salary of the employee
• Risk of accidents the respective industry
• Amount of the expenditure of the Berufsgenossenschaft

Payroll Surcharges in Germany

The surcharges U1, U2 as well as the insolvency allowance (also referred to as U3) are fully funded by the employer. The health insurance institution of the respective employee is responsible for making the contributions accordingly.

While the surcharge U2 is mandatory for all employers, the contribution U1 is only relevant for companies with up to 30 employees. The calculation does not include severely handicapped staff, and part-time employees (only proportionally). The insolvency allowance is mandatory for all employers except public companies.

Depending on the health insurance institution, contribution rates for U1 and U2 may differ. Only the contribution rate for the insolvency contribution amounts to a flat rate of 0.06 percent and is confirmed by the authorities on an annual basis.

Special cases on Labor Burden Calculations

For some types of employment, separate rules apply to calculate the employers’ total cost of employment.

Mini Jobs

Non-wage labor costs also arise for employees in low employment (“mini-job”). However, for mini-jobbers, separate contribution rates apply. 

Trainees / Apprentices and Federal Volunteers

For trainees with a monthly salary of up to EUR 325, employers will take over the entire amount of social security in full. The same rule applies to employees in voluntary service.

Variable and voluntary non-wage labor costs

In addition to the Labor Burden required by German labor law, every company is able to pay additional benefits to its employees. This can be done by providing allowances, certain discounts or other benefits.

Individual Social Benefits

Employers can subsidize or fully take over social benefits. The extent to which the company subsidizes benefits is determined by the employer.

Additional social benefits may include but are not limited to:

• Subsidy for sickness benefits
• Dental support
• Retirement fund and health care provision
• Aid for medical services, rehabilitation measures
• Grants for childcare costs
• Death insurance

Allowances

Allowances, bonuses or gratuities can be provided on a voluntary basis. If they are independent of benefits or defined goals, they are often listed within company agreements so that they are available to each employee. Employers may not exclude individual employees or groups of employees from paying such an allowance. Otherwise, they risk a breach of the General Equal Treatment Act.

In practice, allowances can include the following:

• Holiday pay
• 13-month salary
• Performance bonuses
• Allowance for company anniversary
• Other special payments

Monetary benefits

Voluntary remuneration in the form of non-cash remuneration, which is individually agreed with the individual employee, is considered a monetary advantage. These include, for example:

• Relocation costs
• Employee discounts
• Workwear
• Company car and mobile phone
• Health prevention training
• Meals
• Gas vouchers
• Education and training costs
• Travel expenses
• Rent incl. electricity and utility costs

Universal Hires: Payroll Experts for Germany

As Germany’s leading staffing firm, Universal Hires supports foreign corporations with their hiring activities onsite. Our Employer of Record & PEO services enable to hire staff without having to incorporate an entity when expanding into Germany.