How to hire employees in Germany

Hiring an employee in Germany means either setting up a German entity and running payroll through local tax and social insurance registrations, or engaging an employer of record (EOR) that employs the person for you. The first is the right foundation once you intend to build a German team; the second gets a first hire working without a local company. Capstan does not offer EOR services, so if that is the route you need, engage a provider directly.

Germany is a highly regulated, employee-protective jurisdiction, and that shapes everything from contracts to contributions to how you part ways with someone. This guide is a conceptual map, not a rate card. Rates, ceilings, thresholds, and rules change, so confirm current figures with German counsel or a German payroll provider (a Steuerberater is the usual partner) before you rely on them.

Entity or employer of record

If you form a German entity, you register for wage tax and social insurance and carry the employment yourself. That is worth doing once you plan to hire several people or stay for the long run, though it comes with real administrative weight.

If you are not ready for that, an EOR employs the person under its own German entity, handles their payroll and social contributions, and invoices you. You direct the work; they hold the employment. It costs more per head and gives you less control, and given Germany’s administrative load it is a common bridge for early hires. In both cases the person is an employee with substantial statutory protection, not a contractor.

Social insurance and wage tax exist

Every German payroll run withholds wage tax and social insurance contributions and remits them to the right bodies. You do not need to master the maths, but you should recognise the structure, because German social insurance is broad and the employer share is a significant cost on top of gross pay.

Social insurance contributions. Germany’s system covers statutory pension, health, long-term care, and unemployment insurance, with contributions generally split between employer and employee up to income ceilings. Accident insurance sits with the employer. Together these are a defining feature of the cost of a German hire.

Wage tax (Lohnsteuer). Income tax on wages is withheld each period based on the employee’s tax class and circumstances, along with related charges, and remitted to the tax office.

The pattern is a comprehensive national system with contributions and ceilings that change year to year. That is why the calculation belongs with a provider who tracks it, and why this guide gives you none of the numbers.

Contracts, notice, probation, and dismissal

Written contracts are the norm and set out role, pay, hours, and notice. Notice periods are set by statute and often extended by contract, and they typically lengthen with service. Probation periods are a recognised convention with their own shorter notice, within legal limits.

Dismissal protection is where Germany differs most sharply from the US or UK. Once the relevant size and service thresholds are met, ending employment generally requires a valid legal ground and correct process, and it is genuinely hard to do casually. Collective agreements and works councils can add further requirements. Plan termination with German counsel before you hire, not after a problem arises.

Works councils and codetermination

Germany’s system of codetermination gives employees a formal voice. Works councils (Betriebsrat) can be established at qualifying workplaces and hold consultation and co-decision rights over a range of matters affecting staff, and at larger scale codetermination extends further. For a small startup this may not bite immediately, but it is part of the landscape and worth understanding before you grow, because it changes how decisions about people are made.

Data protection: GDPR, strictly applied

Employee data in Germany falls under the GDPR and national data-protection law, applied with real rigour. You need a lawful basis for processing employee data, clear retention, and strong security, and works councils may have a say in how staff data and monitoring are handled. Keep employee data in one controlled place with proper access limits rather than scattered across tools. Our note on HR data security and compliance covers practices that hold up under a strict GDPR regime.

The contractor line

Germany takes the contractor-versus-employee distinction seriously, and treating someone as a freelancer who in substance works as an employee (Scheinselbstständigkeit, or bogus self-employment) can bring back contributions and penalties. A genuine contractor runs an independent business with multiple clients and real autonomy; someone integrated into your team, under your direction, on your schedule, looks like an employee. If you are unsure, read contractor versus employee and take German advice before you commit.

Where Capstan fits

Capstan does not run German payroll and is not an employer of record. It holds no wage tax tables or contribution rates and files nothing with any authority. What it does is be the system of inputs around the calculation: employee records, pay structures, joiners and leavers, leave, attendance, and adjustments, compiled into a documented export for your German payroll provider or Steuerberater. Their computed results come back onto the employee record, so your record and their filings agree. Contractors live in the same workspace as your team, and the contractor module adds their portal, invoices and payout register on top; like every module it needs a paid plan under it.

Public holidays. There is no bundled German holiday set, so you create the calendar, set its working week, add the dates, and assign it to the locations it covers. Bundled sets exist today for a short list of countries and Germany is not on it, which is worth knowing before you plan a first-day setup rather than after. The calendar itself works the same way everywhere: holidays typed as public or restricted, a cap on how many restricted days an employee may pick, and an employment inheriting its calendar through its location.

Jurisdiction rules are data, not code. Nothing in Capstan hardcodes a country. Jurisdiction content ships as versioned country packs a workspace adopts, which is what lets a rate change be a new version of the content rather than a software release. Being exact about what exists today: the only pack authored is for India, and it covers contractor invoice withholding and tax lines rather than employee payroll. For Germany, the tax treatment comes from you and your provider.

The payroll export is the same shape everywhere. It carries day counts, the compensation components in force at period end, and joiner or exit prorations recorded as dates and payable days rather than prorated amounts. There is no Germany branch in it, because there is no country logic in it at all. Your provider supplies the country; Capstan supplies clean, documented inputs and files the computed results back onto the record.

Where to go next

If your German hire is part of a cross-border team, the guide to hiring global contractors covers the wider structures, and the country notes for the US, the UK, and Singapore follow the same shape. For the current contribution rates, ceilings, and notice rules this guide has left out on purpose, speak to a German payroll provider or employment lawyer. The structure is what carries over; the numbers you confirm each year.