How to hire and pay independent contractors in Germany

Whether you're launching a business or looking to grow your company in Europe — hiring talent from Germany is a solid option. After all, Germany is the largest economy in Europe and is renowned for its innovation and efficiency. 

But the process of hiring independent contractors in Germany can seem overwhelming. German employment regulations are complex, and you have to make sure that your company is fully compliant with the country's employment laws.

It doesn't have to be, though — especially if you've got the right tools and know-how. In this article, we’ll take you through relevant aspects of German employment law, tax and compliance practices, and how to avoid employee and contractor misclassification.

What are some unique considerations of managing contractors in Germany?

Germany provides strong labor conditions and protections for employees. Independent contractors generally don’t get employee benefits such as statutory leave, paid holidays, health insurance, or pension. However, your German-based contractors may be entitled to benefits if they become part-time or full-time employees.

Apart from making sure that your company is compliant with the country's employment regulations, you have to make sure you're paying your independent contractor fair wages. As Germany is one of the leading economies in the world, workers expect a competitive salary package. Based on the location of the worker, the average salary in Germany is €49,200 in gross pay annually. 

If you're looking to hire independent contractors in Germany at the hourly minimum wage, the average minimum wage is €12 per hour. A higher minimum is often set by collective bargaining agreements, and these are enforceable across certain industries by German law.

What are Germany's labor laws?

German employment laws cover a wide range of statutory regulations. These regulations are codified in the German Civil Code and are further governed by various federal acts.

In Germany, contracts between employers and their employees form the basis of working relationships and are essential to employee protection. According to new German legislation introduced in August 2022, employers are required to provide employees with additional information on the terms and conditions of employment.

Work schedules are also very specific in Germany. As in other countries, five-day workweeks consist of eight-hour workdays. Employees are entitled to at least four weeks of holiday and receive a full salary while on sick leave. If the sickness period exceeds six weeks, health insurance will cover the employee’s gross salary. 

There are also stringent rules about employee termination. The statutory notice period for an employer depends on the duration of employment, with a minimum of four weeks for those employed less than nine months and up to seven months for those employed for over 20 years.

Companies that don't abide by German labor laws regarding their workers can face serious consequences. When you’re hiring independent contractors in Germany, you have to:

• Draft a contractor agreement.

• Make sure that your contractor is correctly invoicing you.

Draft a contractor agreement

A contractor agreement defines the employer’s working relationship with the independent contractor, and should clearly outline:

• The contractor’s duties and responsibilities

• Duration of the contract

• Details of compensation and payment period

• The notice period, in case of termination

Ensure correct invoicing by contractors

It’s also important to ensure that your contractor is correctly invoicing you. If the invoice is found to be incorrect or incomplete, then it may be rejected by tax authorities during an audit. Your contractors in Germany must include the following information in their invoices:

• Name and physical address/contact details of the employer and contractor 

• Date and number of the invoice

• Description, duration, and kind of service provided

• VAT/income tax identification number

What are tax and compliance practices for hiring independent contractors from Germany?

When you’re hiring independent contractors in Germany, you also have to be mindful of tax and compliance practices.

A contractor is usually responsible for handling their taxes and social security contributions. However, under the above ruling, if a contractor at your company is considered an employee, you'll be required to reimburse their outstanding social security contributions. Additionally, a fine of four times the amount of social security withheld can be imposed on employers.

If your company is based in the US, you have to report payments made to contractors to the Internal Revenue Service (IRS). Companies have to collect Form W-9 and Form W-8 BEN from their contractors along with their taxpayer information. US companies who are hiring international contractors in Germany have to submit Form 1042-S if their payments exceed $600 in a tax year. 

When you use a contractor management platform like Remote, you don’t have to worry about these forms. Keeping track of paperwork has become easier for American companies, thanks to our tax compliance feature. When contractors are invited to onboard via Remote, they're automatically directed to fill out the relevant forms based on their area of residence. The forms can be downloaded and filled out within minutes, saving both you and your contractor time and effort. 

What are the risks of misclassifying German independent contractors as employees?

In Germany, there is a distinction between employees and independent contractors.  According to the German Commercial Code, independent contractors have the freedom to decide when and how they work. On the other hand, employees must follow a work schedule and meet work performance markers set by their employers.

The German Federal Labor Court uses various criteria to determine the employment classification of the worker. As a general rule of thumb, the more degree of control the employer has over the performance of a worker, the more likely the worker is an employee. 

Classification is typically based on how the government views your worker’s status. The worker’s classification depends on the day-to-day working relationship between the employer and the worker, rather than the terms of service set out contractually between the two parties.

A company typically has more control and responsibility toward an employee. For instance, a company can handle an employee’s payroll taxes, oversee the insurance program they enroll in, and offer benefits. This is why misclassification risks are higher for employees than for independent contractors.

Giving your workers the wrong classification— intentionally or unintentionally — carries many consequences. You may face penalties or fines in either case, though deliberate misclassification carries a higher risk. If your company doesn't legally own the intellectual property (IP) produced by the worker, there may be costly legal proceedings if their classification is challenged.

You don’t have to stress, though. 

Remote can help you minimize misclassification risks while hiring independent contractors in Germany. We provide localized contracts which are compliant with German tax and labor laws. Once you’re signed up with Remote, we can offer you the maximum protection for your IP and help you comply with local employment laws in Germany.

How do I convert an independent contractor in Germany to an employee?

Hiring international contractors has its advantages and is seemingly less complex than hiring full-time employees.

As your company grows, you might want to have greater control over your contractor’s work schedule and performance. But, you can’t risk treating them as an employee, as this could land you in legal trouble. The obvious solution is to convert your contractor to an employee.

There are other advantages too. Employees cost a lot less than contractors in the long term and your IP rights are more secure. Besides, offering employee benefits can help to retain your best workers.

However, the transition process from contractor to employee can be complicated. The employer has to understand employment laws, manage local payroll and taxes, and provide benefits.

But you don’t have to stress because a global contractor management platform like Remote can convert your global contractors to employees, quickly and easily. We can help you manage your new employees by offering global payroll, benefits, and taxes while ensuring compliance with German employment law.

How do I pay an independent contractor in Germany?

In Germany, as in most countries, contractors are paid once they submit an invoice to their employer that lists:

• Tasks they completed during the current pay period.

• Milestones met during the current pay period

Independent contractors in Germany must be registered with the German tax office and pay taxes on the income they earn. 

Employers can pay independent contractors via any of the following methods:

• Bank transfer

• Direct deposit

• Paper check

• Money orders 

• Digital payment platforms like PayPal or Wise

Alternatively, you could run payroll with Remote to ensure that your independent contractors are paid in the local currency on time, every time. Our team can help you navigate the complexities related to contractor payments, including misclassification and compliance risks.

Which is the best way to hire international contractors in Germany?

Germany has a robust economy and a highly skilled workforce — which make it a great destination to hire independent contractors. But the process of hiring and paying contractors in Germany is not an easy task. It can be challenging to understand German employment laws and stay compliant with tax practices. 

Remote’s contractor management services can make your life easier by making contractor management quick and hassle-free. Specifically, Remote can help you to: 

• Draft fully compliant localized contracts for your German contractors.

• Automate the payments process, so that you’re paying contractors quickly.

• Comply with German labor laws and avoid misclassification risks.

Hiring, paying, and onboarding your independent contractors has never been easier. Get in touch with our friendly team if you have questions about contractor management. Ready to onboard German contractors? Sign up with Remote and get started today!