Top Issues for U.S. Employers in Germany

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Jim McGrew: Hello, everyone, and welcome to Ogletree Deakins podcast series. I’m Jim McGrew, here in the New Orleans office, and today we’re going to talk about the top issues for US employers in Germany. And I’m joined today by Dr. Martin Romermann, who is in our Berlin office. Hello, Martin, how are you today?

Dr. Martin Römermann: Hello Jim. Well, I’m good, and I hope you are fine, too.

Jim McGrew: Doing very well, thank you, and Martin, so what we’re trying to do is give US employers who are based in the US, perhaps, but they have employees in Germany if I’m starting operations there, what are some of the key things, if I’m an employer, that I need to know about, having employees in business? You sent me five things that we’re going to talk about, and so, I thought what I would do is talk about each of those, and raise the topic to you, and let you tell us a little bit about it. First, you mentioned that there’s the issue ofm do you directly employ employees in Germany, or perhaps use an employer of record? And I guess before we move on, we should ask this question. What is an employer of record?

Dr. Martin Römermann: Jim, modern companies, in particular, for which many employees work remotely, and not in a fixed location, recruit their personnel in different countries. In order to avoid consulting lawyers and advisor in each country, to fulfill the tax and social security requirements, such companies turn to so-called employers of records, especially in Europe, where we have so many different countries, different languages, different social security systems. These employers of records then offer model employment contracts for each country, directly and independently hire the employees, take care of the fulfillment of social security contributions and taxes, and then, virtually lend the desired employees to the respective company. They charge for this service, of course, which is to comply with local law accordingly.

Jim McGrew: So what are some of the pros and cons about using employers of record in Germany?

Dr. Martin Römermann: One easy pro is that you do not have to worry and care about the local peculiarities, especially, questions in the respective country. This is the main pro. One of the main cons is that you do not have a direct link to this employee.
So, one hand, is more a moral thing, I think. The employees do not feel so loyal to your company, as if it was the direct employee, and sometimes, even clients call us, and do not believe what the employers of records tell us. So I think a big disadvantage is, there is no direct link.

Jim McGrew: So, are employers of record only suitable, typically, for smaller workforces, or is it also potentially used in larger workforces?

Dr. Martin Römermann: Well, as always, Jim, it is a question of money. The more employee you hire in a country, the more likely it is cheaper to fulfill local obligations with your own resources. But especially, if you grow and hold Europe as an employer, and have some people in one company, and some in the next, and some in the next, then it might be cheaper to have one big perfect provider having, covering it all.

Jim McGrew: Got it. So, is there a special situation in Germany that argues in favor of using an employer of record or, not?

Dr. Martin Römermann: Well, in Germany, there is a special situation that should make you consider more than other European companies to choose this business model. One is that there are special legal requirements in Germany for lending votes. Among other things, this can, in Germany, only be a temporary solution. So it’s hardly possible to lend employees in Germany for an unlimited period of time. But what is more crucial, however, is that with the small workforce in Germany, as a direct employer, you had a lot of options for restructuring your business. German labor law is very protected, which applies to protection against dismissal, continued payment of wages during illness, parental leave, part-time work. But many of these protection laws stipulate a sub-minimum threshold of employee, which a smaller company in Germany would, on its own, never reach. But if you choose the model via an employer of records, which employs many other people for other companies as a service provider, you may have, in the end, comply and pay for many protection laws, which you wouldn’t have to do, if you employed the people on your own.

Jim McGrew: Got it. Okay. You Martin, well, let’s move on to our next topic. The second topic that you mentioned that US employers ought to be aware of is when they’re hiring employees in Germany, is whether to hire someone as an employee or a freelancer. Can you explain that a little bit?

Dr. Martin Römermann: Yeah. Well, in Germany, our employment protection is in line with our social security law. So, on Germany, for employees, we pay social contributions, as an employer, and as well, the employees have to pay from their own salary, which is deducted automatically, so-called social distributions. And to avoid this, many employers and employees in Germany just call their contract a freelance contract, although it is, in reality, because there is an employer giving directions on how and where to perform the work, although it is, in real, an employment relationship.
And in Germany, from time to time, our administrative, especially, the health insurances, do investigations of this. And if they find out that a so-called freelancer relationship has been, in reality, an employment relationship, they ask to pay back all the social contributions which should have been paid in the past. The problem here lies in the fact that, if this comes out, the employer is not only liable for his own contributions, but as well, for the contributions and wage taxes of the freelancer, or so-called employee.
So before, as an employer you think of concluding a contract about a freelancer status, you should ask a lawyer about doing a quick check if a freelancer status would be accepted, if it comes to an official investigation, or not. And if you are not sure, or if you see any risk, you should choose the 100% correct and safe way, to avoid being liable for payments you don’t want to have.

Jim McGrew: Got it. And it sounds very similar to the independent contractor concept in the US. It sounds very similar to that. Would you agree?

Dr. Martin Römermann: Yeah, absolutely. From our US colleague, we know that you have the same problems over there, but as it sometimes is, you go to a different country, and then, you like to choose the, which sound smartest way, avoid local specialities, and just conclude a freelancer contract under US law, with a German person. This leads, on the one hand, to the problem I mentioned. And on the other hand, if this relationship then lately is seen as a hidden employment relationship, you have an employment relationship agreeing on US law. And this, under Germany, is even worse. Because then, German courts, if it comes to any sort of conflict about this contract, have to do a comparison between the more favorable laws in each momentum, which means, for the person, it is a sort of cherry-picking. If in a certain case, the chosen US law is beneficial, then this is applicable. And the German courts, don’t ask me how, have to decide on US law, and if German law would be favorable, they would use German law. So you really have a complicated law process you don’t want to have.

Jim McGrew: Yeah, very interesting. Well, I’ll tell you, I think the bottom line here, is that for US employers who are establishing workforces in Germany, they need to really get advice, in terms of how they establish and set up the workforce, and get advice on these issues. So, very interesting discussion. Let’s move to our third topic, Martin, if you don’t mind. The third topic is formalism and wording. Can you explain what do you mean by that? What do US employers need to know about formalism and wording in Germany?

Dr. Martin Römermann: Well, the problem is that you wouldn’t say that, but I might say, we are Germans, and we are quite formal persons. In other European countries, you might set up a contract, just via e-mail, and terminate the relationship as well, via e-mail. Quite simple, quite informal, quite open. In Germany, we have, for many things, just enforced by law, that you have to do a legal act in writing. And in writing, under German law, really means wet signature, wet ink signature. And this is for US clients, in many times, surprising. So they got an employee which really committed a heavy breach of the contract, they just want to get rid of him, which is, under German law, necessary within 14 days after you found out this heavy breach. And they sent over an e-mail, and say, “You are fired.” And then, the German dismissal is void. Although, in fact, the employee really committed a heavy breach, just because of the wrong form, and you can’t dismiss him again, because then you missed the 14 days’ deadline. So we’re really having, well, ridiculous cases, where you were 100% sure that a court would have confirmed the dismissal, and our US client just lost because of these formalisms, which is annoying. So please, before you start with the German entity, do one time, a legal check, which is the real entity which concludes the contract with the employee, who is, under your local law, the official representative, which is allowed to sign documents. And how can we, at any time, guarantee that this person is available to sign a dismissal?
We had cases, then, where the president of the US company wasn’t available, because he was on holidays or anywhere else. So everything did not work. We can prepare this, we can reassure this in advance. For example, draft proper power of attorneys, to prove representation, or something, but this is something which just need to be prepared in advance, and not when a case is coming up. Because then, everybody is in hurry, and it’s difficult to get the right persons to sign something, wet ink. That’s a main problem, really.

Jim McGrew: Honestly, that is a unusual topic that I really didn’t expect. That really is different and something that clients need to be aware of. Thanks for sharing it. So let’s move on, we have two more to talk about. This one, we could talk about for a long time, but I know you want to touch upon data protection. What do US employers need to know about data protection in Germany, which is basically, I’m sure you need to get a lot more information, but in this short period of time, what can you tell us about data protection?

Dr. Martin Römermann: Well, I think, as you said, we could talk days about German data protection law, and I think you will have a own podcast coming up soon about this issue. But just as a quick takeaway, we have a strict data protection law. Of course, this concept for foreign employers, especially from the US, where the whole data protection area is more liberal, is something strange, which we accept and know. So, under German law, if you employ more than 20 people, or what is, I think, to many clients applicable, if you frequently process extensive personal data, then by law, you must have a so-called data protection officer. So, somebody who sets up a data concept, and sort of a certificate of proof, which data is processed to where, and how, has access. So, more or less, a paper showing the main data flow. And you do not need to employ one person extra for this, but if you’re having people in Germany, or even more in Europe, there are fantastic service providers who do this as a quick solution, and at least build up a quick data protection concept. So by this, which employee data you must keep within Germany, and which data you can transfer to the US. Because we will find out that if we got court processes with employees of US clients, the lawyers of these employees hope that the US entity is not aware of our protection laws. And they sometimes try sort of to blackmail us, or tell us, “Well, we’re going to make an official report of funds to the administration, if you don’t give us bit or that, your data is not handled in a proper way.” So please, just seek a quick, easy advice. We can give considerations, we can give advisors on that, to be protected, and feel on the safe side, and don’t feel weak.

Jim McGrew: Great, thank you, Martin. And as we said, we could talk about this a lot more, but it really is just important to highlight this very critical issue of data protection for employers who have employees in Germany. So, okay, before we finish, give us one more tip on an area that US employers need to be aware of. And that is, I was surprised by this one too, but tell us about court procedures, Martin.

Dr. Martin Römermann: Yeah, well, we always got the same discussions with our US clients. I think, in the US, because, maybe of costs or other reasons, the clients are quite shy when it comes to court hearings. And I must say, don’t be afraid. Under German law, it’s common to meet your employee again, in front of the court, and even just for a conciliation hearing. There are several reasons for this. One reason is, if you hand out a dismissal letter, and then, you agree on a compensation to have a mutual agreement, the person might get a ban or block by the unemployment agency for unemployment payment, and this ban or block will be repealed, if you prove that the person’s had a legal court procedure. So I just want to tell you, of course, we try to find solution outside costs for clients, and avoid any extensive procedures, but a core procedure in Germany is not as un-normal as it is in the US, and it is not as cost expensive. It is sometimes even something you do, well, it’s sort of in alignment with the employer to prove that you came to a well-balanced mutual agreement. So please, just be, if your lawyer advising you is telling you, “Hey, let’s go to court, and settle this in court,” don’t be too negative on that advice. Don’t be too trying to avoid this. It’s not that bad over here, going to court.

Jim McGrew: All right, so I think we’ve covered all five of the areas for our listeners. Obviously, there’s a lot to be thinking about if you have employees in Germany, and of course, in other countries, as well. And Martin, just thank you very much for taking the time, for talking with us today. I hope our listeners please stay tuned for more podcasts in the future. Thank you, Martin.

Dr. Martin Römermann: Thank you. Bye-bye.

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