Employment Contracts in Germany for Foreign Employers

Employment contracts in Germany: what foreign employers need to know

Employment contracts in Germany look simple, but they operate within a dense framework of mandatory statutes and case law. Foreign employers hiring their first German staff often use group templates from their home jurisdiction, with clauses on at-will termination, broad non-competes, unpaid overtime or forfeiture of bonuses that German labour courts will not enforce. German law does not prescribe a written contract as such, but the Evidence Act (Nachweisgesetz, NachwG) requires the employer to document the essential terms in writing within short deadlines, and many individual clauses are subject to the strict review applied to standard business terms under §§ 305 to 310 of the Civil Code (BGB).

Termination, holiday, sick pay and working time are governed by mandatory law that the contract cannot undercut.

This article covers the points that matter most when a foreign company drafts employment contracts for employees in Germany, whether through a German subsidiary, a branch or, without a local entity, directly from abroad.

Choice of law and mandatory German rules

The parties can choose the law governing an employment contract, for example the law of the parent company's home country. Under Article 8 of the Rome I Regulation, however, the choice cannot deprive the employee of the protection of mandatory provisions of the law that would apply without a choice, which is usually the law of the country in which the employee habitually works. For an employee based in Germany, German dismissal protection, holiday, sick pay, working time, minimum wage and anti-discrimination rules therefore apply regardless of the chosen law. In practice, choosing a foreign law adds complexity without removing German protections, so most international groups use German law for German employees.

Jurisdiction follows a similar logic. Under the Brussels Ia Regulation, an employer domiciled in an EU member state can be sued by the employee at the place where the employee habitually works, and jurisdiction clauses concluded before a dispute arises cannot prevent this.

The Evidence Act: documenting essential terms

Since the Evidence Act was reformed in 2022 to implement the EU Transparent and Predictable Working Conditions Directive, employers must document an extensive list of terms, including the parties, start date, end date of fixed-term contracts, place of work, job description, probation, composition and amount of pay with each component listed separately, working time, rest breaks and shift arrangements, overtime, holiday, training entitlements, the occupational pension provider where applicable, the termination procedure including the three-week deadline for actions under the KSchG, and references to collective and works agreements (§ 2(1) NachwG).

The deadlines are staggered: the names of the parties, pay and working time must be documented by the first working day; the start date, place of work, job description, probation and other items by the seventh calendar day; and the remaining terms within one month.

Following a recent amendment, the documentation may be provided in text form and transmitted electronically if the employee can access, store and print it and the employer requests a confirmation of receipt; the employee can still demand a signed paper version. Electronic delivery is not permitted for employees in sectors listed in § 2a of the Act to Combat Undeclared Work, such as construction, hospitality and logistics. Breaches can be fined up to EUR 2,000 per case (§ 4 NachwG).

Probation, notice periods and termination

A probationary period of up to six months allows either party to terminate with two weeks' notice (§ 622(3) BGB). After probation, the basic statutory notice period is four weeks to the 15th or the end of a calendar month. For dismissals by the employer, the period rises with length of service, from one month after two years to seven months to the end of a month after twenty years (§ 622(2) BGB). Contracts commonly provide that the extended periods apply to both parties; the employee may never be bound by a longer notice period than the employer (§ 622(6) BGB).

There is no at-will employment. Once the employee has more than six months' service in an establishment with more than ten employees, a dismissal must be socially justified under the Protection Against Dismissal Act. Every dismissal must be in writing with a handwritten signature (§ 623 BGB), and where a works council exists it must be consulted beforehand. The distinction between the six-month waiting period and probation is explained in our article on dismissal protection and small businesses.

Clauses in employment contracts that courts uphold or strike down

Pre-formulated contract terms are reviewed under §§ 305 to 310 BGB, with employment law specifics taken into account. Ambiguities are construed against the employer, and an invalid clause is generally not reduced to a valid core: it falls away entirely. The table above summarises the main patterns from case law.

Three clauses deserve special attention. First, post-contractual non-competes require compensation of at least half of the employee's last contractual remuneration for each year of the restriction (§ 74(2) of the Commercial Code), and they may not exceed two years (§ 74a(1) HGB); without compensation, the clause is void.

Second, exclusion periods (Ausschlussfristen), which require claims to be asserted within a set time, must allow at least three months, must not require a stricter form than text form (§ 309 no. 13 BGB) and must exclude minimum wage claims and liability for intent. Third, flat-rate overtime clauses are invalid unless they specify how many hours are covered by the salary, except for highly paid employees who cannot legitimately expect separate overtime pay.

Clauses common in other jurisdictions, such as garden leave without pay, unilateral salary reductions, liquidated damages for any breach or the forfeiture of earned commission on resignation, rarely survive review. Contractual penalties are possible within limits, for example for failing to start work, but must be proportionate. A penalty exceeding the pay the employee would have earned during the applicable notice period, for example, is usually considered excessive by the labour courts.

Mandatory terms that employment contracts cannot undercut

• Minimum wage: EUR 13.90 per hour from 1 January 2026 and EUR 14.60 from 1 January 2027; see our article on the minimum wage 2026 and 2027.
• Working time: generally a maximum of eight hours per working day, extendable to ten if the average of eight hours is maintained over six months or 24 weeks (§ 3 of the Working Time Act), with rest breaks and an eleven-hour daily rest period; employers must record working time.
• Holiday: at least 20 days per year on a five-day week under the Federal Holidays Act, with strict rules on forfeiture.
• Sick pay: continued pay for up to six weeks of incapacity per illness (§ 3 of the Continued Remuneration Act), after four weeks of employment.
• Equal treatment: the General Equal Treatment Act (AGG) prohibits discrimination in hiring, pay and termination.

Language, remote work and executive employment contracts

German law does not require employment contracts to be written in German. English contracts are common in international groups and are enforceable, but labour courts conduct proceedings in German, so a certified translation will be needed in litigation. Bilingual contracts with a clause stating which version prevails reduce disputes about meaning. Where the employee's German is limited, the employer should ensure that he or she actually understands key clauses such as non-competes and exclusion periods, because courts may otherwise question whether they were validly agreed.

Remote and hybrid work should be regulated expressly. Employment contracts should state whether the employee works from home, how equipment and costs are handled, how working time is recorded and whether the employer may require attendance at the office. Cross-border remote work, for example an employee who moves to another EU country while working for the German entity, raises separate questions of social security, tax and applicable law that should be resolved before the move is approved.

Senior executives below board level are still employees and benefit from most protective rules. Executive employment contracts typically add longer notice periods, garden leave clauses with continued pay, detailed bonus and equity terms and post-contractual restrictions. Managing directors of a GmbH are a different category: their service agreements are mostly governed by corporate law, as explained in our article on service agreements for GmbH managing directors.

Hiring in Germany without a German entity

A foreign company can employ staff in Germany directly. It must then register with the German social security system and, depending on the circumstances, operate German payroll for wage tax. An employee working from a home office in Germany can also create a permanent establishment of the foreign employer for corporate tax purposes, particularly if he or she concludes contracts or performs core business functions; see our article on permanent establishment risk.

Alternatives include setting up a GmbH, using an employer of record arrangement or posting employees from abroad, each with its own legal implications. Employer of record models must be checked carefully against the rules on temporary agency work. Our GmbH formation checklist sets out the steps for a local subsidiary.

How TRW & Co helps foreign employers

We draft German employment contracts and adapt group templates so that they comply with the Evidence Act and survive judicial review of standard terms, in English or bilingual versions. We advise on bonus and equity plans, non-competes, secondment and remote-work arrangements, and on the choice between local entity, direct employment and other models. When relationships end, we prepare dismissals and settlement agreements and represent employers before the labour courts. Our employment and pensions team works closely with our tax and corporate lawyers for market-entry projects. To discuss your plans, contact us. This article provides general information and is not legal advice.