Startup employees & workers in Germany

Employment contracts, participation, home office & Co under german law - explained by a lawyer

Anyone who works or wants to work for a startup has to keep a few things in mind and know important terms of the german startup world. Employees are not necessarily directly employed, but initially work as freelancers or for a long time on a project of the heart without a written contract. It is essential for those involved to know what rights and obligations accrue to them as a result and what risks exist under german law.

As soon as a contract comes into being, the basics of german labor law for the contracts have to be known as well as the legal and especially tax implications of special forms of wages. Particularly for startups, in german practice this almost always includes employee stock ownership plans (ESOP) or virtual stock ownership plans (VSOP) as indirect wage components. And what actually happens once the startup I work for is sold or investors come on board? These and many other questions for employees of a startup in Germany are answered here.

The german startup before / in formation

If you are working for a startup that has not yet completed the incorporation process in Germany, you need to consider the following: As a rule, a commercially active startup will or should be cast in the form of a GmbH under german law sooner or later in any case. You can find more information on the other possible legal forms for a startup in Germany on our page on corporate forms for a startup.

If this founding process has not yet been completed in german practice, employees must always be aware when concluding a contract or working for the startup who exactly is their contractual partner at this point in time and whether a continuation of the activity after founding is also automatic with the then existing startup or has legal implications under german law. As a rule, several founders who join forces to realize a project and conclude contracts as such quickly form a german civil law partnership (GbR) without necessarily knowing it. Through this, the founders are personally liable for wage payments in case of doubt. Often, but not necessarily, the GbR is later merged into the GmbH and then also assumes its rights and obligations according to german law. In the event of a dispute, however, it can be difficult for employees to prove the existence of a GbR. Moreover, employees often do not have insight into the circumstances of the formation process. In this case, the contracts may be concluded with the founders personally and not necessarily transferred to the german GmbH.  Incidentally, many founders are not aware of these processes themselves, especially if they do not receive (sufficient) legal advice and support.

Therefore, the following always applies to contractual partners of startups in formation in Germany: Ask exactly who the contractual partner is and what the formation processes look like. Please ask questions in order to secure evidence for the case of dispute, in any case by e-mail and keep it. Recordings of oral conversations are, without the consent of the parties involved, punishable and usually not usable in german court. If you are offered the prospect of a new contract with the future GmbH after the formation processes have been completed, have the essential conditions assured. Incidentally, a new employer - at least on paper - may have consequences for employees in terms of german labor law, such as notice periods.

Working in Germany without (written) contract

Especially in the early stages, it happens time and again that stakeholders start working for a young german startup without a written contract. Here it is important to know: According to german law a contract can also be concluded verbally! It is sufficient for the parties in Germany to agree on the essential points of the contract. In case of dispute, these are of course often difficult to prove. But e-mail correspondence or even WhatsApp messages can be sufficient in german practice. An employment for several months under certain conditions can also be an important indication.

In addition, there is the following legal aspect in german labor law: working for free is generally prohibited in Germany. Only in certain exceptional cases, such as mandatory internships for students, an exception may apply. Even then, however, the duration is limited in german practice. This means that anyone who starts working for a startup without any agreement has an employment contract in case of doubt. Payment must then be made according to the respective industry average for a similarly qualified employee. Otherwise, the german statutory regulations apply to vacation, notice periods, etc. for the time being.

Something else applies to those who participate as founders in Germany. However, they should definitely have this position confirmed in writing - otherwise they will have to chase after their money in the event of a dispute.

Cooperation as intern, working student, employee in full-/part-time or freelancer under geman law

It is not uncommon for startups in Germany to initially resort to interns, working students and marginal employees ("450 EUR jobs"). In most cases, sample contracts from the Internet are used. Often, there is not much need for contractual regulation in german practice. However, as soon as employees with full or part-time employment contracts are added, the employment contracts should be briefly reviewed and understood by the employees themselves. From the perspective of german labor law, the relevant german regulations in each case should be taken into account (social security obligation, minimum wage, maximum earnings limits and maximum weekly or monthly working hours, vacation entitlement, wage components, notice periods). As far as tax implications are concerned in Germany, employees are obliged to obtain information themselves from a german tax advisor. This applies all the more to indirect salary components such as provided benefits in kind (laptop, train card, telephone), bonuses or (virtual) shares in the german company.

Certain special regulations in german labor law apply to startups: On the one hand, the Dismissal Protection Act (KSchG) only applies if the company employs more than 10 full-time employees (addition of part-time employees, no consideration of managing directors). On the other hand, young german companies benefit from the so-called start-up privilege. This allows employment contracts in Germany to be concluded for a fixed term of up to four years during the first four years, and even repeatedly, without there being any objective reason for a fixed term. Up to this total duration of four years, multiple extensions of a fixed-term employment contract are also possible.

Freelancers & the danger of bogus self-employment in Germany

Anyone who is not employed but works for a startup in Germany on a freelance basis should always keep an eye on the risk of false-self-employment. Because german startups in particular often shy away from the regular path to employment due to a lack of liquidity and fear of a financial burden from employees. However, anyone who is only self-employed "on paper" and otherwise works for a german startup like an employee may be pseudo-self-employed - and thus employed. They then not only have claims from their employment relationship and a right to protection against dismissal.

In german practice, the startup is also threatened with serious claims for back payments of social security contributions. Often in Germany, these circumstances only come to light after several years - namely when a company audit takes place or the freelancer is terminated or his contract is not renewed. Only then does he often resort to the support of a german lawyer and learn of his claims. Here, by the way, haste is required! Protection against dismissal must be asserted immediately in Germany. So do not waste valuable time in the event of termination.

Special case home office: rights & obligations under german law

Startups in particular often have little capital available at the beginning - and therefore resort to the tried-and-tested home office method with above-average frequency. However, special rights and obligations under german law apply in the home office, which employees should observe. Sometimes employees in Germany have the right to comprehensive equipment even in the home office - from laptops to all the necessary office furnishings. Here, employees should also inform themselves with the possibility of special claiming of home office items in the tax return and talk to their tax advisor in Germany.

Special care should also be taken in the home office with regard to time recording for employees under german law. The common clause in many employment contracts that "overtime is compensated with the salary" is invalid. In principle, you are entitled to remuneration. Make sure that your working hours are also recorded correctly in the home office if you plan to claim your overtime in Germany.

Also deal with your rights when using your company laptop for private purposes. If your employer has prohibited private use, it can monitor compliance with this prohibition. If you have permitted more extensive monitoring in your employment contract, monitoring of your laptop may also be in compliance with german data protection laws under certain circumstances. Private use, especially during working hours, may then be grounds for a warning or even termination in german practice.

Employee participation (ESOP, VSOP) in german practice

There are various ways in which employees can participate directly or indirectly in the german company itself. Because startups often have little capital at the beginning, this type of indirect payment through shares is particularly popular in the german startup scene. However, employee participation is not only a way for founders to indirectly finance their company in Germany. This form of participation also leads beneficiaries to identify more strongly with the german company and work harder to help it succeed. In addition, most participation programs provide legal mechanisms to bind the participants to the company over a certain period of time (good&bad leaver clauses, vesting clauses). This allows qualified specialists to remain with the company for the critical start-up phase.

(Future) employees should always keep in mind: Employee shareholdings in Germany have advantages for you, but also for the founders and, as a partial wage replacement, are not just a pure accommodation by the startup. Know your rights and the important contractual components of the participation programs in Germany. Be aware of the conditions attached to the shares and what happens to the participation if you ever want to terminate it. You should also be aware of the differences between real and virtual shares, which should not be underestimated! Often in german practice, the founders promise participants a "share" in the company at the beginning, but later this only becomes a virtual share. Check early, exactly and in writing. If you have doubts, have your contracts briefly checked for irregularities and fairness by the german lawyer you trust.

Special case: Managing director of a german startup

Special issues also arise for the managing director of a german startup. He has a dual role as the body authorized to represent the startup externally, but at the same time as an employee of the startup internally.

The managing director should inform himself about his rights and duties under german law as managing director and acquire the necessary basic knowledge for managing directors. Ignorance does not protect here in german practice. Founders of young startups in Germany were often not (so) extensively active in business before. However, they have many legal obligations from the beginning of their position as managing director in Germany. If they do not comply with these, they may even be liable for the damage with their private assets.

A double special case exists if the founder is also the managing director. In this case, the question of social security obligations is often relevant in german practice. These so-called shareholder-managing directors do not have to pay social security contributions on their salary if they can perform the managing director's activities without being bound by instructions.

In german practice, the degree of influence and the degree to which they are bound by instructions are determined on the basis of the provisions of the partnership agreement and the employment contract. The founders should therefore take a "goal-oriented" approach when drafting the relevant contracts. Practical advice: The German Pension Insurance (Deutsche Rentenversicherung) can clarify in advance (with binding effect) whether or not there is a social insurance obligation within the framework of the so-called status determination procedure.

Business valuation of startups in Germany

Many employees ask themselves what the german startup they work for is worth - or will be worth in the foreseeable future. This can become particularly relevant in the context of employee stock ownership programs in Germany, where the amount paid out to the employee in the event of an exit is based on the future value of the company. There are various valuation methods for valuing startups in german practice, all of which can lead to different results. Which valuation method is used is often the deciding factor in the war. Employees should familiarize themselves with the methods and the basics of valuation. Only then can you correctly assess the value of the startup in Germany.

Startup is sold - consequences for employees under german law

If a german startup is completely bought by an investor, the employment contracts are generally transferred to the new owner in this so-called transfer of operations according to the legal regulation in german labor law. The new owner assumes all rights and obligations of the old employer. Therefore, termination is only possible in compliance with the german legal regulations as it would have been possible for the old employer. However, employees can object to the transfer of the contract. You are therefore entitled in Germany - if you do not like the investor or have only felt obliged to the founders - to terminate your contract upon transfer.

In the case of startups in Germany, there is often the peculiarity that employee participation programs provide for certain continuation clauses. Those who hold (virtual) shares have often committed themselves to continue working for the investors for a certain time in the event of an exit. Alternatively, there are sometimes redemption and settlement constellations for the employees' shares. The investors, for their part, can then buy out the employees' shares at market value if they do not wish to continue their participation. In case of doubt, it is worthwhile to obtain a brief assessment from a german lawyer, as many of these clauses are invalid under german law.

Investors found for german startup - consequences for employees

If new investors simply change the ownership structure of the shareholders and their involvement merely changes the orientation and objectives of the german company, employees of startups in Germany often struggle with the new "mentality" of the startup. However, the economic or moral orientation of the company itself is usually not a reason for extraordinary termination in german practice. Employees must comply with the applicable contractual or statutory notice periods. However, the situation is different if, for example, the management or shareholders violate their legal obligations as employers. In that case, extraordinary termination may be justified.

If new investors want to change the applicable provisions of your employment contract, always remember that a contract requires a two-party agreement - this also applies when changing existing regulations.

Termination of the contract - what applies to startups in Germany?

Every employee should also know the most important rights and obligations in connection with termination according to german law: First of all, anyone can be dismissed in accordance with the statutory notice periods if the dismissal is socially justified. Sometimes in german practice the employment contract provides for a deviation from these periods. On the other hand, extraordinary termination without notice is possible if there is good cause, for example for misconduct. This applies to both sides, i.e. to a termination by the employee himself as well as a termination by the german startup.

For startups in Germany, however, there are many special features here: On the one hand, the Dismissal Protection Act (KSchG) only applies if the company employs more than 10 full-time employees (addition of part-time employees, no consideration of managing directors). On the other hand, young german companies benefit from the so-called start-up privilege. This allows employment contracts in Germany to be concluded for a limited period of up to four years during the first four years, and even repeatedly, without there being any objective reason for a limited term. Up to this total duration of four years, multiple extensions of a fixed-term employment contract are also possible.

In addition, employees with employee participation programs often have questions in connection with the consequences for their (virtual) shares in the german company. Here, the individual contract may need to be briefly reviewed. Many of the contractual terms and conditions of common stock ownership programs are invalid or at least must be viewed very critically. Nevertheless, a costly lawsuit is often out of the question for those involved. A settlement to compensate for further claims may be the most sensible course of action in german practice.

Switching to competitors or partners of the german startup

Competent specialists are rare - and especially in the german startup world, fiercely contested. It is not uncommon for employees of a startup to switch to a partner with whom they worked while employed by the startup in Germany - or even to the competition itself. This is where prospective employees should take a look at their employment contract. There you will often find a contractual competition clause that prohibits working for competitors. It is important to know: the post-contractual competition clause that applies to working for the competition after leaving the company is often invalid under german law. It must provide for appropriate, financial compensation - usually at least 50% of the last salary. This is because, in principle, employees in Germany enjoy freedom of occupation and can work wherever they want.

The situation is different when it comes to taking with them information, knowledge or data that they acquired in the course of their old job. Extreme caution is required here, and if such a step is desired, a german lawyer should definitely be contacted beforehand. Otherwise, there is a risk of immense claims for damages, including under the German Act on the Protection of Business Secrets (GeschGehG).

FAQ - Questions from startup employees in Germany to our lawyers

Here we collect frequently asked questions from employees of a german startup to our specialist lawyers for labor law, corporate law and tax law in Germany.