Six common employment law pitfalls for US companies operating in Germany

1. Offer letter versus employment contract

Unlike in the US, German employers typically do not provide applicants with an offer letter (OL); instead, they provide an employment contract directly. The use of an OL may entail risks, as it can be interpreted as a legally binding declaration in individual cases and may then lead to the conclusion of an employment contract—even if the employer did not intend to be bound by it. This is problematic if the OL—as usual—only highlights the advantages of the employment relationship, and the employee later refuses to sign the employment contract that includes the less favourable terms. To minimise these risks, it is advisable to send the actual employment contract along with the OL. Additionally, the OL should explicitly state that it is not a legally binding declaration, but merely a summary of the key points.

2. Invalid clauses

US companies often include clauses in their contracts that are invalid under German law. This includes, in particular, clauses on limitation periods, intellectual property (IP), and non-disclosure obligations. German courts typically do not enforce clauses that significantly disadvantage employees, such as excessively short limitation periods for claims, overly broad IP assignments, or catch-all clauses on non-disclosure obligations. It is crucial to tailor these clauses so they comply with German legal standards to ensure their enforceability.

3. Costly post-contractual non-compete agreements

Another frequent issue is that post-contractual non-compete agreements either lack the required form, are too broad in scope, or do not provide adequate compensation. In Germany, these agreements must be signed in ink (e-signatures, such as DocuSign, are insufficient). Furthermore, they have to be limited in scope and duration and provide for the payment of a statutory minimum financial compensation for the duration of the non-competition clause to be enforceable. Careful consideration should be given regarding which employees should be subject to a post-contractual non-compete clause, as the compensation due is fairly costly.

4. Incorrect incentive programs

US companies often implement incentive programs that do not comply with German employment laws. Bonus schemes and commission structures must be clearly defined and achievable. Vague or discretionary bonus terms are not allowed and may lead to disputes and claims by employees. Additionally, the employment contract should not include a provision for an entitlement the parent company. This could create a risk that a court might recognise an (additional) claim against the employer.

5. Dismissals: effective planning and adherence to legal requirements

A well-planned roadmap and strict adherence to legal requirements are critical for managing employment relationships in Germany. Unlike in the US, there is no hire-and-fire principle. Once a company regularly employs more than 10 workers, strong protection against dismissal applies, meaning termination is only permissible for a valid reason. The termination notice must be signed in ink by the employer or their representative (again, e-signatures, such as through DocuSign, are insufficient). Employers must follow specific procedures and timelines when terminating employees, including complying with the applicable notice period. If a works council exists, it must be consulted in advance. In cases of mass dismissal, mandatory notification obligations must be observed. Failure to comply with the aforementioned obligations may result in invalid dismissals and significant financial penalties. Against this background, effective communication and a clear roadmap are critical for both managing employment relationships and avoiding legal disputes.

6. Dismissal due to low performance

Dismissing a low performer is challenging and there are various hurdles to overcome.

Firstly, a formal warning is necessary as a rule. Furthermore, high demands are placed on the proof of low performance. In any case, the evidence requires the compilation and analysis of a considerable amount of data in order to prove the negative deviation in quantitative or qualitative terms from comparable employees. This becomes significantly more difficult if the employee has been praised in previous performance reviews. However, performance reviews and performance improvement plans (PiPs) can serve as evidence of low performance in court, but only if conducted according to German standards. German employment law requires that performance evaluations are fair and objective. PiPs must be clearly documented, and employees should be given a reasonable opportunity to improve their performance.

Osborne Clarke comment

Understanding these common pitfalls is a decisive step towards legally compliant and successful entrepreneurial activity in Germany. However, this article highlights only some of the most common issues, and the legal landscape in Germany is vast and varied. Depending on the business model, setup and sector, companies may face additional challenges. Sector-specific regulations, peculiarities of labor law and managing cross-border employment issues can impose further hurdles. Therefore, entrepreneurial success requires a comprehensive approach to legal compliance and a thorough understanding of evolving employment law that can enable US companies to navigate the German market confidently.

For tailored advice and support, contact our employment law experts at Osborne Clarke.