Most important points

• An employment contract is a special service contract relationship in which the employee is obliged to work in accordance with instructions and the employer is obliged to pay remuneration.

• Among other things, the employment contract regulates work duties, remuneration, working hours, vacation days, contract duration and notice periods. It often also contains clauses on probationary periods, confidentiality, secondary employment and non-competition clauses.

• Employment contracts are subject to special statutory protective provisions (e.g. Dismissal Protection Act, Federal Leave Act, Continued Remuneration Act). Many statutory regulations are mandatory in favor of the employee, i.e. they cannot be circumvented by contract.

• It is important for start-ups to use standardized and legally compliant employment contract templates in order to avoid later disputes about contract content or the effectiveness of clauses (e.g. overtime pay, fixed-term contracts).

• The distinction from freelancers is crucial: bogus self-employment can occur if an employment relationship exists in fact, but no employment contract has been concluded.

Content and form of the employment contract

An employment contract establishes an employment relationship between the employer and employee. Unlike a general service contract, the employee is integrated into the employer’s work organization and is subject to the employer’s instructions (Section 611a BGB defines the employment contract by law). In principle, an employment contract can be concluded in any form (including verbally), but the Evidence Act stipulates that essential conditions must be set out in writing and handed over to the employee. Typical contents of a written employment contract are

• Job description: Position and tasks of the employee, if applicable, reference to the employer’s right to unilaterally specify tasks.

• Start and duration of the employment relationship: permanent or fixed-term (if fixed-term with end date or objective reason, in compliance with the Part-Time and Fixed-Term Employment Act).

• Working hours: Agreed weekly working hours, distribution of working hours, regulations on overtime (and whether these are compensated with the salary or paid separately).

• Remuneration: amount of salary (monthly wage or hourly wage), any special payments (bonus, premiums), supplements, payment date.

• Vacation: Number of vacation days per year (at least 24 working days in accordance with the Federal Vacation Act for full-time employees).

• Probationary period (optional): Usually 3 to 6 months, during which shortened notice periods apply.

• Secondary employment: Often a clause stating that secondary employment must be notified and may not compete with the employer.

• Confidentiality: Confidentiality obligations for trade and business secrets.

• Company and collectively agreed regulations: Reference to applicable collective agreements or company agreements, if applicable.

Rights and obligations of the contracting parties

The employment contract establishes a continuing obligation with mutual primary obligations:

• Employee’s duty to work: The employee must perform the agreed work personally, to the best of their ability and in accordance with the employer’s instructions. This also includes the obligation to be fit for work and to adhere to working hours. In the event of illness, the employee must inform the employer immediately and submit a medical certificate (continued payment of remuneration for up to 6 weeks in accordance with the Continued Remuneration Act).

• Employer’s obligation to employ and remunerate: The employer must employ the employee (i.e. deploy them sensibly) and remunerate them in accordance with the agreement. The salary must be paid on time. The employer also has a duty of care: safeguarding occupational health and safety, equal treatment, protection against bullying, etc.

• Right to issue instructions: The employer can specify the content, place and time of work, unless this has already been contractually agreed. This right to issue instructions is limited by law, contract and, where applicable, co-determination.

• Fiduciary duties: Both parties have secondary obligations. For example, the employee must observe company rules, comply with obligations to avert damage and refrain from doing anything that could harm the employer (e.g. not disclosing business secrets). The employer must respect the employee’s personal rights and treat them equally.

Termination and termination of the employment relationship

An employment relationship can end through termination, a termination agreement or expiry (in the case of fixed-term contracts). The employment contract usually refers to the statutory notice periods in accordance with Section 622 BGB. Important points:

• Ordinary termination: In principle, notice can be given in compliance with the notice period. If the Dismissal Protection Act (KSchG) applies (company > 10 employees and employment > 6 months), the employer needs a socially justifiable reason (operational, personal, behavioral). Smaller start-ups are often not (yet) subject to the KSchG, which makes dismissals easier.

• Extraordinary termination (without notice): In the event of serious misconduct or loss of trust, notice of termination may be given without notice (Section 626 BGB), provided there is good cause and notice of termination is given within 2 weeks of knowledge of the cause.

• Form of notice: Written form is required by law, e-mail is not sufficient.

• Termination during the probationary period: In this case, it is often possible to terminate the contract with 2 weeks’ notice (if agreed).

Upon termination, the employer is obliged to issue an employer’s reference. In addition, issues such as compensation for overtime, return of company property, etc. must be clarified.

Importance for start-ups

As an employer, startups should be aware of the employment law framework. Standard employment contracts should be legally checked, especially if they contain special clauses (e.g. extension of the probationary period, flat-rate overtime compensation, non-competition clauses after leaving the company). Ineffective clauses can later lead to disputes or additional payments (e.g. if overtime was not effectively agreed as inclusive).

It is also important to distinguish between freelancers and self-employed persons: an employment contract should be concluded for activities that are subject to fixed integration and instructions in order to avoid the risk of bogus self-employment. Otherwise, there is a risk of back payments of social security contributions and penalties (see separate article on bogus self-employment).