German HR: Small Businesses Can Be Reimbursed for 80% of Sick Pay Outlays

In Germany, when an employee is unable to work due to illness and the employer is legally required to continue paying their salary, employers can obtain reimbursement for a large portion of those wage expenses through the U1 procedure (Umlage 1).

I. Why Did Germany Establish the U1 Contribution Scheme?

According to German labor law, employers must continue paying employees their wages during illness for up to 6 weeks.

• While this requirement has a limited impact on large corporations, for small businesses, a single employee's long-term sick leave can pose significant financial pressure.
• Therefore, Germany established a "risk-sharing among employers" system via U1:
  • Normally: Employers pay a U1 contribution calculated as a percentage of the employees' wages.
  • During illness: Employers continue paying the salary while simultaneously applying for reimbursement.

II. What Does the U1 Scheme Specifically Cover?

The U1 scheme primarily compensates wage expenses incurred under the following circumstances:

• Employees unable to work due to illness.
• Employees suspending work due to medical rehabilitation.

In these cases:

• Employers must legally continue paying employee wages.
• Through U1, employers can be reimbursed for approximately 80% of their sick pay outlays.
• Note: U1 does not apply to work-related accidents or occupational diseases; those cases are covered by statutory accident insurance (Berufsgenossenschaft).

III. Which Companies Must Participate in the U1 Scheme?

According to current German regulations:

• Companies with 30 or fewer employees must participate in the U1 scheme.
• Even if a company only employs Minijob workers, it must still pay U1 contributions.
• Minijob employees, just like full-time staff, are legally entitled to sick pay.
• Crucial factor: Participation in U1 is independent of the employment form; it is strictly based on company size.

IV. Important Changes to the U1 Rate in 2026

• Effective January 1, 2026: The U1 contribution rate was reduced from 1.1% to 0.8%.
• This adjustment also applies to Minijob employers.
• For employers, this is a clear welcome relief that lowers operational costs.

V. Who Pays the U1 Contribution, and Where Is It Paid?

• The U1 contribution is borne entirely by the employer.
• Paid together with other social security contributions:
  • Declared monthly.
  • Paid uniformly to the respective health insurance provider (Krankenkasse).
• For Minijob employees: U1 contributions are paid centrally to the Minijob-Zentrale.

VI. U1 Scheme and Minijobs: A Common Misconception

Many employers mistakenly believe that Minijob employees do not need to be paid during illness. This is incorrect.

• The fact is: Minijob employees are legally entitled to sick pay, and employers must continue paying their wages just like any other employee.

VII. Summary: What U1 Means for Employers

• For employees: Income is secured during illness.
• For small businesses and entrepreneurs: Financial risk is mitigated.

VIII. Practical Recommendations for HR and Employers

1. Verify mandatory participation: Check whether your company falls under the mandatory U1 threshold ($\le 30$ employees).
2. Update payroll systems: Ensure the U1 contribution rate has been updated to 0.8%.
3. Establish clear processes: Set up streamlined sick leave reporting and reimbursement procedures.
4. Apply promptly: When an employee falls ill, remember to apply for U1 reimbursement on time so you don't miss out on funds you've paid into.