Kurzarbeit (Short-Time Work Allowance) – Germany

When the 2008 financial crisis hit, Germany did not shed jobs at the rate most economists predicted. When COVID-19 brought entire industries to a standstill in 2020, Germany again avoided the mass unemployment that devastated labour markets elsewhere. The mechanism behind both outcomes was the same – Kurzarbeit.

Short-time work allowance is not a new idea. Germany has operated some form of it since the early twentieth century. But its modern incarnation – refined, expanded, and stress-tested through repeated economic shocks – is one of the most sophisticated labour market stabilisation tools in the world. For employers operating in Germany, understanding Kurzarbeit is not just a matter of knowing a benefit exists. It is understanding a complete parallel payroll process that runs alongside normal payroll when it is activated, with its own calculation rules, its own notification requirements, its own documentation obligations, and its own audit trail.

This guide covers all of it – from the eligibility conditions and notification process through to the payroll mechanics and recovery from the Federal Employment Agency.

Mercans supports employers in Germany with end-to-end payroll compliance, including Kurzarbeit calculation, notification filing, and reimbursement processing through the Bundesagentur für Arbeit.

What Is Kurzarbeit?

Kurzarbeit – literally “short work” – is a state-subsidised scheme administered by the Bundesagentur für Arbeit (Federal Employment Agency) under the Sozialgesetzbuch III (SGB III), Germany’s Social Code governing employment promotion.

Under the scheme, employers who face a temporary, unavoidable reduction in work volume can reduce their employees’ working hours – including to zero in some circumstances – rather than making redundancies. The Federal Employment Agency compensates employees for a portion of the net wages they lose as a result of the reduced hours. The employer continues to pay wages for hours actually worked, tops up with the Kurzarbeit allowance (Kurzarbeitergeld), and then recovers the allowance from the Federal Employment Agency.

The core logic is straightforward: it is cheaper for the state to subsidise a temporary wage reduction than to fund unemployment benefits for workers who have been laid off and then pay the costs of companies rebuilding their workforce when conditions improve. Employers retain trained, experienced staff. Employees retain income and employment continuity. The state avoids the full social cost of unemployment. All three parties benefit – which is why the scheme commands such broad political support across Germany.

The Legal Framework – Types of Kurzarbeit

German law provides for several variants of Kurzarbeit, each suited to different circumstances:

• Konjunkturelles Kurzarbeitergeld (KUG): Cyclical Short-Time Work Allowance The standard form, available when work reductions result from economic downturns or unavoidable structural shifts in business conditions. This is the variant most employers activate during recessions or demand shocks.
• Transferkurzarbeitergeld: Transfer Short-Time Work Allowance Designed for structural restructuring situations – for example, when a division is being wound down and affected employees need a transitional period to be retrained and placed elsewhere. Transfer Kurzarbeit is typically linked to a transfer company (Transfergesellschaft) arrangement.
• Saison-Kurzarbeitergeld: Seasonal Short-Time Work Allowance Specific to seasonal industries – primarily construction and related trades – where weather-related or seasonal work reductions are predictable. Separate rules and funding mechanisms apply.
• Crisis-Expanded Kurzarbeit During the COVID-19 pandemic, the German government enacted a series of temporary expansions to the standard KUG rules – lowering the employee threshold for activation, extending the maximum duration, increasing the replacement rate over time, and temporarily waiving the requirement for employers to pay social security contributions on reduced hours. While the COVID-specific measures have now largely expired, they demonstrated the scheme’s flexibility and established precedents likely to inform future crisis responses.

This guide focuses primarily on standard cyclical Kurzarbeit (KUG), as it is the form most commonly encountered by employers in ordinary operational planning.

Eligibility Conditions – When Can Kurzarbeit Be Activated?

Kurzarbeit cannot be unilaterally activated whenever an employer faces a difficult quarter. Specific legal conditions must be met, and the Federal Employment Agency assesses them at the notification stage.

Condition 1 – Significant Work Reduction

There must be a significant reduction in normal working hours caused by economic reasons or an unavoidable event. Specifically:

• At least 10% of employees in the establishment must face a loss of earnings exceeding 10% of their gross monthly salary in the relevant month
• The work reduction must be temporary – the employer must expect that normal working hours will resume within a foreseeable period
• The work reduction must be unavoidable – the employer must demonstrate that normal operational measures (use of overtime balances, drawdown of leave entitlements, flexible working time accounts) have been exhausted or are insufficient

The 10% employee threshold applies per establishment, not per the company as a whole. A company with multiple establishments can activate Kurzarbeit in one while operations continue normally in another.

Condition 2 – Operational Preconditions

The establishment must have either:

• A works agreement (Betriebsvereinbarung) with the works council (Betriebsrat) governing the introduction of short-time work, or
• An individual contractual agreement with each affected employee consenting to the reduction in hours

The works council has co-determination rights over the introduction of Kurzarbeit – employers cannot impose it unilaterally where a works council exists. In establishments without a works council, individual employee consent is required. Attempting to activate Kurzarbeit without the correct legal foundation exposes the employer to both labour law claims and Federal Employment Agency reimbursement refusals.

Condition 3 – Employee Eligibility

Not all employees in an establishment are automatically eligible for Kurzarbeit. Individual employees must:

• Be in a continuing employment relationship subject to social insurance contributions
• Not have given or received notice of termination
• Not be in the qualifying period of a new employment relationship (unless collectively agreed otherwise)

Mini-jobbers (employees earning below the marginal employment threshold), apprentices, and employees on fixed-term contracts in certain circumstances may be excluded. The specific eligibility of each affected employee must be assessed individually.

The Notification Process – Before Kurzarbeit Begins

Kurzarbeit does not begin automatically. The employer must follow a formal notification and approval process with the Federal Employment Agency.

Step 1 – Anzeige (Notification of Short-Time Work)

The employer submits a Kurzarbeitsanzeige (notification of short-time work) to the Federal Employment Agency – specifically to the local Agentur für Arbeit office responsible for the establishment’s location. This notification must be submitted before the short-time work begins – in practice, it should be submitted as soon as the need for Kurzarbeit becomes foreseeable, as the allowance is only payable from the month in which the notification is received.

The notification must include:

• The reason for the work reduction and why it is temporary and unavoidable
• The expected start date and anticipated duration of the short-time work period
• The number of employees affected and the expected extent of the reduction in hours
• Confirmation that the operational preconditions (works agreement or individual consents) have been met
• Confirmation that operational measures to avoid the reduction have been exhausted

The Federal Employment Agency reviews the notification and issues an acknowledgement. This is not an approval of individual monthly claims – it is a confirmation that the basic conditions appear to be met. The actual allowance is claimed monthly in arrears.

Step 2 – Monthly Kurzarbeitergeld Application (Leistungsantrag)

At the end of each month in which Kurzarbeit operates, the employer submits a Leistungsantrag (benefit application) to the Federal Employment Agency. This monthly application includes:

• A list of all affected employees and their individual hours data
• The actual reduction in hours worked compared to normal hours for each employee
• The gross wages paid for hours worked
• The Kurzarbeitergeld calculated for each employee
• Employer social security contribution amounts

The Federal Employment Agency reviews the application and reimburses the Kurzarbeitergeld – and, where applicable, the employer’s social security contributions on the lost hours – within a few weeks of submission.

How Kurzarbeitergeld Is Calculated

The calculation of Kurzarbeitergeld sits at the heart of the payroll processing challenge. It is not a flat rate – it is an individualised calculation for each affected employee, based on their specific circumstances.

Step 1 – Determine the Sollentgelt (Target Earnings)

The Sollentgelt is the gross wage the employee would have earned in the relevant month if they had worked their full normal hours. It is calculated based on the employee’s standard contractual hours and their regular hourly or monthly rate – excluding overtime, one-off bonuses, expense reimbursements, and certain allowances.

Step 2 – Determine the Istentgelt (Actual Earnings)

The Istentgelt is the gross wage the employee actually earned in the month – reflecting only the hours actually worked under the reduced schedule.

Step 3 – Calculate the Lost Earnings

Lost earnings = Sollentgelt minus Istentgelt

This figure represents the gross wage loss attributable to the reduced hours.

Step 4 – Convert to Net Lost Earnings

The Kurzarbeitergeld is not calculated as a percentage of gross lost earnings. It is calculated as a percentage of the net lost earnings – specifically, the difference between the net Sollentgelt (the net pay the employee would have received at full hours) and the net Istentgelt (the net pay they actually received).

To compute the net figures, Germany uses a standardised Leistungsentgelttabelle (benefit pay table) published by the Federal Employment Agency. This table converts gross earnings to a net reference figure used for Kurzarbeit calculations – it does not directly reflect each employee’s personal tax and social security situation but provides a consistent, administratively manageable proxy.

Step 5 – Apply the Replacement Rate

The standard Kurzarbeitergeld replaces:

• 60% of the net lost earnings for employees without children
• 67% of the net lost earnings for employees with at least one child (in the household for tax purposes)

During the COVID-19 pandemic, these rates were temporarily increased for employees who had been on Kurzarbeit for an extended period – reaching up to 80% and 87% respectively after several months. Under standard rules, the 60%/67% rates apply throughout.

The Earnings Cap

The Kurzarbeitergeld calculation is subject to a monthly earnings ceiling – the Beitragsbemessungsgrenze (contribution assessment ceiling) for unemployment insurance purposes. For 2024, this ceiling is:

• West Germany: €7,550 per month
• East Germany: €7,450 per month

Earnings above the ceiling are not taken into account when calculating the allowance.

Social Security Contributions During Kurzarbeit

The social security treatment of Kurzarbeit has two components – and getting both right is essential for correct payroll and reimbursement processing.

Contributions on Hours Worked

Normal social security contributions (pension, health, long-term care, unemployment) are paid on the Istentgelt – the wages actually paid for hours worked – in the standard way. These are split between employer and employee in the normal proportions and are not affected by Kurzarbeit.

Contributions on Lost Hours

The employer is required to pay social security contributions on the fictitious gross equivalent of the Kurzarbeitergeld – that is, on a notional gross amount representing the lost hours, even though no wages are paid for those hours and even though the employee pays no social security on the Kurzarbeitergeld itself. This employer-side social security cost on lost hours is significant and is one of the main cost elements of Kurzarbeit for employers.

Under standard rules, the Federal Employment Agency reimburses 50% of the employer’s social security contributions on the lost hours. During COVID, this was temporarily increased to 100%. Under current standard rules, the 50% reimbursement applies – meaning employers bear 50% of social security on lost hours themselves.

Payroll Processing During Kurzarbeit

From a payroll mechanics perspective, each pay period during Kurzarbeit involves several parallel calculations:

• Calculate normal gross wages for hours actually worked (Istentgelt)
• Deduct employee social security contributions and income tax on the Istentgelt
• Calculate the Kurzarbeitergeld for each affected employee
• Add the Kurzarbeitergeld to the payslip as a separate, tax-exempt line item
• Calculate employer social security on the full Sollentgelt (employer continues to pay social security as if full hours were worked – the cost is partially reimbursed)
• Produce the payslip showing both the wage for hours worked and the Kurzarbeitergeld separately
• Prepare the monthly Leistungsantrag data for submission to the Federal Employment Agency

The Kurzarbeitergeld is exempt from income tax but is subject to the Progressionsvorbehalt – the progressive reservation rule. This means the Kurzarbeitergeld itself is not taxed, but it is added to the employee’s other income for the purpose of determining the tax rate applied to that other income, potentially pushing the employee into a higher bracket. Employees who receive significant Kurzarbeitergeld during a year may face an additional income tax liability when they file their annual return – a point worth communicating to affected employees.

Duration and Maximum Period

Standard Kurzarbeit can be approved for a maximum of 12 months per triggering event, though this has been extended by ministerial order during crisis periods (to 24 months during COVID). Once the 12-month period expires, the employer must demonstrate that the work reduction situation has fundamentally changed before a new Kurzarbeit period can be approved.

The Federal Employment Agency monitors the duration and may conduct audits to confirm that the conditions for Kurzarbeit continue to be met throughout the approved period. Employers should maintain contemporaneous documentation of business conditions, orders, and the operational decisions that substantiate the ongoing need for short-time work.

How Mercans Supports Kurzarbeit Payroll Compliance

Kurzarbeit payroll is payroll within payroll – a parallel calculation process running alongside the standard wage computation, with its own data inputs, its own output documents, its own submission deadlines, and its own reimbursement process. For employers activating Kurzarbeit for the first time, the operational lift is significant. For employers who have been through it before, the discipline required to maintain documentation standards and monthly submission accuracy over an extended period is considerable.

Mercans’ Germany payroll services manage the full Kurzarbeit process:

• Preparation and submission of the Kurzarbeitsanzeige to the relevant Agentur für Arbeit
• Monthly Sollentgelt and Istentgelt calculations per affected employee using the current Leistungsentgelttabelle
• Kurzarbeitergeld computation at the correct rate reflecting each employee’s child entitlement status
• Payslip generation showing Kurzarbeitergeld as a separate tax-exempt line item
• Employer social security calculation on lost hours
• Monthly Leistungsantrag preparation and submission for Federal Employment Agency reimbursement
• Full audit-ready documentation maintained throughout the Kurzarbeit period

For multinational employers managing German operations alongside payroll in other European or global markets, Mercans’ global payroll platform delivers the local German compliance depth that Kurzarbeit demands within a unified international reporting framework. Find out more at mercans.com.

Frequently Asked Questions

Can Kurzarbeit and redundancies happen at the same time?

Technically, an employee who has been given notice of termination is no longer eligible for Kurzarbeitergeld from the date notice is given – the Federal Employment Agency will not reimburse allowances paid to employees under notice. However, an employer can operate Kurzarbeit for the portion of the workforce that is being retained while simultaneously making redundancies in a different part of the business, provided the two populations are clearly separated and the Kurzarbeit employees genuinely meet the eligibility conditions independently of the redundancy process. Using Kurzarbeit as a transitional measure to delay redundancies that are already decided is not a legitimate use of the scheme and creates both reimbursement recovery risk and potential fraud liability.

What documentation must employers retain during and after a Kurzarbeit period?

Employers must retain comprehensive records for a minimum of four years following the end of the Kurzarbeit period, as the Federal Employment Agency has the right to audit reimbursements during this window. Required documentation includes time records showing actual hours worked for each affected employee in each relevant month, payroll records showing Sollentgelt, Istentgelt, and Kurzarbeitergeld calculations, copies of all Kurzarbeitsanzeigen and Leistungsanträge submitted, the works agreement or individual employee consent documents, and business records substantiating the economic basis for the work reduction. Audits by the Federal Employment Agency are not infrequent, and the burden of proof lies entirely with the employer – if documentation cannot be produced, reimbursements already received can be clawed back with interest.

How does Kurzarbeit interact with employees who have flexible working time accounts?

The Federal Employment Agency requires that employers exhaust positive balances in flexible working time accounts before Kurzarbeit is activated – employees must draw down their accumulated overtime and flexible time balances first. Once those balances are at zero, Kurzarbeit can be applied to any further work reduction. However, there are exceptions – specifically, balances that were built up for a different purpose (such as a long-term account earmarked for an early retirement arrangement) may be protected from drawdown. The interaction between working time accounts and Kurzarbeit eligibility is one of the more complex operational questions in the activation process, and the Federal Employment Agency’s local office should be consulted where significant account balances exist.

Does the Progressionsvorbehalt (progression reservation) mean employees owe tax at year-end because of Kurzarbeit?

Yes, potentially. Kurzarbeitergeld is tax-free in the sense that no wage tax is withheld from it during the year. However, it is subject to the Progressionsvorbehalt – it is added to the employee’s taxable income solely for the purpose of calculating the applicable tax rate on the rest of their income. If an employee receives significant Kurzarbeitergeld across a calendar year, their effective tax rate on their taxable wages may be higher than their standard monthly withholding assumed, resulting in an additional income tax liability when they file their annual Einkommensteuererklarung. Employees who receive Kurzarbeitergeld are legally required to file an annual tax return for that year – it is not optional. Employers should communicate this clearly to affected employees at the point Kurzarbeit is introduced, as the year-end tax liability can otherwise come as an unwelcome surprise.

Can Kurzarbeit reduce an employee’s hours to zero, and if so, what are the implications?

Yes – Kurzarbeit can be applied to a complete cessation of work, often referred to as Kurzarbeit Null or zero-hour short-time work. In this situation the employee does no work at all for a period, receives no wages for hours worked (since there are none), and receives Kurzarbeitergeld at the standard rate on the full net Sollentgelt. This is legally permissible and was widely used during COVID-19 lockdowns when entire workforces were temporarily unable to operate. The employer continues to pay employer social security on the notional gross equivalent and recovers 50% from the Federal Employment Agency. The employee retains all employment rights, continues to accrue pension entitlements, and remains protected by unfair dismissal provisions throughout. Zero-hour Kurzarbeit for extended periods does, however, raise questions under works council co-determination requirements and should be documented carefully as a genuinely temporary measure with a credible path to resumption of normal operations.