Umlagen 1 & 2: What employers need to know about continued payment levies in Germany

When employees are away on sick leave, the employer is still obliged to pay their wages. For many companies, paying an absent employee can quickly become a financial burden.  For this reason, the Entgeltfortzahlungsversicherung Umlage 1 (continued payment insurance levy 1 – referred to simply as U1) is compulsory for all smaller companies. Find out what exactly the U1 and U2 are in here.


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What are Umlagen 1 & 2?

Both levies are so-called continued remuneration insurances, which are regulated by the AAG (Expenditure Compensation Act). The aim is to provide financial support, especially for small and medium-sized enterprises, when employees have to be absent for long periods. In principle, the employer’s participation in the pay-as-you-go system helps finance the employee’s social insurance. Employers taking part in this reimbursement scheme must pay a monthly contribution to the employee’s health insurance fund.

What is the U1? – All about the sick pay levy

To prevent sick leave from becoming a financial burden on small businesses, all businesses with fewer than 30 regular employees must participate in this pay-as-you-go (PAYG) scheme called the U1. They pay monthly contributions to their employees’ health insurance funds. Depending on the health insurance fund, the contribution rates are between 0.9-4 %. The employer can choose a different contribution rate for each health insurance fund, but not for each employee. The rate can be re-adjusted each financial year. However, it is not possible to change to a different contribution rate during the current financial year.

The advantage of the U1 is that the health insurance fund partially reimburses the employer for the costs incurred in continuing to pay the employee’s wages as part of the compensation procedure. The reimbursement rate is calculated based on the employee’s gross salary. Depending on the allocation rate chosen by the employer with the health insurance fund, between 40-80% of the costs incurred for a sick employee are reimbursed.

Example: U1

Six of your employees are insured with health insurance fund A. You have chosen a Umlagesatz (contribution rate) contribution rate of 0.9% for this health insurance fund. This means that all six employees have the same contribution rate.

One of your employees is insured with health insurance fund B. You have chosen a contribution rate of 1.1% for this fund.

Four other employees are insured with health insurance fund C, for which you have set a contribution rate of 2.4%.

The fact that the employer can set a different contribution rate for each health insurance fund allows him to better adapt to the number of sick days of his employees. If the employees who are insured with health insurance fund A tend to have few sick days, it is worthwhile for the employer to choose the lower contribution rate. Conversely, it makes more sense to choose a higher contribution rate if the employees are sick more often during the year. Of course, this assessment is more difficult for each new employee.

Employers can grant employees up to three days’ leave until a certificate of incapacity is presented. The health insurance company will reimburse the employer for the costs incurred during this period, regardless of whether a sick note has been submitted.

Who is excluded from the U1 levy?

Some establishments are exempt from the U1 levy:

  • Businesses with no employees or more than 30 employees.
  • The federal government, federal states, municipalities, and associations of municipalities (AAG § 11 par. 1 no. 1)
  • All corporations, institutions and foundations under public law as well as institutions, enterprises and associations bound by Tarifverträge (collective agreements) (AAG § 11 par. 1 no. 1)
  • Employees in the public sector/civil servants (AAG § 11 par. 1 no. 2)
  • Establishments operating as Hausgewerbetreibenden (home-based businesses) (AAG §11(1)(3))
  • Umbrella organisations of independent welfare organisations such as Diakonisches Werk, Deutscher Caritasverbund, Deutsches Rotes Kreuz, etc. (AAG Section 11(1)(4))


Important: Employees who work from home have only limited protection from the gesetzliche Unfallversicherung (statutory accident insurance). It is often difficult to declare an accident at home as an accident at work. Even on the way to work, the employee is only covered by the employer under certain conditions. To be insured on the way to work, the employee must take the direct route to work or home. If the employee chooses a detour, the employee is no longer covered by statutory accident insurance.

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What is the U2? – All about Mutterschaftsgeld (maternity benefits)

In principle, the U2 contribution follows the same cost-compensating principle as contribution 1, i.e. it compensates the company for the cost of Mutterschaftsgeld (maternity benefits). The main difference with U1, however, is that participation in U2 is compulsory for every employer, regardless of the size of the enterprise. U2 also has different rules on the contribution amount and reimbursement by the health insurance fund.

For each employee, the employer must pay a monthly contribution to the employee’s health insurance fund. The contribution rate varies by health insurance fund, which means that the contribution varies by health insurance fund. However, unlike in the case of U1, the employer is reimbursed 100% of the costs incurred by the sickness insurance fund.

Mothers are not allowed to work during maternity leave. During this time, they receive maternity pay from their employer. The amount of the maternity allowance depends on the mother’s previous salary. The maternity allowance is calculated as an average of the mother’s last twelve monthly salaries. Supplements (e.g. for overtime or promised salary increases) are also taken into account in the calculation.

Changes to the U2 law

Up until the end of 2005, participation in the U2 levy system was only compulsory for enterprises with a workforce of up to 30 employees. This was changed because it gave larger enterprises in particular an incentive to employ fewer women to avoid the financial burden of employees on maternity leave. Thus, since 2006, participation in the U2 pay-as-you-go scheme has been compulsory for all businesses, regardless of their size.

Under certain conditions, self-employed persons are also entitled to maternity and parental benefits and must participate in the U2 pay-as-you-go system. As the self-employed are subject to different tax rules than employees, there are several extra aspects to bear in mind. Read more about this in the detailed guide to parental allowance for self-employed persons.


Calculating U1 contributions

As mentioned above, employers can set the contribution rate for their employees individually for each health insurance fund. Depending on the health insurance fund, the contribution rate can be between 0.9-4%. However, only 40-80% of the employer’s expenses are reimbursed when an employee is absent due to illness. The reimbursement is therefore always lower than the contribution paid by the employer.

The amount of the respective employee’s salary plays a major role in the calculation of the levy. The higher the employee’s monthly salary, the higher the contribution to be paid.

Part-time employees are only charged proportionally:

Weekly working time Weighting factor
up to 10 hours 0.25
up to 20 hours 0.50
up to 30 hours 0.75
over 30 hours 1.00

Example calculation: U1 payment

An employee is absent for five working days due to illness. She works 40 hours a month and her monthly salary is €2,800. The month in which the employee is ill has 25 working days. The health insurance fund with which the employee is insured reimburses 80% of the employer’s expenses. The amount to be reimbursed is calculated as follows

2.800 € : 25 x 5 = 560 €

Of the €560, the health insurance fund reimburses the employer 80%:

560 € x 80% = 448 €

The levy for privately insured employees must also be paid to the relevant health insurance fund. Contributions for minijobbers are paid to the Minijobzentrale (minijob centre).

Employees who are employed by a business for a maximum of four weeks or who are not entitled to a wage under § 3 para. 3 of the EFZG (continued remuneration act). Even if an employee only receives a one-off payment, there is no need to pay a levy under Section 23a of the SGB IV (social security code).

It can also happen that an employee falls ill during a working day. In this case, the employer will not be reimbursed for the remainder of the day. Only from the first full day of illness, with a doctor’s certificate, will the sick leave pay be reimbursed.

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