Collective Agreements and Minimum Wage: What Changes for Small Firms

Why pay rules are back on the agenda for small businesses

For many owners, the minimum wage was long a figure that only affected temporary help. That has changed. It has risen several times since its introduction in 2015, most recently by a considerable amount, and at the same time new rules on collective agreement compliance and an EU directive are changing the framework in which wages are set. For a business with 15 employees, this is less about politics than about its own costing, the pay structure in the team, and whether certain contracts will remain within reach.

This article therefore asks: What do the minimum wage and collective bargaining rules actually change for small businesses, and how should an owner prepare? To answer it, we first clarify the terms, introduce the Kaitz index as a measure of a minimum wage's impact, put the current changes and the research findings in context, weigh two views, and finally derive a check for your own business.

Collective agreements, minimum wage, compliance: the terms

Collective agreement coverage means that a collective agreement applies to a business. This is the case if the business is a member of the employers' association that concluded the agreement (sectoral agreement) or has itself concluded an agreement with a union (company agreement). In addition, there are businesses that are not bound but orient themselves by an agreement, adopting individual rules voluntarily.

The statutory minimum wage is the hourly pay floor that applies to almost all employees, regardless of any collective agreement. Its level is set by the federal government by ordinance on the proposal of the Minimum Wage Commission, in which employers and unions are represented. Collective agreement compliance (Tariftreue) finally means that a contracting authority, usually the public sector, requires its contractors to grant collectively agreed working conditions, even if they are not bound by an agreement themselves.

The step from 12.82 to 13.90 euros is an increase of 8.4 percent, and the one from 13.90 to 14.60 euros a further 5.0 percent. The federal government adopted both steps by ordinance in October 2025. With the minimum wage, the earnings limit for mini-jobs rises too, from 556 euros in 2025 to 603 euros in 2026 and 633 euros in 2027.

How widespread is collective agreement coverage?

According to the establishment panel of the Institute for Employment Research (IAB), around 49 percent of employees in Germany worked in establishments with a collective agreement in 2025, and 45 percent in eastern Germany. After years of decline, the share has stabilized at a low level. Measured by the number of establishments, coverage is much lower: according to the analysis by Hohendanner and Kohaut (2026), only around a quarter of establishments were covered.

The difference between the two figures is explained by company size. Large companies are often covered and employ many people; small businesses are covered far less often. For most owners of small businesses, the minimum wage is therefore the most important binding pay rule, and the industry's collective agreement serves more as a benchmark, for example in salary talks. The guide Conducting salary conversations describes how to use this comparison.

The EU Minimum Wage Directive requires member states with collective bargaining coverage below 80 percent to draw up an action plan to promote collective bargaining. On November 11, 2025, the Court of Justice of the EU annulled two provisions of the directive because the level of wages is a matter for member states. The obligation to draw up an action plan remained. For Germany, with coverage of around 50 percent, it therefore still applies.

The thinking model: the Kaitz index, or how strongly a minimum wage bites

Whether a minimum wage changes a lot or a little does not depend on its absolute level but on how close it is to the usual wage. Labor market research measures this with the Kaitz index: the ratio of the minimum wage to the average wage, usually the median. If the index is 40 percent, the minimum wage affects only a few very low wages. If it is 60 percent, it reaches deep into the pay structure. The EU directive names 60 percent of the gross median wage as one possible reference value for adequate minimum wages.

An everyday analogy: a minimum wage is like the bottom shelf of a bookcase. If little stands on it, you can raise the shelf without rearranging anything. If many items stand just above it, raising it means re-sorting all the shelves above. The Kaitz index measures how full the bottom shelf is.

The same idea can be applied to an individual business. What matters is how many employees earn close to the minimum wage and how large the gap to the next pay groups is. A business whose helpers earn 14 euros and whose skilled workers earn 16 euros feels the increase to 14.60 euros twice: directly for the helpers and indirectly, because the gap to the skilled workers shrinks from 2 euros to 1.40 euros.

The minimum wage rarely hits a business at the bottom of the pay scale, but mostly in the middle, where the gap is lost.

What research says about the effects on small businesses

The findings on the introduction of Germany's minimum wage in 2015 are comparatively reassuring. In an overview of wage-setting institutions in OECD countries, Giotis (2025) summarizes that the reform raised earnings at the bottom and reduced wage inequality. Adverse employment effects remained limited and mainly concerned mini-jobs. Giotis describes the German case as an example of how a statutory minimum wage can complement collective agreements, especially in industries with weak union presence.

Other studies show that the effect varies greatly from business to business. Majchrowska and Strawiński (2023) analyzed data from 16 Polish regions from 2006 to 2020. They found negative employment effects mainly among younger workers and in regions with many small businesses and industries where prices are hard to raise. Piek and von Fintel (2020) found a similar pattern for South Africa: small farms exposed to international competition lost employment, while retail, which could pass costs on to customers, did not.

On pace, an international comparison by Doh and Van der Meer (2023) is instructive. They compared large increases in Hungary, South Korea, Brazil, and Germany. Large, rapid jumps had a more negative effect on employment than gradual increases, especially in competitive industries.

Compliance with collective agreements in public contracts: what has applied since May 2026

Germany's Federal Collective Agreement Compliance Act (Bundestariftreuegesetz) has applied since May 1, 2026. Companies that take on federal construction or service contracts with an estimated value of 50,000 euros or more must grant their employees the working conditions of the relevant sectoral agreement for the duration of the contract, in particular pay, leave, and certain working-time rules. This also applies to businesses without their own collective agreement. Pure supply contracts are excluded, as is procurement for the armed forces until the end of 2032.

For small businesses, this has two sides. Those who pay at or above the agreed rates lose one competitive disadvantage against providers who calculate with lower wages. Those who pay below them must prove compliance with the agreed conditions for a federal contract and adjust payroll for individual projects accordingly. Many German states have their own compliance and procurement laws with different thresholds. The guide Public tenders describes when public contracts pay off for small businesses at all.

Two views: protection for fair businesses or a burden for small ones?

Both views have empirical support. Research suggests that gradual increases are manageable overall. But it also shows that the burden is unevenly distributed and falls hardest on small businesses with little pricing room.

I therefore consider the question of passing on costs more important than the question of the level. A business that calculates its labor costs openly and adjusts prices with good reason can operate at 14.60 euros. At risk is the business that has not adjusted its prices for years and whose margin is expected to absorb the increase alone. Raising prices without losing customers describes how to prepare a justified price increase. Inflation expectations explains how expectations about wages and prices are connected.

The pay gap check for your business

From the Kaitz idea I derive a check that I call the pay gap check. It takes an hour and needs only your latest payroll.

1. List pay groups

   Sort all employees by hourly wage and group them, for example helpers, skilled workers, experienced skilled workers, team leaders.

2. Calculate the gap to the 2027 minimum wage

   For each group, calculate how many percent it lies above 14.60 euros. Groups with less than 10 percent distance are the critical ones.

3. Check gaps between groups

   Check whether, after the lowest group has been adjusted, the gap to the next group is still large enough for qualifications and responsibility to be visibly rewarded.

4. Calculate the cost of the overall adjustment

   Calculate what it costs to maintain the gaps and compare it with revenue. This shows by how many percent your prices would need to rise.

In this worked example, the gap between helpers and skilled workers shrinks from 14 to 10 percent. If you want to keep it, you must raise skilled workers' pay too, and it is exactly these costs that are often forgotten in planning. Especially when skilled workers are scarce, compressed gaps are a reason for resignations. Employee retention in a small business describes what keeps good people, and Skills shortage in sales how to secure capacity in sales.

Conclusion: the floor is rising, the structure above it decides

To the guiding question: for small businesses, three things change above all. The minimum wage rises to 14.60 euros by 2027, gradually and announced well in advance. For federal construction and service contracts of 50,000 euros or more, collectively agreed working conditions have applied since May 2026. And the political expectation of wider collective bargaining coverage remains, even after the CJEU ruling. Research suggests that such increases are manageable overall but hit unevenly, hardest for small businesses with a high personnel share and little pricing room.

The owner's real task therefore lies not with the lowest pay group, but with the structure above it and with prices. Planning both in good time turns an obligation into a calculable figure.

• Compare all hourly wages with the 2027 minimum wage of 14.60 euros.
• Calculate the gaps between pay groups before and after the adjustment.
• Include the cost of the overall adjustment in price planning for 2027.
• Before bidding for federal contracts, check the collectively agreed conditions in your industry.