The allegations were made by a former butler and a former head waiter, who have taken a case against the German state for wrongful dismissal and undeclared work.
The men claimed they were fired for criticizing the system of cash payments for overtime work.
Their lawyer Antoine Gillot told AFP the system was put in place in 2007 "by means of an embassy note, with the green light of the German foreign ministry".
Le Monde daily reported Tuesday that the top-ups were partly funded by a "general expenses" levy on events organized at the ambassador's residence on behalf of private companies such as BMW, Mercedes and ZDF television network.
Citing internal embassy documents the newspaper estimated that staff had received "hundreds of thousands of euros" in cash payments since 2007.
Gillot said the matter came to a head in 2015, during a dispute between the butler and other staff members over how the money should be distributed.
The butler, who had worked at the embassy for 11 years, was dismissed shortly afterwards for "harassment", along with the head waiter who had taken his side, he said.
Foreign ministry spokesman Rainer Breul said Wednesday that German authorities were investigating the allegations.
"Germany's foreign missions must not only respect German law but also local labour and social security laws," he said.
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