Employer of Record in Germany: What Is Actually Legal

What is an employer of record, and why is it temporary agency work?

An employer of record is a service provider that concludes an employment contract, in its own name, with the person who is to work for your company. The EOR formally becomes the employer and takes over payroll, wage tax and social security. The professional direction and day-to-day management, however, stay with you as the client company. This creates a triangular arrangement: the EOR is the contractual employer, the person works under your direction, and a service agreement sits between the EOR and you.

This exact structure is the statutory definition of temporary agency work. Under section 1 (1) AÜG, temporary agency work exists where an employer (the hirer-out, here the EOR) supplies a person employed by it to a third party (the hirer, here your company) to perform work, and that person is integrated into the third party's operation and subject to its instructions. The international marketing label “employer of record” changes nothing about this classification. Anyone who employs staff in Germany through an EOR is, from the perspective of German law, conducting regulated temporary agency work, with all the obligations attached to it.

Is an employer of record legal in Germany?

Yes, provided the AÜG is observed. Legality rests on one clear condition: the provider must hold a valid temporary agency work licence from the Federal Employment Agency, and the assignment must stay within the statutory limits. An EOR without this licence supplies labour illegally, with serious consequences for both sides.

The place of work is the decisive distinction. For people who work physically in Germany, whether in an office, at a client site or in a German home office, the AÜG applies in full under the principle of territoriality. This is the classic case where a foreign company wants to build up staff in Germany.

The position differs if a person works purely online for a German company exclusively from abroad within the EU or EEA and never travels to Germany for that work. For this pure cross-border case, the Federal Employment Agency has since qualified its position (more on this below). For the marketable case of “employees in Germany without your own entity”, the rule stands: the AÜG applies in full.

Does an EOR provider need an AÜG licence?

For assignments in Germany: yes, without exception. Without the licence under section 1 AÜG, both the supply agreement between the EOR and your company and the EOR's employment contract with the person are void under section 9 AÜG. Before every engagement, therefore, check whether the provider can demonstrate a German supply licence. Many international EOR platforms work with local partners; what matters is that the contractual employer itself holds the licence.

The licence question has been in motion recently. On 15 October 2024, the Federal Employment Agency took the view, in an administrative directive, that even a purely virtual activity by foreign staff for a German company established a sufficient domestic connection and therefore the licence requirement, even if the person never sets foot in Germany. That would have captured a large share of cross-border EOR models.

With the directives updated from 1 October 2025, the agency corrected this line: if the person remains abroad within the EU or EEA and works exclusively online, without ever travelling to Germany for work, the licence requirement of section 1 (1) AÜG does not extend to that case for lack of a domestic connection.

This relief applies only to the pure cross-border case. As soon as the person also works physically in Germany, even temporarily, for example on business trips or remotely from a German residence, the licence requirement revives. The agency itself also points out that there is as yet no supreme court case law on these borderline situations. Administrative practice can therefore shift again, and a court is not bound by the directive. Anyone who builds a model on this basis carries a genuine forecasting risk.

What happens after 18 months of employer of record?

Under section 1 (1b) AÜG, the same worker may be supplied to the same hirer for a maximum of 18 consecutive months. A collective agreement of the sector of use may set a different maximum period under section 1 (1b) sentence 3 AÜG; in the typical EOR case, with no applicable sector agreement, the limit stays at 18 months. The maximum assignment period is measured per hirer. Switching EOR providers does not reset the clock: earlier assignments to the same hirer are counted, as long as no more than three months lie between two assignments. The trick of simply swapping the provider after 18 months and keeping the same person on does not work in law.

If the 18-month limit is exceeded, the legal consequence is drastic. Under section 9 (1) no. 1b AÜG the employment contract with the EOR becomes void, and under section 10 (1) AÜG an employment relationship is deemed, by operation of law, to have come into existence between the person and the hirer, that is, with your company. The foreign company that used the EOR precisely in order not to be an employer in Germany thereby becomes the direct employer, with German dismissal protection, social-security obligations and all documentation duties.

The same consequence threatens in the case of disguised temporary agency work, where an assignment is declared a service or works contract but in fact involves integration with a right to issue instructions (section 9 (1) no. 1a AÜG). The person affected can object to this fiction only through a time-bound declaration of adherence (Festhaltenserklärung); if they do not, the statutory employment relationship stands.

The fiction does, however, presuppose that the employment contract between the EOR and the person is governed by German law and is void under it. For staff who work in Germany, that is regularly the case. If, by contrast, the contract is validly governed by a foreign law, the Federal Labour Court (Bundesarbeitsgericht, BAG) has denied that an employment relationship with the domestic hirer arises (BAG, 26 April 2022, 9 AZR 228/21); the fine and social-security risk remains even then. The 18 months are therefore not a bureaucratic formality but the hardest breaking point of the EOR model.

Do equal pay and equal treatment also apply with an EOR?

Yes. Section 8 AÜG requires the principle of equal treatment for supplied staff: the same pay and the same essential working conditions as for comparable core staff of the hirer. A collective agreement of the temporary staffing sector may deviate from the pay principle for a limited time. After nine months of uninterrupted assignment to the same hirer at the latest, however, full equal pay is owed, stretched somewhat by sector surcharges in certain collective-agreement scenarios, but never permanently set aside.

For practice this means: the model of “cheap employment through an EOR” does not hold up over time. From the ninth month on, the supplied person must be paid the same as a comparable permanent employee in the client company. Breaches of the equal-pay obligation are no minor matter; under section 16 AÜG they carry the highest fine tier.

What fines and penalties apply for breaches?

The AÜG sanctions are tiered. Section 16 (2) AÜG provides for fines of up to 500,000 euros for the most serious breaches, including violation of the equal-pay obligation (section 16 (1) no. 7a AÜG) and the employment of foreign agency workers without the required residence permit (no. 2). Breaching the maximum assignment period and using labour without a licence carry up to 30,000 euros per individual case. With a larger workforce, these individual cases quickly add up to a substantial sum.

Alongside the fine risk stands social-security and criminal law. If the section 10 fiction creates an employment relationship with the hirer, the hirer is retroactively obliged to pay social-security contributions. Where contributions are withheld, criminal liability under section 266a of the German Criminal Code (Strafgesetzbuch, StGB) (withholding and misappropriating remuneration) comes into consideration, with imprisonment of up to five years or a fine.

The hirer-out and the hirer are jointly and severally liable for withheld contributions (section 28e (2) SGB IV). If foreign staff without the required residence permit are used in the process, the assignment can even be a criminal offence for the hirer (section 15a AÜG). On top of the back payments, wage-tax liability regularly follows. An EOR model that was first calculated as cheap can turn into a multi-year back claim including late-payment surcharges.

Does an EOR create a taxable permanent establishment in Germany?

This is the most frequently underestimated risk. EOR providers advertise that no permanent establishment of your own arises in Germany. For tax purposes that is no guarantee.

Whether a foreign company creates a corporate-tax permanent establishment within the meaning of section 12 of the German Fiscal Code (Abgabenordnung, AO) and the applicable double taxation treaty depends on the person's actual activity, not on the label of the contractual relationship. If a person permanently exercises core business functions from a German home office, or acts as a permanent representative with authority to conclude contracts, a permanent establishment, and with it limited corporate-tax liability in Germany, can arise despite the EOR.

Wage tax is a separate question. Where staff work in Germany, it arises here. An EOR shifts the remittance duty to the provider but does not remove the underlying question of where your company is tax-resident. Anyone building up sales or management functions through an EOR in Germany should have the permanent-establishment question clarified for tax purposes in advance, rather than relying on the marketing claim of “no permanent establishment”.

Employer of record, own entity or direct employment: what is right and when?

The EOR is a tool for the start-up phase. The 18-month limit makes it structurally a bridge, not a foundation. Time horizon, headcount and the nature of the work are decisive for the choice of model.

The employer of record is, in legal terms, temporary agency work: it requires little setup effort and carries a fast start, but the provider needs an AÜG licence, the supply ends after 18 months per person and hirer, and the permanent-establishment risk is not eliminated. Its territory is the short-term market entry, the market test and bridging the period until a company has its own structure. An own entity, whether GmbH or branch, demands incorporation and ongoing administration, but it makes the company its own employer in Germany and knows no time limit; the permanent establishment is not a risk here but intended and clarified for tax purposes. For a lasting build-up with several employees there is rarely a way around it.

Direct employment by the foreign employer is the often overlooked third way. Here the foreign company employs the person itself, without interposing a labour supplier. Because no triangle arises, it is not temporary agency work, and the AÜG with its 18-month limit and licence requirement does not apply. The foreign company must, however, register as an employer in Germany for social security and, as a rule, appoint a domestic authorised representative for the payroll records; the wage-tax obligations have to be clarified. This model holds up permanently and without a time limit, but it demands clean tax and social-security setup.

A case example

A US software provider employs a sales engineer in Germany through an EOR to open up the German market. After 18 months the build-up is going well, the company wants to keep the person and simply switches EOR provider instead of setting up its own structure. In law the switch does not count: the earlier assignment is counted, the maximum period is exceeded.

Under section 10 AÜG an employment relationship is now deemed to have arisen directly with the US company, including German dismissal protection and retroactive social-security liability. At the same time, the tax office examines whether the permanent sales activity from the home office creates a permanent establishment. What looked like a simple provider switch turns into employer status that the company never wanted to take on. A timely transition to its own entity or to direct employment before the 18 months expired would have prevented this.

When does an EOR still make sense?

An employer of record has legitimate use cases. For a fixed-term market entry, testing a location, or bridging the gap until your own entity is in place, it is a fast and practical instrument, provided the provider holds the AÜG licence, the 18-month limit is deliberately managed, and equal pay is observed from the ninth month. The mistake rarely lies in the start; it lies in staying put. Anyone who treats an EOR as a permanent model is heading for the statutory employer fiction.

The sound decision is made before entry. Time horizon, the number of planned positions, the nature of the work and the permanent-establishment question determine whether EOR, your own entity or direct employment is the right model. We test the specific arrangement for its AÜG, tax and social-security risks and support the legally secure build-up of employment in Germany.