Employer of Record in Germany: What the law actually says

Is an ‘Employer of Record’ legal in Germany?

Yes, provided that the German Temporary Employment Act (AÜG) is complied with. However, its legality depends on one clear condition: the provider must hold a valid temporary employment licence from the Federal Employment Agency, and the provision of staff must remain within the legal limits. An EOR operating without this licence is acting illegally, which can have serious consequences for both parties.

The decisive factor is the place of work. For people who are physically working in Germany – whether in an office, at a client’s premises or working from home in Germany – the AÜG applies in full under the principle of territoriality. This is the classic scenario where a foreign company wishes to deploy staff in Germany.

The situation is different if a person works exclusively online for a German company from another EU or EEA country and never travels to Germany for this purpose. The Federal Employment Agency has since qualified its stance on this purely cross-border scenario (more on this shortly). However, in the high-profile scenario of ‘employees in Germany without their own company’, the AÜG continues to apply in full.

Does an EOR provider need an AÜG licence?

This is absolutely essential for assignments in Germany. Without the licence required under Section 1 of the AÜG, both the supply contract between the EOR and your company and the EOR’s employment contract with the individual under Section 9 of the AÜG are invalid. You should therefore check before every assignment whether the provider can provide evidence of such a licence. Many international EOR platforms work with local partners. However, it is crucial that the contractual employer itself holds the licence.

There have recently been developments regarding the licensing issue. In a technical guidance note published on 15 October 2024, the Federal Employment Agency took the view that the mere performance of a purely virtual role for a German company by foreign employees constitutes a sufficient domestic connection and thus triggers the requirement for authorisation, even if the individuals never travel to Germany. This would have covered a large proportion of cross-border EOR models.

With the updated guidelines effective from 1 October 2025, the agency has revised its position. If the person is resident in another EU or EEA country, works exclusively online and never travels to Germany, the requirement for a permit under Section 1(1) of the AÜG does not apply in this case due to the lack of a domestic connection.

This exemption applies only to situations where the work is carried out entirely abroad. As soon as the person works physically in Germany, even temporarily – for example, on business trips or from a German residence – the requirement for authorisation applies once again. The authority also points out that there is as yet no case law from the highest courts on these borderline cases. Administrative practice may therefore change again, and a court is not bound by this guidance. Anyone basing a model on this faces genuine uncertainty regarding the outcome.

What happens after 18 months as Employer of Record?

Under Section 1(1b) of the German Temporary Employment Act (AÜG), the same employee may be assigned to the same hirer for a maximum of 18 consecutive months. A collective agreement for the sector in which the assignment takes place may specify a different maximum duration in accordance with Section 1(1b), third sentence, of the AÜG. In a typical EOR scenario without a relevant sectoral collective agreement, the 18-month limit applies.

The maximum assignment period applies on a hirer-by-hirer basis. Changing EOR providers does not reset the clock: previous assignments to the same hirer are counted towards the limit, provided that no more than three months have elapsed between two assignments. Attempting to switch providers after 18 months and continue to deploy the same person is not legally permissible.

If the 18-month limit is exceeded, this has serious legal consequences. In accordance with Section 9(1)(1b) of the German Temporary Employment Act (AÜG), the employment contract with the EOR provider becomes invalid and, pursuant to Section 10(1) of the AÜG, an employment relationship between the individual and the hirer – i.e. your company – is deemed to have been established by operation of law. The foreign company that used the EOR to avoid being an employer in Germany thereby becomes the direct employer, subject to German protection against unfair dismissal, social security obligations and all duties to provide evidence.

The same legal consequence applies in the case of disguised temporary agency work, where an assignment is declared to be a contract for services or a contract for work, but is in fact an integration with the right to issue instructions (Section 9(1) No. 1a of the German Temporary Employment Act (AÜG)). The person concerned can only object to this legal presumption by submitting a declaration of objection within a specified time limit. If no such declaration is made, the statutory employment relationship is deemed to have come into existence.

However, this presumption presupposes that the employment contract between the employer of record and the individual is invalid under German law. This is generally the case for individuals employed in Germany. If, on the other hand, the contract is governed by foreign law, the Federal Labour Court has ruled out the creation of an employment relationship with the domestic hirer (BAG, 26 April 2022, 9 AZR 228/21). However, the risk of fines and social security liabilities remains even in such cases. The 18-month period therefore represents the most critical breaking point in the EOR model.

Do the principles of equal pay and equal treatment also apply to EOR?

Yes, Section 8 of the Temporary Employment Act (AÜG) stipulates the principle of equal treatment for temporary agency workers: they are entitled to the same pay and the same essential working conditions as comparable permanent employees of the hirer. A collective agreement for the temporary employment sector may deviate from the pay principle for a limited period. However, full equal pay is due after no more than nine months of uninterrupted assignment to the same user organisation. In certain collective agreement scenarios, this is somewhat extended by sectoral supplements, but is never permanently waived.

The model of ‘cost-effective employment via an EOR’ is therefore not a permanent solution. From the ninth month onwards, the agency worker must be remunerated in the same way as a comparable permanent employee at the client company. Breaches of the equal pay obligation are not trivial offences, but are punishable by the highest level of fines in accordance with Section 16 of the German Temporary Employment Act (AÜG).

What fines and penalties are imposed for breaches?

The sanctions under the AÜG are tiered. Section 16(2) of the AÜG provides for fines of up to 500,000 euros for the most serious breaches. These include breaches of the equal pay obligation under Section 16(1)(7a) of the AÜG and the employment of foreign temporary agency workers without the required residence permit as set out in No. 2. Breaches of the maximum duration of temporary agency work and the deployment of workers without authorisation are punishable by fines of up to 30,000 euros per individual case. With a larger workforce, these individual cases can quickly add up to a substantial sum.

In addition to the risk of fines, social security law and criminal law must also be taken into account. If an employment relationship with the hirer arises as a result of the ‘§ 10 fiction’, the hirer is obliged to pay social security contributions retroactively. If contributions are withheld, the hirer is liable to prosecution under Section 266a of the German Criminal Code (StGB) (withholding and embezzlement of wages) and faces a prison sentence of up to five years or a fine.

The temporary employment agency and the hirer are jointly and severally liable for withheld contributions (Section 28e(2) of Book IV of the Social Code). If foreign workers are employed without the necessary residence permit, this may even constitute a criminal offence for the hirer (Section 15a of the Temporary Employment Act (AÜG)). In addition to back payments, liability for payroll tax usually also applies. An EOR model that initially appears cost-effective can therefore result in back payments spanning several years, including late payment penalties.

Does an EOR create a permanent establishment for tax purposes in Germany?

This is the risk that is most frequently underestimated. EOR providers advertise that no permanent establishment of their own is created in Germany. From a tax perspective, however, this is no guarantee. Whether a foreign company establishes a permanent establishment for corporation tax purposes within the meaning of Section 12 of the German Fiscal Code (AO) and the relevant double taxation agreement depends on the actual activities carried out by the individual – and not on the label applied to the contractual relationship. If a person working from a home office in Germany permanently performs core business functions or acts as a permanent representative with authority to conclude contracts, a permanent establishment – and thus a limited liability to pay corporation tax in Germany – may arise despite the use of an EOR.

This is to be distinguished from income tax. If employees carry out work in Germany, income tax is payable here. An EOR shifts the obligation to pay tax to the provider, but does not resolve the fundamental question of where your company has a tax presence. If you are establishing sales or management functions in Germany via an EOR, you should have the permanent establishment issue clarified from a tax perspective in advance, rather than relying on the marketing claim that there is ‘no permanent establishment’.

Employer of Record, a company of your own or direct employment: which is the right choice and when?

The EOR is a tool for the start-up phase. Due to the 18-month limit, it is more of a bridge than a foundation. When choosing the model, the time frame, the number of employees and the nature of their work are decisive factors.

From a legal perspective, the ‘Employer of Record’ model constitutes temporary agency work: it requires little set-up effort and enables a quick start. However, the provider needs a licence under the Temporary Agency Work Act (AÜG). The temporary employment arrangement ends after 18 months per person and per hirer. Furthermore, the risk associated with maintaining a permanent establishment is not eliminated. It is best suited for short-term market entry, market testing and as a stopgap until the company establishes its own structure. Setting up your own company, in the form of a GmbH or a branch office, requires incorporation and ongoing administration, but makes the company the employee’s direct employer in Germany and is not subject to any time limit. The permanent establishment is created intentionally in this case and is clearly defined for tax purposes. For long-term expansion involving several employees, there is rarely an alternative to this approach.

Direct employment by the foreign employer is the third option, which is often overlooked. In this case, the foreign company employs the individual directly, without an agency acting as an intermediary. As no three-party arrangement is formed, this does not constitute temporary agency work, and the German Temporary Agency Work Act (AÜG) – with its 18-month limit and requirement for a permit – does not apply.

However, the foreign company, as an employer in Germany, must register with the social security authorities and, as a rule, appoint a local authorised representative to handle payroll records. In addition, income tax obligations must be clarified. This model can be applied on a permanent basis with no time limit, but requires careful implementation in accordance with tax and social security legislation.

When does an EOR still make sense?

An Employer of Record has legitimate use cases. It is a quick and practical tool for a temporary market entry, testing a location or bridging the gap until a company of one’s own is established – provided that the provider holds the necessary AÜG licence, the 18-month limit is carefully managed, and equal pay is ensured from the ninth month onwards. The mistake usually lies in sticking with it: anyone who treats an EOR as a permanent model risks falling foul of the legal ‘deemed employer’ rule.

A well-considered decision must be made before commencing the arrangement. The timeframe, the number of planned positions, the nature of the work and the question of permanent establishments are decisive in determining whether EOR, a company of one’s own or direct employment is the right model. We assess the specific circumstances for risks under the German Temporary Employment Act (AÜG), tax law and social security law, and support the legally compliant establishment of employment in Germany.