Employer of Record in Germany

Germany, like many other countries, has long suffered from a shortage of skilled workers. In response to this challenge, organizations identifying themselves as "Employer of Record" (EoR) are gaining significant attention among German companies. An EoR is an organization that officially undertakes the recruitment of employees and subsequently assigns them to respective companies.

The EoR concept is well known in Germany, as German companies regularly receive offers from organizations providing such services. However, this entails hiring staff abroad and assigning them to German companies. It is important to emphasize that in Germany, the EoR model is specifically discussed in the context of cross-border personnel assignments. This occurs when a foreign EoR hires an employee abroad and assigns this employee to the German company. If an EoR is active in Germany and hires employees, assigning them to the respective (foreign) companies, this, in fact, constitutes a temporary employment arrangement.

In accordance with the principle of territoriality, any form of employee leasing that takes place in, to, or from Germany is subject to the jurisdiction of German law. Since the temporary work agency is based in Germany and the leased employee also performs their work in Germany, they fall within the scope of the German Temporary Employment Act (AÜG). On the other hand, the user undertaking (economic employer) operates outside German territory. Therefore, the provisions of the AÜG do not apply to them.

Temporary employment in Germany is subject to strict regulatory provisions. Employers who assign employees to third parties (to the economic employer) as part of their business activities must obtain a corresponding permit. The temporary workers will be integrated into the economic employer's work organization and will be subject to the economic employer's instructions.

There is a time limit for temporary employment in Germany. A temporary worker may not be assigned to the same economic employer for more than 18 consecutive months. It should be noted that, apart from the aforementioned time limit, the statutory requirements do not apply to temporary employment between group companies.

The principle of equal treatment applies while the temporary worker is working for the economic employer. This means that the temporary work agency must grant the temporary worker the basic working conditions, including salary, that apply to a comparable employee of the economic employer during the period of employment with the economic employer.

If the temporary work agency does not have the required permission, the employment contract between the temporary work agency and the temporary worker is invalid. As a result, an employment relationship between the economic employer and the temporary worker comes into effect at the time agreed upon between the temporary work agency and the economic employer for the start of the work. In principle, the same legal consequences arise if employment contracts between temporary work agency and temporary workers do not expressly state the temporary employment relationship, and the person of the temporary worker is not specified, or if the permitted duration of the assignment has been exceeded.

Particular caution is required when employing third-country nationals. In principle, third-country nationals require a residence permit to work in Germany, which, in most cases, is only granted with the approval of the Federal Employment Agency. However, this approval must be refused if the foreigners wishes to work as temporary workers in Germany.

Illegal temporary employment carries the risk of committing an administrative offence. For instance, if the economic employer employs a temporary worker provided by a temporary employment agency without the required permit from the Federal Employment Agency, they are in violation of Section 16 AÜG, constituting an administrative offense. The commission of this offense can result in a fine of up to 30,000 euros.

The EoR concept does not exclude the risk of permanent establishment in Germany, as the temporary worker is subject to the instructions of the economic employer. Specifically, the temporary worker can be classified as a dependent representative (referred to as a representative establishment). Depending on the type of activity the temporary worker is engaged in within Germany, representation rights, such as power of attorney, entries in registers, and rights to negotiate and conclude contracts, increase the risk of a permanent establishment for tax purposes. A detailed examination is recommended, particularly considering the relevant double taxation agreement.

As the temporary worker is employed by a domestic employer, the temporary employment agency is obligated to withhold income tax in accordance with Section 38 EStG. Additionally, the economic employer may be required to withhold income tax if a permanent establishment is deemed to exist in Germany.

Most Double Taxation Agreements (DTAs) concluded with Germany follow the OECD Model Agreement and do not contain any special provisions regarding temporary employment. Examples of DTAs with special provisions are listed below:​

As already mentioned, the “Employer of Record” concept is, in fact, a temporary employment agency under German law, subject to strict regulatory requirements. Against this backdrop, the model in which a German temporary employment agency hires an employee and assigns them to a foreign company could be less attractive for this company. In the reverse scheme, where the German company hires an employee abroad via the EoR, German companies are certainly interested, as the German Temporary Employment Act does not apply as long as the employee works exclusively abroad. However, it is important to check the provisions of the respective foreign legislation to determine whether such a model is permitted in the country and whether it is generally profitable for the German company.​