A quick overview: can I use an Employer of Record in Germany?
Yes, using an Employer of Record (EOR) in Germany is possible — but only with strict compliance with German labor law and a valid Employee Leasing Act licence (AÜG). EOR services have been allowed again since 1 October 2025, and this model enables fast market entry without a local branch. However, Germany is not a market where compliance can be caught up later.
Key points:
- An EOR acts as the legal employer. In Germany, this model is regularly classified as temporary employment (employee leasing) under the AÜG.
- Without a permit according to the Employee Leasing Act, the model constitutes illegal temporary employment — with significant risks for the client company.
- An EOR allows companies to hire employees without founding a subsidiary. The model enables quick access to international talent but requires strict adherence to German law.
- Co-employment (PEO) is not recognised as an independent concept under German labor law.
Typical use cases in 2026: market testing with 1–10 employees, fixed-term projects (12–18 months), transitional phases before founding a German GmbH. For country-level detail on statutory entitlements and payroll rules, see our Germany country guide.
Last reviewed: July 2026.
Why Germany is a particularly compliance-intensive market
Within Europe, Germany is among the countries with the highest standards for employee rights, co-determination, and social security. For UK and US companies accustomed to employment-at-will logic, this represents a fundamental paradigm shift.
Labor law particularities:
- Employees are subject to German dismissal protection law. The Dismissal Protection Act applies from 10 employees in a company — dismissals without valid reason are then invalid.
- Labor law sets high standards; from the perspective of international teams, employment law here means the same legal framework, including working hours law, minimum wage, co-determination, and works council (Betriebsrat).
- Employment contracts must meet strict formal requirements and cannot undercut mandatory law.
Tax and social security requirements:
- Mandatory registration with tax office, health insurance funds, and social security institutions — including regular tax filings and DEÜV notifications.
- Complex payroll tax and social security calculations under German law: pension, health, nursing care, unemployment, and accident insurance must be correctly calculated and paid.
- Data protection (GDPR) and extensive documentation obligations add further complexity.
Why UK and US companies struggle: these markets have less formalised co-determination, weaker dismissal protection, and different expectations regarding employment flexibility. Ignoring these differences leads to costly pitfalls in Germany.
How an Employer of Record is legally classified in Germany (employee leasing)
The term Employer of Record (EOR) in the German context almost always describes a temporary employment relationship under the Employee Leasing Act (AÜG). The EOR model can be classified as temporary work, which entails specific obligations and risks.
The three-party relationship legally looks like this:
- The EOR as the legal employer: acts as the official employer, signs the employment contract with the employee, handles payroll, taxes, and social security contributions. The EOR assumes full legal and financial obligations of employment, and must comply with all labor law requirements including dismissal protection.
- The client company: the de facto employer in daily operations, directing the employee’s work and integrating the person into the team, while the EOR remains responsible for formal employment and administration.
- The employee: has a formal employment contract with the EOR but works operationally for the client.
The AÜG sets the framework:
- Permit requirement (AÜ permit) issued by the Federal Employment Agency.
- Written temporary employment contract between the service provider (EOR) and the client.
- Equal pay and equal treatment principles after a certain deployment period.
A common misconception: neither co-employment models nor payroll-only or contractor arrangements replace the AÜG obligations. EOR models are considered temporary employment under the AÜG, and this cannot be negotiated away.
AÜG licence, the 18-month limit, and other hard limits of employee leasing
Without an AÜG licence, there is no reputable Employer of Record in Germany and no legally secure EOR setup. EOR providers need an AÜG licence to operate legally. Providers circumventing this operate illegally under German law.
About the licence:
- Issued by the Federal Employment Agency (e.g. Regional Directorate Nuremberg).
- The EOR must prove reliability, maintain orderly payroll accounting, and document compliance with labor law — including minimum security deposits (e.g. €3,000 per leased employee, at least €15,000 liquid assets).
- The permit is initially granted for one year and renewed annually. After three years of continuous operation, it becomes indefinite.
The 18-month rule:
- The maximum deployment duration of an EOR employee with the same client is 18 months.
- After 18 months, a cooling-off period of at least 3 months and 1 day must be observed. Interruptions shorter than three months are fully counted.
- Changing EOR providers does not bypass this limit — previous deployment times with the same client are added.
Collective agreements (e.g. chemical, metal industries) can allow exceptions up to 24 or 48 months — but only with solid legal review and actual collective bargaining coverage of the deployment company.
Arrangements without a licence, or with consultancy contracts that disguise temporary employment, pose significant compliance risks and are problematic under German law.
What an EOR covers in Germany: payroll, social contributions and co-determination
A good Employer of Record does much more than handle salary payments. The EOR manages payroll and compliance for the client company and assumes full HR administration under German law. For a breakdown of pay cycles and statutory deductions, see our guide to payroll in Germany.
Payroll and payments:
- Preparation of monthly payroll in German.
- Withholding and payment of wage tax and solidarity surcharge (income tax rates 2026: 14–45%).
- Implementation of bonuses, premiums, and benefits in kind (e.g. job ticket) under German tax law.
Social security contributions (employer shares, 2026):
Total employment costs are based on the employee’s gross salary. Social security contributions are split evenly between employer and employee, and are legally mandatory in Germany.
| Contribution type | Total rate | Employer share | Employee share |
|---|---|---|---|
| Pension insurance | 18.6% | 9.3% | 9.3% |
| Health insurance (GKV) | approx. 17.5% (incl. 2.9% additional contribution) | approx. 8.75% | approx. 8.75% |
| Nursing care insurance | 3.05–4.2% | approx. 1.8% | variable |
| Unemployment insurance | 2.6% | 1.3% | 1.3% |
| Accident insurance | approx. 1.09% | 1.09% | – |
Employer contributions thus amount to about 19–22% of gross wages, depending on the health insurance provider and industry. Employment costs add up to significantly more than the net salary.
Co-determination and works council:
- From 5 eligible employees in a company, a works council can be established.
- The works council has information and co-determination rights regarding working hours, vacation, remuneration systems, hiring, and dismissals.
- In the EOR model, the question arises: does the works council belong to the EOR’s company or the client’s company? This becomes increasingly relevant with growing teams.
Additionally, the EOR handles typical HR administration such as certificates, attestations, and reporting obligations to authorities. EOR models significantly reduce administrative burdens for companies.
Employment contracts under German law: structure in the EOR model
All employment contracts in the EOR model are subject to German labor law if the work location is in Germany. Contract design does not exempt the employer from mandatory law, regardless of the company’s headquarters.
Mandatory contract contents:
- Description of duties, work location (including remote work arrangements), weekly working hours (typically 35–40 hours).
- Compensation including variable components and special payments (e.g. 13th salary); the statutory minimum wage in Germany is €13.90 per hour from 2026.
- Vacation entitlement: at least 20 working days for a 5-day week, usually 25–30 days in practice.
- Probation period (max. 6 months) and notice periods according to § 622 BGB.
Special clauses:
- Overtime and time tracking rules under the Working Hours Act.
- IP and know-how transfer and confidentiality agreements (NDAs), possibly additionally between client and employee.
- Non-compete clauses with compensation: under German law, at least 50% compensation must be paid.
An experienced EOR helps UK and US companies use the flexibility in German law without violating mandatory rules — for example regarding fixed-term contracts (only with objective reasons under the Part-Time and Fixed-Term Employment Act) or the written form requirement, which cannot be circumvented digitally for employment in Germany. These limits define the legal framework of employment in Germany.
Social security, health insurance, and additional benefits in the EOR setup
Social security is a core element of every employment relationship under German labor law. The EOR assumes full administration here — from registration to ongoing contribution payments. Our Germany benefits and leave guide covers statutory entitlements in more detail.
Mandatory social security:
Employees must contribute to the statutory pension insurance. The statutory unemployment insurance is compulsory for all employees. The statutory accident insurance is part of social benefits in Germany. Together with health and nursing care insurance, these five pillars form the social security and compliance system in Germany.
Health insurance in detail:
- Statutory health insurance covers about 90% of the German population.
- Employees must be included in statutory health insurance up to an annual income threshold of €77,400 (2026). Above this, private health insurance is possible.
- The EOR registers employees with the chosen health insurance fund and continuously pays contributions.
Company benefits:
- Occupational pension schemes, meal subsidies, mobility budgets, and wellbeing benefits are common and form competitive packages.
- UK and US companies should structure benefits to comply with German labor law and equal treatment principles — especially when employees are spread across locations.
The 3 most common mistakes UK and US companies make when hiring in Germany
Most HR teams from the UK and US only realise the consequences of German labor laws after hiring. Here are the three mistakes that reliably repeat.
Mistake 1: underestimating temporary employment and the AÜG
Many companies use payroll-only or global contractor models without an AÜG licence. The result is illegal temporary employment. Consequences are severe — fines up to €30,000 per violation, back payments of social security contributions and wage tax, and in serious cases, criminal liability for management. In Germany, the EOR must comply with labor law; providers without a licence expose themselves and their clients to enormous risks.
Mistake 2: ignoring co-determination and the works council
Building larger teams (e.g. 20–50 people) without considering works council rights regularly leads to conflicts. Disputes about working time rules, home office policies, shift planning, and increased risks of challenges to dismissals are typical consequences. Co-determination in Germany is not optional but a fundamental employee right.
Mistake 3: incorrect handling of termination and severance payments
Employment-at-will logic from the US does not work in Germany. Missing or incorrect reasons for termination almost always lead to dismissal protection lawsuits. A common misconception is that there is no legal entitlement to severance pay. Formally true — but in practice, severance payments of 0.5 to 1 monthly salary per year of employment are regularly paid to avoid lawsuits. UK and US companies systematically underestimate this. Our Germany termination guide sets out notice periods and process requirements.
These mistakes can be avoided by early cooperation with an EOR with local labor law expertise. EOR models minimise legal risks for companies — but only if the provider truly masters the subject.
EOR vs your own company in Germany: when does what make sense?
The decision between a Germany EOR and founding your own legal entity (e.g. GmbH or branch) depends on team size, time horizon, and the strategic role of the location. EOR enables rapid market entry without a local entity — but this is not always the right solution.
Advantages of an EOR:
- Fast start: onboarding in 1–2 weeks instead of months for entity setup.
- No need for a local director, no commercial register entries.
- Predictable monthly costs and reduced fixed costs in the early phase.
- Quick market entry without a local branch — ideal for testing a market.
Advantages of your own entity:
- Full control over HR policies, compensation systems, and corporate benefits.
- Better perception as a real employer in the market, facilitating recruiting.
- Long-term cost optimisation, especially with larger teams of 20–30+ employees.
- No restriction by the 18-month rule.
Decision logic:
- Use EOR as a transitional or test model for 1–3 years while preparing GmbH formation in parallel.
- Switch to your own entity when thresholds are reached (headcount, revenue, strategic importance).
- A good EOR supports the transition of employment relationships — legally clean, including transfer of business under § 613a BGB.
Alternatives often discussed — and their risks
Many UK and US companies try to avoid the EOR route, with mixed results and sometimes significant risks.
Freelancers and contractors: companies must know the difference between genuine self-employed persons and disguised employees under German law. Key factors are instructions, integration into the company, and whether only one client exists. Misclassification risks back payments of social security, wage tax, fines, and criminal proceedings. The client is retrospectively liable for unpaid contributions. If your team mixes employees and independent workers, our contractor management guidance explains where the line sits.
PEO and co-employment: PEO shares employer responsibilities with the client company — a model that works in the US. Under German law, co-employment is not recognised. PEO requires a legal entity in the host country, and PEO models for physical employees in Germany are usually classified as temporary employment, with the same AÜG obligations as EOR.
Direct employment without a German entity: foreign companies can employ people in Germany under German labor law without a German entity. However, reporting, registration, and payroll compliance obligations remain fully in place. Moreover, a permanent establishment risk often arises, triggering corporate and trade tax liabilities. Administrative hurdles and liability risks often exceed those of a structured EOR setup.
Practical process with an Employer of Record in Germany — from offer to offboarding
An EOR enables companies to hire international employees legally and securely. Here is how the process looks in practice.
Onboarding:
- Collect necessary data: tax ID, social security number, bank details, proof of health insurance, work or residence permits if applicable.
- Agree on salary, employee benefits, and job title between client and EOR in line with German market standards.
- Draft and sign the employment contract under German law.
Ongoing administration:
- Monthly payroll and notifications to tax office and social security — the EOR handles payroll and legal compliance, and can consolidate this with global payroll across other markets.
- Manage vacation, sick leave (continued pay up to 6 weeks, then sickness benefits), parental leave, and other absences.
- Adjust salaries, bonuses, and promotions in coordination with the client.
Offboarding:
- Observe statutory notice periods and formal requirements (written form) — employment does not end by email.
- Support in amicable termination agreements including negotiating severance payments.
- Issue qualified references according to German standards.
Throughout the employment, the client manages operational leadership and performance. The EOR is responsible for the legal and administrative employer role — a clear division of tasks that does not overlap with the client’s core business. See how RemotePass EOR handles this across 150+ countries.
FAQs about Employer of Record in Germany (2026)
Can I use an EOR to hire in Germany without my own entity?
Yes — provided the EOR provider holds a valid AÜG licence and assignments comply with AÜG rules. Companies can hire employees in Germany legally this way.
What are the social security contributions for employers in Germany?
Employer contributions amount to about 19–22% of gross wages and include pension, health, nursing care, unemployment, and accident insurance. Contributions are withheld by the employer and paid together with the employee’s share.
What is co-determination (Betriebsrat) and does it affect me as a foreign employer?
From 5 eligible employees, a works council can be formed. It has co-determination rights on working hours, vacation, and dismissals. In the EOR model, the works council’s affiliation — EOR company versus client company — is crucial.
What are the 3 most common mistakes when hiring in Germany?
Lacking an AÜG licence, ignoring co-determination, and incorrect termination practices. Each can lead to five-figure fines and lengthy labor court proceedings.
How long can I employ people via an EOR?
Maximum 18 months with the same client, unless collective agreements allow exceptions. After that, a cooling-off period is required.
Is an EOR worthwhile compared to setting up my own entity?
For market entry, small teams, and transitional phases: yes. For 20–30+ employees and long-term commitment, a local company is often more economical.
Individual cases — especially for executives with signing authority or tech teams with IP-sensitive projects — should always be reviewed with German labor law experts. Compliance with German regulations is not an area for shortcuts.
Last reviewed: July 2026.
