Employer of Record (EOR) in Germany: A Guide

Germany offers a highly educated talent pool and one of the strongest economies in the world. There’s no doubt it presents a great opportunity for international expansion in Europe, but hiring remote workers in Germany isn’t always straightforward.

The local employment laws are complex and can be difficult to navigate without expert support. And while we usually recommend the Employer of Record (EOR) model to overcome global employment challenges, Germany’s EOR legislation does have certain restrictions that may create unique obstacles for your business. It's paramount you partner with a qualified EOR service that understands German labor law regarding working hours, employee benefits, and annual leave.

This article will guide you through the best ways to hire remote talent in Germany, whether through an EOR or an alternative solution.

EORs in Germany

The Employer of Record (EOR) model is widely used across the globe, including Germany, where it’s known as “labor leasing” (“Arbeitnehmerüberlassung”). Like traditional services, German EORs and labor leasing companies employ talent on behalf of other companies. They also commonly handle:

Onboarding
Payroll
Benefits
Time off management
Offboarding

However, unlike many other countries and jurisdictions, Germany’s EOR equivalent comes with a time limitation of 18 months per employee. That’s to say, after 18 months, a foreign business can no longer retain a given team member through the labor leasing company. Instead, the business must either let the individual go or hire them directly through its own local business structure. Understanding the minutia of German labor law is vital for ensuring German employees receive proper minimum wage, paid leave, and severance pay requirements.

Extending the 18-month EOR Rule in Germany

For businesses who want to use labor leasing for longer than 18 months, there is a workaround. Bear in mind that while it is compliant, it’s not very practical.

If an employee stops working for you for over three months, the 18-month timeline resets, and you can re-hire them through a labor leasing company for another 18 months. Though it can provide a short-term employment fix, this stop-start method can be cumbersome and detrimental to your long-term business growth.

You’ll likely experience gaps in workflows, lower engagement and productivity, and decreased retention due to your team member(s) being out of work for three months. It may also prove difficult to hire employees and manage payroll services for international companies with the German employee leasing system.

You may think hiring independent contractors is the solution to this issue, but that can be risky too - especially if you misclassify your chosen talent.

Thankfully, there’s a simple solution for long-term employment that doesn’t involve hiring contractors.

Register as a Foreign Employer in Germany

In Germany, you can register your existing company as a “foreign employer” (“Ausländischer Arbeitgeber”). This means you will have a virtual presence in the country without needing to open a separate legal entity, new company, or even an office.

Through this model, you can employ talent in Germany for as long as you like, and in many cases, you aren’t liable to pay corporate taxes in the country either. Doing so will allow you the opportunity to hire German workers without needing to hire them as independent contractors.

However, being a foreign employer in Germany can still be complex as you have to navigate local labor laws; you have to:

Liaise directly with the German authorities in the German language.
Understand and comply with German employment law.
Process payroll and contributions compliantly.
Navigate HR compliance with German employees.

That’s why it’s beneficial to partner with an expert team like Omnipresent, who can guide you through the entire process and offer critical administrative support.

Limitations of Being a Foreign Employer in Germany

Being a foreign employer is a great way to hire a handful of employees in Germany compliantly without having to set up a local entity. But this model also has limitations.

Ultimately, it’s designed to help companies employ individuals outside the company’s home country. It’s not meant to support the development of a whole operational business in Germany.

Once you start building a German team with the aim of international expansion - think 10+ employees - the local authorities may start to question why you haven’t set up a local entity or pay local corporate taxes.

As you begin to push the threshold, it’s usually best to set up a more official local presence in compliance with German employment law.

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Set up a Local Entity in Germany

Establishing a local entity in Germany can be time-consuming and expensive, but it may be the most practical next step in your expansion strategy after validating the market.

Two of Germany’s most popular local entity types are branch offices and foreign subsidiaries (typically limited liability companies). Choosing between them depends on your business strategy.

Generally speaking, a foreign company is liable for its branch offices, whereas a foreign subsidiary is legally independent. Foreign subsidiaries can also conduct additional and separate business activities to the parent company, whereas a branch office cannot.

One of the biggest draws to establishing a branch office over a subsidiary is that it doesn’t require any share capital (equity financing). This may be an attractive option for start-ups and SMBs.

There are two types of branch office structures in Germany: an autonomous branch (Zweigniederlassung) and a dependent branch (unselbständige Zweigniederlassung). As the names suggest, an autonomous branch has some degree of autonomy from its foreign head office. For example, it can trade under a different name to the head office and open a German bank account.

A dependent branch can’t do either of those things or make any business decisions without the approval of the head office. You can learn more about the differences between the two structures on Hamburg’s Chamber of Commerce website.

Depending on the type of local entity you wish to set up, you may need to:

Choose the right limited liability company for your subsidiary (Unternehmergesellschaft haftungsbeschränkt - UG vs. Gesellschaft mit beschränkter Haftung - GmbH).
Determine the minimum share capital required for your chosen legal entity type.
Register with the local Trade Office (Gewerbeamt), the German Commercial Register. (Handelsregister), and the German Transparency Register (Transparenzregister).
Prepare incorporation documents.
Register for corporate tax, trade tax, and VAT.
Obtain special certificates and licenses.
Pay translation, notarization, and other professional fees.
Set up payroll & bookkeeping.
And more!

As you can see, it’s pretty complicated, so it’s always best to seek local expertise, such as legal and tax advice, throughout the process.

Which Remote Hiring Option Is Best for Your Business?

To recap, the three main ways for foreign businesses to hire talent in Germany are:

Work with labor leasing companies (EORs)
Register as a foreign employer
Establish a local entity

Selecting one of these options will depend on your unique business goals and desired outcomes.

If you’re looking for a short-term solution to test out the market, labor leasing is a useful way of hiring local talent without spending time on administration.

Labor leasing companies (EORs) are responsible for creating compliant employment contracts, setting up payroll, and employing your chosen talent compliantly. It’s quick, easy, and cost-effective. As a result, labor leasing gives you the freedom to focus on higher ROI tasks.

However, labor leasing is just that: short-term. After 18 months, the contract must end - at least temporarily. That’s where registering as a foreign employer can support your retention efforts.

As a foreign employer, you can employ talent directly and for as long as you like. It’s usually the best option if your company wants to tap into and retain top talent, no matter where they’re based.

It’s worth noting that both labor leasing and registering as a foreign employer can put your business at risk of permanent establishment. However, if you’re aware of the main triggers, you can minimize this risk.

Finally, if your business is looking to push ahead with expansion into Germany and hire an extended team of local talent, establishing a legal entity in the country is likely your best option.

While you’ll be liable for paying corporate taxes, a legal entity will give your company much more freedom to sell your products or services in Germany, set up permanent operations, and continue to grow your business.