At a glance
- An Employer of Record lets you have someone working in Germany in weeks instead of months, without your own company. That part is real and it is why the model exists.
- What the marketing pages leave out is the Arbeitnehmerüberlassungsgesetz. If a provider employs the worker and you direct their work, the arrangement can amount to labour leasing, which needs a licence from the Federal Employment Agency under § 1 AÜG.
- If the licence is missing, §§ 9 and 10 AÜG make the contracts ineffective and deem an employment relationship to exist between the worker and you. The risk lands on the hirer, not the provider.
- Where the arrangement is labour leasing, § 1(1b) AÜG caps assignment of the same worker to the same hirer at eighteen consecutive months, subject to collective agreements. That turns an Employer of Record into a bridge, not a permanent structure.
- Using an Employer of Record does not settle whether your company has a permanent establishment in Germany. That is a question of fact under § 12 AO and the applicable treaty, and it depends on what the person actually does.
What an Employer of Record does
An Employer of Record is a company that becomes the legal employer of your worker in Germany. It signs the employment contract, runs payroll, withholds wage tax, pays the social security contributions and carries the formal employer obligations. You direct the work: you set the objectives, you manage the person day to day, you decide what they build or sell.
The appeal is speed. Setting up a German company, opening the bank account, getting the tax number and the employer registration takes months if you are doing it from outside Germany. An Employer of Record can have somebody employed in weeks. For a company that wants one engineer or one salesperson in Germany to find out whether the market is real, that is a reasonable proposition and we would not argue against it.
What we would argue against is signing one without understanding the two German provisions below, because the risk they create sits with you.
The German complication nobody markets
Read the description again: a third party is the formal employer, the worker is integrated into your organisation, and the worker follows your instructions. In German employment law that description has a name. It is Arbeitnehmerüberlassung, labour leasing, and it is regulated.
§ 1 AÜG requires an employer who wishes to place employees with a hirer as part of its economic activity to hold a licence from the Bundesagentur für Arbeit. Whether a particular Employer of Record arrangement falls under the Act depends on how it is actually organised, and we are not going to pretend the boundary is always obvious, it is a genuinely contested area. What we will say is that many providers operating in the German market do hold an AÜG licence, which tells you how the providers themselves read the risk.
So the first question to a provider is not about price. It is: do you hold an Erlaubnis under the AÜG, and may I see it?
The distinction between labour leasing and a genuine contract for work or services is the subject of our separate article on Werkvertrag, Dienstvertrag and Arbeitnehmerüberlassung, which also lists the licence fees from the Federal Employment Agency's own fee leaflet.
What happens if the licence is missing
§ 9 AÜG provides that where the licence is missing, the contracts between the provider and the hirer and between the provider and the worker are ineffective.
§ 10 AÜG then provides that an employment relationship is deemed to have come into existence between the worker and the hirer. The hirer is you.
Read that consequence slowly, because it is the opposite of what the arrangement was bought for. A company that used an Employer of Record specifically to avoid being a German employer can end up as the legal employer of that person by operation of law, with the German dismissal protection, the social security exposure and the payroll obligations that follow, retrospectively.
This is not a theoretical footnote. It is the reason the licence question comes before the price question, and it is the reason to get the answer in writing rather than on a sales call.
The eighteen-month ceiling
If the arrangement is labour leasing, § 1(1b) AÜG limits the assignment of the same worker to the same hirer to eighteen consecutive months. Collective agreements in the hiring industry can provide otherwise, and previous assignments count towards the period unless there has been a break of the length the provision specifies.
We have not found this ceiling mentioned on a single Employer of Record marketing page, and it changes the decision more than anything else on this one. If the model has a time limit, then it is not an alternative to having your own company. It is a bridge to having one, which is a perfectly good thing to be, but it should be planned as one.
The practical consequence: if you expect the person to still be there in two years, start working out the formation timetable in month six, not in month seventeen.
Equal pay from day one
§ 8 AÜG sets out the principle of equal treatment, and it applies from the start of the assignment. A collective agreement may deviate from it, but only for a limited period, commonly up to nine months, with particular rules where sector supplement agreements apply.
The widespread shorthand that "equal pay applies after nine months" has it backwards. The nine months are the maximum length of a permitted exception, not a grace period before the principle begins. If you are budgeting a German hire on the assumption that you can pay below the comparable internal rate indefinitely, the budget is wrong.
What an Employer of Record does not give you
It gives you a person. It does not give you a company, and the difference matters more than the headcount comparison suggests.
- No German contracting party. Your customers still contract with a foreign entity. For German B2B buyers, particularly in the Mittelstand, that is a real friction, jurisdiction, payment terms, and someone to sue.
- No German bank account in your own name, and no German credit history being built.
- No German company in the register. Nothing for a customer to look up, no Handelsregister extract to send with a tender.
- No basis for a residence permit for you. § 21 AufenthG is about your own self-employed activity, and an Employer of Record employing somebody else does not address it.
- No asset base. If the German operation is meant to hold stock, equipment, a lease or intellectual property, it needs to be something.
The permanent establishment question
This is where foreign companies get an unpleasant surprise in year two.
Whether your company has a taxable presence in Germany does not depend on whether you set up a GmbH. It depends on the facts, assessed under § 12 AO and the applicable double taxation treaty, and the decisive factor is usually what the person actually does. Someone who habitually concludes contracts on your behalf is a very different case from a developer working on a product sold elsewhere.
An Employer of Record does not answer that question and generally does not take responsibility for it. Put it to a tax advisor before the first hire, because the answer may change which structure makes sense, and because discovering it retrospectively means amended returns in two countries.
Where the crossover actually is
Providers commonly place the point at which your own entity becomes cheaper somewhere around fifteen to twenty-five employees. That is their figure and we pass it on as such, we have not verified it and it depends heavily on salary levels and on what the provider charges.
The structural point is more reliable than any number. An Employer of Record charges per person per month, so its cost scales linearly with your headcount. A German company costs broadly the same whether it employs two people or twenty: the accounting, the annual accounts, the tax returns and the chamber of commerce contribution do not double when you hire a second engineer. Somewhere those two lines cross, and where they cross depends on your salaries rather than on a rule of thumb.
You can put your own numbers against the fixed side of that comparison in our formation cost calculator, which computes the statutory formation costs and the recurring first-year items.
What to ask a provider
- Do you hold an Erlaubnis under the AÜG? May I see it, and in whose name is it held?
- Do you treat this arrangement as Arbeitnehmerüberlassung? If not, on what basis, and get the reasoning in writing.
- How do you handle the eighteen-month limit? A provider who has not thought about it has told you something.
- How is equal pay under § 8 AÜG applied to this role, and against which comparable position?
- Who bears the cost if an authority reclassifies the arrangement? Read the indemnity clause, not the summary of it.
- What is your position on permanent establishment risk, and does your contract exclude it from your responsibility? It usually does.
- What happens to the employee if I terminate the agreement, can they transfer to my own company later, and on what terms?
What to do, in which order
- Settle the licence question first. Before price, before the demo, before the contract. §§ 9 and 10 AÜG put the consequence on you.
- Ask a tax advisor about permanent establishment based on what the person will actually do, not on the job title.
- Decide whether this is a bridge or a structure. If the answer is a structure, the eighteen-month ceiling means you are forming a company either way, better on your timetable than on the clock's.
- If it is a bridge, plan the crossing while it is calm. Formation from abroad takes months, mostly because of the bank and the document chain. Start those in parallel with the Employer of Record, not after it.
- If you form your own company, remember the employer side. A German employer needs a Betriebsnummer, has to register with the relevant Berufsgenossenschaft and has to run compliant payroll from the first month.
Questions
Sources
§ 1 AÜG, licence requirement for labour leasing and the maximum assignment period: gesetze-im-internet.de
§ 8 AÜG, principle of equal treatment: gesetze-im-internet.de
§ 9 AÜG, ineffective contracts: gesetze-im-internet.de
§ 10 AÜG, employment relationship deemed to exist with the hirer: gesetze-im-internet.de
§ 12 AO, permanent establishment: gesetze-im-internet.de
§ 21 AufenthG, residence permit for self-employment: gesetze-im-internet.de
Written by Christoph Schuler
Founder, Business Center Reutlingen. Fifteen years in international automotive at Daimler,
two of them living in Bengaluru.
Published 29 August 2026
Business Center Reutlingen provides administrative and organisational support and introduces you to licensed professionals. We do not give legal or tax advice, in Germany only admitted lawyers (Rechtsanwälte) and tax advisors (Steuerberater) may do so.