8 Labor Laws In Germany To Be Aware Of When Hiring Abroad

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Gino Peters

Written By:

Gino Peters

Reviewed By: Belinda E.

June 3, 2026 8:18 pm

Category Tag: News

The rise of remote work made international expansion much easier in recent years, but hiring abroad still comes with legal and administrative complexity, as every country has its own labour laws and payroll rules that must be followed. In addition, not many companies can open a new entity in every new market that they are expanding into. That is when the Employer of Record (EOR) solution comes in handy.

The EOR serves as the legal employer on paper, while the client company manages important activities related to the employees responsibilities and performance.

In this guide we will cover what an employer of record is, how it works in detail, how much it can cost and which business should consider an EOR solution.

What is an Employer of Record (EOR)?

An Employer of Record (EOR) is a third party service provider that legally employs a person on behalf of another company in the country where the employee officially resides. As an official employer the responsibilities of EOR include issuance of an employment contract, processing payroll and withholding taxes and necessary social security contributions, as well as preparation of offboarding documents or any documentation that need to be signed by the employer. In addition, EOR ensures the compliance with local labour laws and serves as a first point of contact for any legal disputes.

The client company that hired the employee through an EOR also has a list of responsibilities. As an Employer of Record does not have the visibility on operational activities behind the scenes a client company needs to provide direction and ensure proper team integration.

In simple terms, the EOR provider acts as a legal employer in the country of the employee’s residence, while the client company takes on day-to-day manager work.

Responsibility	Employer of Record (EOR)	Client Company
Employment contracts & any other official documentation
Payroll processing
Income tax & social security contributions
Compliance with local labour laws
Statutory benefits administration
Managing daily work and projects
Setting goals and performance expectations
Providing equipment and tools
Leading the employee’s team and workflow

Employer of Record solutions gain more and more popularity in the field of global expansion as they allow businesses to hire best candidates fast and easy while staying compliant with local employment regulations. More information about EOR service are available if you would like to understand more.

EOR Meaning

The term “EOR” is the abbreviation for Employer of Record.

Employer in this instance stands for the company that hires the employee and takes on duties related to it, such as onboarding and offboarding process, payment of wages and compliance with other legal requirements.

“Record” from the EOR perspective refers to official registration with government authorities. The name of the EOR provider is stated in all payslips and tax filings, and should also be listed by the employee in any documents where employer must be stated, such as mortgage or loan applications.

One might ask a question of why this legal structure exists. As it is not possible to provide an employment contract directly to a person that legally resides in another country, the business expanding abroad typically needs to establish a local entity. That involves legal registration, arrangement of local bank accounts and organisation of payroll structure, as well as compliance with local law.

EOR allows to simplify the global hiring and reduce administrative burden through their existing legal entity.

There are some other hiring models that can be confused with EOR.

EOR and PEO

Many sources online refer to EOR as “international PEO”, which may create confusion as these models have 1 important difference.

A Professional Employer Organisation (PEO) serves as a co-employer of a client company. In other words, a business must already have an established entity in the country. The hiring tasks are, therefore, shared between 2 companies, while legal liability stays only with the client company. In the EOR model all legal risks are being taken by the official employer. Read more about the difference between PEO and EOR here.

EOR and staffing agency

Staffing companies mainly provide assistance for short-term projects by providing temporary workers. If the client wishes to employ a person for a longer time, EOR approach must be chosen.

EOR and contractor model

Contractor agreements assume the involvement of independent workers rather than employees. This model is also often used for temporary, project-based assignments. It is important to remember that there is a big misclassification risk between a contractor and an employee in the company which can lead to potential legal issues. An EOR ensures that employment is legally compliant with local labour law.

How does an Employer of Record work?

While it may sound complicated at first, a process behind the employer of record model is relatively straightforward.

The operating company selects a candidate

The client company recruits the employee they want to hire in another country

The EOR becomes the legal employer & local employment contract is issued

The Employer of Record uses its local legal entity to prepare and issue an employment contract that complies with labour law of the country where the employee is based. Depending on case-by- case situation, the work visa might need to be secured beforehand. Our company provides immigration services, more details can be found here.

Payroll and taxes are managed

The EOR takes on recurring responsibilities related to a payroll and ensures correct processing of income tax, social security contributions etc

Benefits are administered

Paid leave, sick leave, pension contributions and any other statutory benefits are being managed by the EOR.

Ongoing compliance and HR support

It is the responsibility of the EOR to monitor changes in local labour law and ensure ongoing compliance.

Example:

Imagine a UK-based tech company found a perfect candidate in Germany for a position of a software developer.

Instead of going through the administrative burden of opening a legal entity in Germany, the company chooses to work with an Employer of Record. The EOR hires the developer under a German employment contract and manages payroll and taxes. At the same time the UK company welcomes the new employee in the team and manages the daily work of a developer.

What services does an Employer of Record provide?

The Employer of Record does more than just providing an employment contract to the employee. Typically a wide range of HR and compliance services is included in the EOR offer. For example, read about the services included in our EOR package here.

Employment and HR administration

Locally compliant employment contracts and support with other documents requested by authorities
Employee onboarding
Employee record management. For example, control over PTO

Payroll and tax management

Regular payroll processing
Tax withholding and reporting of social security contributions with authorities
Payslip generation and creation of annual wage tax certificates

Benefits administration

Management of statutory benefits
Pension contributions (where required)
Support with benefits such as maternity leave allowance, sick leave allowance etc

Compliance and risk management

Insuring compliance with local labour law
Management of onboarding and offboarding processes
Representation in difficult legal and court cases

Additional services:

Some EOR providers ( such as ThisWorks EOR Services) provide additional services such as:

Work permit and dependent visa support
Background checks
Relocation support
Value added services: support with housing, company car, banking, etc ( depending on the country).

This vast list of services allows businesses to manage international teams, while staying compliant and avoiding complex local employment administration.

Benefits of using an EOR service

There are multiple advantages the businesses can get from working with an Employer of Record provider.

Faster global hiring

Setting up a new entity can take up to several months. With an EOR the hiring process can take several days.

Reduced compliance risk

A trustworthy EOR provider ensures the compliance with all local regulations. As the labour law varies greatly between countries, having a knowledgeable party to rely on can make a big difference.

Lower expansion costs

Establishment of a new entity is not only a time-consuming process, but also costly. With EOR services these costs can be avoided.

Access to global talent

The location of a remote candidate is not a problem if the company uses Employer of Record services. In other words, the best candidate for specific business purposes can be chosen.

Scalable hiring model

EOR services are ideal for organisations that want to scale international hiring quickly. They are particularly useful in the following situations:

Remote-first teams and organisations
Companies testing new markets abroad
Startups expanding internationally

How to choose the right Employer of Record

Choosing between several EOR providers is important, as it influences not only compliance, but also employee experience for new hires and how your company is perceived on the job market.

Here are some important things to keep in mind when deciding on your EOR partner:

Geographic coverage

Make sure that EOR provider can cover the country where you want to expand globally. Read about our EOR coverage here.

Pricing transparency

Check that EOR provider does not have any hidden costs and the pricing is clearly outlined in your MSA.

Compliance expertise

A strong EOR provider should have a team of experienced local HR specialists who understands all in and outs of a national labour law.

In-house vs partner model

Some EOR providers rely on their third-party partners, while others manage employment directly through their own local entities.

Customer support

It is important to find a EOR partner that helps with any questions or concerns in a quick and professional manner. That can be crucial when dealing with employee offboarding or any legal disputes.

Warning signs

Understanding the importance of choosing a right party, your company should be cautious of providers that lack local expertise and cannot give clear answers to your labour law questions. In addition, companies with slow response times can prove to be unreliable in critical situations. Furthermore, providers with complex pricing models with many hidden fees can create a lack of cost transparency and result in unforeseen expenses.

By selecting a provider with strong expertise in local labour law and reliable support from dedicated teams, your company can ensure a smooth international growth. Learn why companies choose ThisWorks as their EOR partner.

How much does an employer of record cost

The vast coverage of services the employer of record provides makes many businesses ask how much an EOR costs.

Pricing models vary greatly on the provider and the country of coverage, but most EORs use one or more of the following structures.

Flat monthly fee per employee.

The EOR provider charges a fixed monthly fee for each employee they have on the payroll from the client.

Percentage of salary

While not being a popular approach, some EOR providers charge a percentage of the employee’s salary, typically ranging between 5%-15%.

Setup fees

Some providers charge onboarding or offboarding fee for each employee.

The fee that the business needs to pay to an EOR provider also depend on the location of a service. Local labour law complexity of some countries can influence the fee. In addition, some countries have specific statutory benefits and payroll administration requirements. Furthermore, employee headcount in the specific location can influence the fee.

EOR vs setting up a legal entity

To establish a new entity the organisations needs to go through legal and tax registration. In addition, accounting support and ongoing compliance costs such as the fees for local labour lawyers can make setting up a legal entity significantly more expensive.

An EOR allows companies to expand globally without these upfront investments.

EOR vs hiring contractors

Some businesses decide to hire international workers as contractors. However, this approach can often lead to a misclassification risk, which can cause legal and tax liabilities.

A professional EOR provider ensures that the new starters are compliantly onboarded under local employment regulations.

EOR FAQs

Is an EOR the same as a PEO?

No. PEO model assumes co-employment and requires the business to already have established local entity, while EOR employs new talents through its own entity only.

Can an EOR hire contractors?

While some EOR providers can support hiring contractors, it is important to remember that main function of EOR is the employment of full-time workers legally in a country. A risk of misclassification between EOR and contractor should be also considered carefully.

Is an employer of record legal?

Yes, when established and structured properly, Employer of Record entities are legal and widely used for international expansion by many companies.

When should you use an EOR?

The most common reason for using EOR include:

Hiring employees located in another countries remotely
Testing new markets before establishing an entity
Expanding internationally

Can you switch from EOR to your own entity?

Yes. Many companies initially hire through an EOR for the ease and speed of expansion and later transition employees to own legal entities upon their establishment. It is important to remember that some countries require specific procedure to be followed in such a scenario.

Get in touch with ThisWorks

Expanding your team globally does not need to be long and administratively complex.

With the use of Employer of Record the businesses can have access to the best talent from around the world while ensuring full compliance with local labour laws.

ThisWorks can support your global expansion with our compliant Employer of Record services.

Contact our team to find our how we can help your international team glow fast and compliantly!

8 Labor laws in Germany to be aware of when hiring abroad

Navigating German labor laws for employers is crucial, especially for those involved in temporary employment. The Employee Leasing Act, or AUG, plays a key role here. It outlines the need for an AUG license for temporary employment agencies. This ensures compliance with hiring employees in German regulations. Moreover, it upholds discrimination laws in German workplaces, ensuring fair treatment for all. Additionally, it touches on aspects like German retirement pension contributions, NDAs, and Data Protection in Germany. Understanding AUG is essential for businesses aiming for success in Germany’s job market. This guide aims to provide a comprehensive overview, making complex regulations easy to grasp. Also, you can contact our experts here at ThisWorks for more info.

1. Need for an AUG License

An AUG license is obligatory for any German employer planning to lease workers. This license is your key to functioning legally. It ensures you meet all German labor laws for employers. Holding an AUG license indicates you’re serious about following the rules. It’s not just about legality; it’s about duty. With this license, you’re ready to offer fantastic possibilities while protecting workers’ rights. Let’s look into why this license has such significance.

Why You Need It?

The license does more than just allow you to lease staff. It also guarantees you’re up to speed with Discrimination laws in German workplaces. Plus, it covers you on matters like German retirement pension contributions. Not to forget, it’s also vital for NDAs and Data Protection in Germany.

How to Obtain an AUG License?

Once you pass all the official checks, you’re on your road to earning the AUG license. Remember, this license is more than a permission. It’s a commitment to fair and legal employment practices in Germany. Here’s clear guidance on how to get the license.

Application Submission: Start by submitting your application to the Federal Employment Agency. This is your first step into the realm of lawful employee leasing.

Documentation: You’ll need to offer a selection of documents. These include your business registration and proof of financial stability.

Compliance Check: The agency will assess your application. They ensure you meet all German labor rules for employers.

The Federal Employment Agency looks for particular factors in your application:

Financial Reliability: Your firm must be financially solid. This indicates you can meet your responsibilities to leased staff.

Legal Compliance: You must comply with all relevant laws. This contains discrimination laws in German workplaces and NDAs and Data Protection in Germany.

Fair Treatment: The agency checks if you can give fair wages and working conditions. This accords with the principles of German retirement pension contributions.

2. Equal Treatment and Pay for Leased Employees

In Germany, fairness in the workplace is a must practice, especially when it comes to leased personnel. At the basis of these policies is a simple yet strong idea: leased employees should enjoy the same perks and salary as their permanent equivalents. Equal treatment and remuneration for leased employees are not merely legal requirements. They represent a dedication to fairness and respect in the workplace. By obeying these standards, businesses contribute to a more equal and productive work environment.

Equal Pay: From day one, leased personnel must earn the same wage as permanent staff doing similar tasks. This rule bans any salary discrimination in the workplace.

Working Conditions: Beyond wages, leased employees are entitled to the same working conditions. This includes access to facilities, work hours, and breaks, guaranteeing a level playing field for all.

3. The 18-Month Leasing Cap

In Germany, there’s a clear guideline regarding leasing employees: the 18-month cap. This limit impacts both employers and temporary workers. The 18-month leasing cap is a major aspect of hiring employees in German regulations. It fosters a balanced approach to temporary employment, benefiting both employers and individuals.

The 18-Month Rule Explained

You can’t lease the same employee to the same company for more than 18 months. This regulation ensures variety and fairness in temporary employment. Employers need to plan properly. After 18 months, you must either hire the staff permanently or cycle them out. This maintains your team dynamic and is consistent with German labor rules for employers. For workers, this cap means an opportunity for various experiences. It also opens the door to potential permanent opportunities after the leasing period ends.

Managing the Cap

Strategic Planning: Employers should maintain track of leasing periods. This assists in avoiding unintentional breaches of the 18-month guideline.

Rotation and Hiring: Consider rotating personnel or giving permanent employment as the 18-month milestone approaches. This maintains compliance and workforce stability.

4. Documentation and Reporting for AUG Compliance

For organizations adopting the AUG setup, careful documentation and timely reporting are non-negotiable. These approaches not only ensure compliance but also preserve the interests of all parties concerned. Keeping correct records is the backbone of AUG compliance. Here’s what you need to maintain:

AUG licensing Proof: Always have your AUG licensing papers ready. It’s your ticket to lawfully leasing employees.

Employee Contracts: Maintain thorough contracts for leased personnel. These should replicate the criteria for permanent staff, reflecting German labor rules for enterprises.

Wage Records: Documenting pay rates is vital. It confirms compliance with equal pay standards, a cornerstone of fair employment practices.

Reporting Obligations

Regular reporting to labor authorities maintains your firm visible and compliant. Report the start and end dates of employee leasing terms. This assures adherence to the 18-month cap. Submit data confirming leased employees receive the same benefits and salary as permanent ones. This corresponds with discrimination legislation in German workplaces. Report on occupational health and safety measures for leased staff.

5. Sector-Specific Prohibitions on Employee Leasing

AUG setup requires awareness of sector-specific rules. Certain businesses face limits or outright prohibitions on employee leasing, while others enjoy exceptions. Understanding these limitations and exceptions is vital for maintaining compliance with German labor regulations for firms. It assures your organization may utilize the benefits of employee leasing without falling afoul of industry-specific restrictions.

Industries with Leasing Restrictions

Construction: The construction sector confronts severe regulations due to concerns over safety and employment stability. Leasing staff here demands careful consideration of legal restrictions.

Healthcare: In healthcare, the focus on patient care and the delicate nature of the work typically limit the usage of leased staff.

Public Sector: Government and public services often restrict employee leasing to maintain transparency and public responsibility.

What Are the Exceptions?

While some sectors face restrictions, there are instances under which a leasing license might not be necessary:

Group Companies: Within corporate groups, shifting personnel between entities may not require a separate AUG license, boosting internal freedom.
Short-term Needs: For urgent, short-term projects, notably to avert layoffs or manage unanticipated demand spikes, exceptions may apply.
Cross-Industry Collaborations: Projects combining many organizations from different sectors might allow for more flexible personnel leasing arrangements under specific agreements.

6. Social Security Contributions for Temporary Employees

In Germany, paying sufficient social security contributions for temporary workers is not only a legal requirement—it’s a cornerstone of equitable hiring practices. Social security in Germany covers health insurance, pension, jobless insurance, and nursing care insurance. Both employers and temporary employees share the responsibility for these contributions, offering a safety net for workers.

Employer Responsibilities

Employers must pay social security at the same rate as permanent employees. This ensures temporary workers receive equivalent benefits. Making donations on time is important. Delays might result in penalties and risk the employee’s coverage. Contributions are based on the employee’s gross pay. You as an employer need to determine this carefully to avoid underpayments or overpayments.

Temporary Employee Considerations

Temporary employees should be told of the deductions from their compensation for social security. Clear information from employers on this topic aids in transparency. Despite their temporary status, these workers are entitled to the entire spectrum of social security benefits, including health care, pension accrual, and unemployment payments. For temporary employees from overseas, businesses must traverse extra requirements to ensure compliance with both German and international social security agreements.

7. Termination Rights and Protection

Terminating temporary job contracts in Germany comes with its own set of rules. Terminating temporary employment contracts demands careful consideration of legal requirements and the interests of the individuals concerned. These standards guarantee justice and clarity for both employers and temporary workers.

Notice Periods: The law gives minimum notice periods for discontinuing temporary employment contracts. These periods change based on the contract’s duration and the employee’s employment.
Severance Pay: In certain instances, temporary employees may be qualified for severance pay. This depends on the contract terms and the circumstances of the termination.
Employer Obligations: Employers must clearly explain the reasons for termination, adhering to the principles of justice and transparency. Moreover, employers need to follow the prescribed notice periods, giving employees ample time to plan for their future moves.
Employee Rights: Employees have the right to obtain a clear reason for their termination, guaranteeing openness in the process. If employees think their termination breaches their rights, they have the option to seek legal help and perhaps contest the decision.

8. Health and Safety for Leased Employees

Ensuring the health and safety of leased personnel is a main problem for businesses in Germany. But stressing health and safety goes beyond just compliance. It’s about building a workplace where every employee feels valued and protected. It’s not just about meeting legal requirements—it’s about providing a safe and supportive work environment. Here’s what you as a company need to know.

Key Health and Safety Responsibilities

Workplace Assessments: Employers must frequently analyze the workplace for possible dangers. This proactive approach assists in identifying and managing hazards early.

Safety Training: Providing comprehensive safety training is important. It provides leased workers with the expertise to overcome workplace hazards.

Personal Protective Equipment (PPE): Supplying important PPE is a must. It’s a basic but important step in protecting employees from job injuries.

Creating a Culture of Safety

Encourage leased employees to share safety problems. An open-door strategy can lead to speedy resolutions of possible hazards. Keep safety measures up to date. As workplace dynamics change, so should your attitude to health and safety. Also, ensure that health and safety rules encompass all employees, including those on temporary contracts. Everyone needs a safe workplace.

Conclusion

German labor laws for employers are important for enterprises operating in Germany. The Employee Leasing Act (AUG) is an important component, assuring compliance with hiring employees in Germany regulations. Businesses must also be diligent in keeping discrimination laws in German workplaces, along with obeying NDAs and Data Protection in Germany. Understanding these standards, especially those governing German retirement income payments, is vital for building a fair, compliant, and successful work setting within Germany.

Frequently Asked Questions

Is at-will employment allowed in Germany?

No, Germany doesn’t have “at-will” work like some other countries. Both employers and employees require a good reason and sufficient notice to end a job.

What are the consequences of misclassifying employees in Germany?

If you erroneously classify a worker as a contractor when they’re truly an employee, you could risk fines, unpaid taxes, and even legal problems. It’s best to be sure about the difference.

What protections does Germany offer against discrimination in the workplace?

Germany has strong rules against discrimination based on topics like gender, ethnicity, religion, age, and handicap. Employers must treat everyone fairly.

Do German workers have the right to unionize?

Yes! German workers can join unions to fight for better pay and working conditions. This is a protected right.

What statutory benefits are German employees entitled to?

German workers have items like paid vacation time, sick leave, and parental leave. These are minimum rights given by law.

Are non-disclosure agreements (NDAs) legally binding in Germany?

Yes, NDAs can be used in Germany, but they have to be fair and detailed. They can’t stop an employee from reporting criminal acts, for example.

Are employers required to offer retirement pensions in Germany?

They’re not required to give private pensions, but companies must contribute to the government’s pension system for each employee.

How is personal information safeguarded in German employment?

Germany has stringent data privacy regulations. Employers can only gather the personal information they really need and must keep it safe.

What does the Works Constitution Act (BertVG) entail for German employees?

This regulation lets employees in larger organizations elect a “works council”. This council has a say on matters like working hours, safety, and even layoffs, giving employees a voice