Employer of Record: Opportunities and limits in the age of skilled labour shortage


published on 26 February 2024 | reading approx. 7 minutes


One of the biggest challenges that many companies are currently facing is the shortage of skilled labour. One way out for companies is to look for and hire employees on the international market. For various reasons, it is not an option for these companies to set up a branch, but to utilise the numerous offers of so-called “Employers of Record” (EoR), for example. The number of providers of this employment model and the offers are numerous, although the legal aspects have not yet been definitively clarified. Below, we explain how the EoR model works, the limits within which it can be attractive for companies and the legal and tax aspects that need to be taken into account.



How does the “Employer of Record” model work?

The term Employer of Record (EoR) refers to an organization that, as an employer, officially hires employees (abroad) and assigns them to respective companies. The EoR assumes all compliance obligations related to the employees abroad.

In an international context, this model works as follows: A company based in Germany (economic employer), intending to employ a worker abroad, enters into a service contract with an EoR (provider) based in the respective foreign country. According to this contract, the EoR takes on the civil employment of the worker abroad through its own entity. This includes the handling of all tasks and obligations associated with the employment, such as payroll accounting, reporting the employment to the local authorities and monitoring compliance with local health and safety regulations. At the same time, the EoR delegates the right to give instructions to the German company but retains responsibility for implementing disciplinary measures as instructed by the German company.

The EoR serves as a contractual employer, while the German company acts as the de facto or ecomomic employer to the employee and is entitled to give instructions to the foreign employee. The costs associated with employing the worker, plus a fee for the EoR's services, are borne by the German company.

Important legal and tax aspects of the “Employer of Record” model

The advantages of this model for cross-border personnel deployment are obvious: the EoR promises legally compliant employment of employees abroad and relieves German companies of certain tasks, such as local payroll accounting, which is often considered problematic in the context of cross-border activities.

Furthermore, the German company retains autonomy in the selection of its employees and has influence over the content of the employment contracts.

However, opting for an EoR raises numerous questions. Involving an EoR creates a tripartite relationship. It is evident that the German employer incurs additional costs, as the EoR is remunerated for its services. Furthermore, employing the employee via the EoR means that the economic employer can exert less influence over the employee in this model, as disciplinary instructions are usually issued by the EoR. The employee's sense of belonging to their actual employer is also likely to be less pronounced as a result.

In practice, numerous legal issues arise, such as the classification as temporary agency work (temporary employment). The EoR model is very similar to a temporary agency work which is subject to strict regulatory provisions in Germany. 

In principle, temporary employment is only permitted for a limited period of time. Foreign regulations may also stipulate a time limit. Therefore, the applicability of the respective law must always be checked. 

In cross-border situations, the question arises as to whether the German Temporary Employment Act (Arbeitnehmerüberlassungsgesetz – AÜG) applies. In accordance with the principle of territoriality, any form of employee leasing that takes place in, to or from Germany falls under the jurisdiction of German law. It should be noted that the temporary-work agency is based abroad and the leased employee also carries out their work abroad. As both persons work outside German territory, the provisions of the AÜG do not apply to them.

The situation is different for the user undertaking (economic employer), however, as it is located in Germany. According to the technical instructions of the Federal Labour Agency, the German Temporary Employment Act (AÜG) does not apply to the user undertaking. There are different positions on this topic in the academic literature, with some arguing that the German AÜG also applies to the user undertaking in Germany. However, this point of contention is irrelevant in practice, as the AÜG imposes few obligations on the user undertaking.

However, it should be noted that foreign law must be taken into account. It is possible that the EoR model is a form of employee leasing in accordance with the respective foreign law and that this law specifies specific obligations for the (German) user undertaking.

The situation changes if the foreign employee stays in Germany, e.g. undertakes a short-term business trip to Germany. Even if the temporary worker only crosses the German border for a short time to perform work in Germany, the AÜG is generally applicable in accordance with the territoriality principle. This can have the following consequences: According to Section 9 AÜG, the employment contract between the EoR and the employee would be invalid if the EoR, acting as the temporary-work agency, does not have permission under the AÜG.

Also, according to Section 9 AÜG, the invalidity of the employment contract occurs if temporary employment is not explicitly mentioned in the employment contract, if the permissible maximum lending period has been exceeded, or if there has been a violation of the principle of equal treatment. Once one of the grounds for invalidity mentioned in Section 9 AÜG exists, an employment relationship between the tempotaty-work agency and the temporary worker is considered to have been established.

Furthermore, illegal temporary employment poses the risk of committing an administrative offense. Specifically, for instance, the user of a temporary worker provided by a temporary-work agency without the permission of the Federal Employment Agency, who allows the temporary worker to work, fulfills the criteria of an administrative offense according to Section 16 AÜG. The commission of this administrative offense can be punished with a fine of up to 30,000 euros.

In this context, various questions also arise regarding residence rights. It should be noted that for third-country nationals visiting Germany for a business trip, a visa is required. According to Section 40 (1) No. 2 of the Residence Act (Aufenthaltsgesetz – AufenthG), approval from the Federal Employment Agency must be denied if the foreigner intends to work as a temporary worker. Therefore, a detailed individual examination is required to determine whether a third-country national employed by the employer of record (EoR) is allowed to enter Germany.

In the field of social insurance law, it is important to consider that both the application for an A1 certificate and the issuance of a certificate for business trips from non-EU countries can be problematic in the case of (illegal) temporary employment. Therefore, a thorough individual examination is necessary.

From a tax perspective, the following aspects need to be considered: EoR does not exclude the risk of a permanent establishment abroad. Depending on the local tax legislation and the relevant Double Taxation Agreement (DTA), the EoR model may establish a permanent establishment abroad. Additionally, it needs to be examined whether the client abroad has any obligations as a potential (economic) employer.

If the employee performs workdays in Germany, the temporary-work agency is obliged to withhold income tax in Germany according to Section38 Income Tax Act (Einkommensteuergesetz – EStG). Under certain conditions, an application for exemption from the obligation to withhold income tax can be made if the respective DTA assigns the taxing rights to the foreign country. There is no obligation to withhold income tax according to Section 38 EStG for workdays outside Germany.

Regarding the employee level, it is important to note that in the case of workdays in Germany, there is a risk of double taxation since the residence state (abroad) and the work state (Germany) are different. In this case, the provisions of the relevant DTA should be applied. It should also be checked whether the respective DTA contains a special provision for employee leasing. If so, the workdays are generally subject to taxation in Germany. If there is no special provision, the general principles for income from employment under the relevant DTA apply. Workdays performed outside of Germany are not taxable in Germany since the residence state and the work state are abroad.

How can risks be minimized?

This depends, firstly, on whether the German Temporary Employment Act (AÜG) is applicable. The Federal Labor Court (Bundesarbeitsgericht – BAG) determined in its judgment of April 26, 2022 (Case No. 9 AZR 228/21) that if a temporary agency worker from abroad is unlawfully assigned to Germany according to Section 1 AÜG, the violation of the authorization requirement does not lead to the ineffectiveness of the temporary employment contract under Section 9 No. 1 AÜG, as long as the temporary employment relationship is subject to the law of another European Union member state. The AÜG cannot be applied as an internationally mandatory norm.

According to the BAG's case law, Section 9 No. 1 AÜG aF does not constitute an overriding mandatory provision within the meaning of Article 9(1) of the Rome I Regulation. However, it is possible that the foreign legal system provides for a legal consequence comparable to the provisions of Section 9 and 10 of the AÜG. Therefore, it is important to be aware of and comply with the regulations of the foreign legal system. It is also advisable to be aware of any specific provisions regarding employee protection rights in the host country. The German employer is obligated to comply with the laws that apply abroad to protect employees, especially when issuing cross-border instructions.

In the case of cross-border activities, it should also be noted that certain provisions of German law apply even when temporarily employing a foreign worker in Germany. Since a business trip to Germany is likely considered a posting under the Posted Workers Act ( Arbeitnehmer-Entsendegesetz – AEntG), regulations on working conditions, especially regarding remuneration, paid annual leave, maximum working hours, minimum rest periods, and break times, must be strictly adhered to according to Section 2 AEntG. Therefore, monitoring the locations where an employee employed through an Employer of Record (EoR) is stationed is advisable, for example, by maintaining a travel calendar.


The “Employer of Record” construct is a new employment model that is not yet explicitly regulated in Germany. It resembles temporary agency work, which is why its regulatory principles should be applied. This model seems to offer advantages, especially when it comes to temporary activities abroad. However, it is advisable to conduct an examination before hiring an employee abroad through an EoR. In particular, it should be verified whether the employment of the employee through the “Employer of Record” model is allowed in the host country and, if so, under what conditions this is possible. In most cases, this form of temporary agency work is only possible for a limited period, making permanent employment under an EoR model generally not feasible.

However, it may be suitable for a temporary bridging period, for example to explore the local market until a decision has been made on market entry with a corresponding (corporate) legal setup. Particular caution is required if it is foreseeable that a foreign employee is likely to have working days in Germany. It should also be taken into account that certain provisions of German law are also applicable if the foreign employee works in Germany for a short period of time. For third-country nationals, attention must be paid to the specifics of immigration law. Regarding tax law, it should be noted that the "Employer of Record" model does not fundamentally exclude the permanent establishment risk. Local tax legislation and the respective Double Taxation Agreement (DTA) are relevant and must be examined.
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