Looking for an employer of record in Germany? Here’s what you need to know

Hiring in Germany offers foreign employers the opportunity to tap into a new labor market, but it also comes with specific challenges. Foreign companies must comply with labor laws in Germany, which can become complicated quickly.

If you’re researching how to engage employees in Germany, you’ve likely come across the term Employer of Record (EOR) in Germany. While EOR is a common model in many countries, it’s important to understand that Germany does not legally recognize the EOR model.

Instead, Germany requires companies to use a temporary work agency, also known as an Arbeitnehmerüberlassung (AuG) company, when engaging employees on behalf of foreign businesses. These agencies must hold a valid AuG license, which is a legal requirement for providing labor leasing services in Germany.

This distinction is critical for compliance with German labor laws. Using an unlicensed EOR model in Germany can lead to legal and financial risks, including potential misclassification and penalties.

Keep reading to find out what hiring in Germany involves.

How to hire employees in Germany

There are three main ways foreign companies can hire workers in Germany:

1. Setting up a local entity: By registering a legal entity in Germany, you’ll be able to employ directly. This is a lengthy and expensive process that involves extensive legal and compliance work. 
2. Hiring independent contractors: Rather than hiring employees, you can hire independent contractors. However, misclassifying employees as independent contractors can lead to legal trouble and significant penalties.  
3. Engaging employees: While EOR services in Germany are not a valid approach, companies can engage local workers via temporary work agencies with an AuG license. 

Partnering with a Temporary Work Agency (AuG Company) in Germany

Germany does not legally recognize the Employer of Record (EOR) model.

Instead, companies can engage talent through a licensed temporary work agency, also known as an Arbeitnehmerüberlassung (AuG) company. These agencies hold an AUG license, which is mandatory for labor leasing arrangements.

Temporary work agencies typically assist with:

• Drawing up employment contracts and other key documents
• Registering employees for payroll and benefits
• Onboarding employees in line with German employment law
• Running payroll in Germany 
• Supporting with ongoing HR needs

These services help businesses stay aligned with local labor laws without needing to establish a legal entity in Germany.

Payoneer Workforce Management is a licensed temporary work agency (AuG company) in Germany, enabling companies to compliantly engage talent without setting up a local entity.

How to onboard employees in Germany

Certain onboarding processes are critical for complying with the German labor code, but it’s also essential to provide a good experience for your new employees. 

Here’s a brief overview of the onboarding process in Germany:

1. Send an offer letter that includes all the essential elements of a compliant contract. 
2. Run background checks. Get the employee’s written consent and only collect information relevant to their role. (The checks must comply with GDPR)
3. Enroll them in benefits, including retirement pensions, unemployment insurance (as part of social security), vacation entitlements, public holidays, employer liability insurance (Berufsgenossenschaft), paid sick leave, statutory healthcare insurance (GKV), maternity leave, and long-term care insurance.
4. Add them to payroll and set up tax contributions and deductions.
5. Order and configure their devices. Make sure they have all the necessary tools and equipment they’ll need to perform their duties. 
6. Schedule an orientation. Help them get to know their new coworkers with team meetings, 1-to-1s with managers, and an office tour where applicable.
7. Organize training to help them settle into their role. 

Partnering with a temporary work agency in Germany can help you manage the onboarding process so the new candidates can hit the ground running.

Germany payroll

The tax year in Germany runs from January to December. Payroll cycles are usually monthly, with wages paid at the end of each month. 

The minimum wage in Germany is at EUR 12.82 per hour, as of January 2025. While employers are not required to pay bonuses, it’s customary for employers to pay a 13th-month salary bonus at the end of the year, usually equivalent to 1 month’s wage. 

Employers in Germany withhold employees’ income tax and pay it to the relevant authorities. The 2025 income tax brackets in Germany are:

Employers in Germany are also required to contribute to the social security system and deduct employee contributions from their wages. 

The total social security contributions can be broken down as follows:

A streamlined way to manage payroll and statutory deductions in Germany is by partnering with a licensed temporary work agency (AuG company). This offers support as per local labor laws and simplifies compliance.

Employment laws in Germany

Labor laws in Germany are not consolidated into a single code. Instead, Germany has separate laws that provide different regulations and protections for employers and employees. 

Here are some key German employment laws and regulations that foreign employers should know.

Working Hours Act (Arbeitszeitgesetz)

The Working Hours Act states that German employers must record their employees’ working hours and overtime. 

The standard is 40 hours/week; the maximum is 48 hours/week 

Federal Paid Leave Act(Bundesurlaubsgesetz)

The Federal Paid Leave Act entitles employees who follow a 5-day work week to a minimum of 20 vacation days per year. 

Probation periods (Probezeit)

Under the German Civil Code (Bürgerliches Gesetzbuch or BGB), probation periods can last up to 6 months.

Rest days

The Working Hours Act (Arbeitszeitgesetz) stipulates that employees are entitled to an uninterrupted daily rest period of at least 11 hours. They should also be granted at least 1 day off each week. 

Together with the 11-hour statutory daily rest period, they should receive a 35-hour uninterrupted weekly rest period.

Continued Payment of Remuneration Act (Entgeltfortzahlungsgesetz)

The Continued Payment of Remuneration Act protects the regular payment of employees on leave due to illness, injury, and other reasons.

Minimum wage in Germany

From January 2025, Germany’s minimum wage is:

• Per hour: EUR 12.82 
• Per 40-hour week: EUR 512.80 
• Per month: Roughly EUR 2222

Germany’s government regularly reviews and updates the minimum wage to ensure it aligns with the cost of living and inflation. 

Partnering with a licensed temporary work agency (AuG company) in Germany can help monitor minimum wage regulations.

Employment contracts in Germany

While verbal contracts can be legally binding in Germany, it’s best practice to have a written agreement in place. 

This helps employers stay compliant and provides documentation of key employment details. 

 Employment contracts in Germany should include:

• Names and addresses of the employer and employee
• Contract start date
• Contract duration
• Probation period and duration
• Place of work
• Job description 
• Remuneration, including salary, additional allowances, bonuses, and overtime
• Leave allowances
• When the salary will be paid
• Working hours
• Notice period

Leave policy in Germany

German employees are entitled to various types of paid time off and leave, including:

This is a brief overview of leave policies in Germany. 

Partnering with a licensed temporary work agency (AuG company) in Germany can help keep you on track when granting leave to employees, keeping your company compliant with statutory minimums. 

Work permit in Germany

In Germany, work permits are granted in conjunction with residence permits that include work authorization. 

Citizens of countries outside of the European Union (EU) and European Economic Area (EEA) will need both a work permit and a residence permit. 

You can check the types of work permits in Germany on their official site.

Both employers and candidates should refer to official government sources to verify the specific rules, documentation, and procedures involved.

Background check in Germany

Background checks are common in Germany. Employers often run background checks after making a conditional offer but before an employee starts work.

Employers generally must obtain the candidate’s consent and clearly outline what will be reviewed. It is essential to consult local laws and guidelines before initiating any checks.

Employment termination in Germany

German employment contracts can be terminated by mutual consent, whether through notice or the expiration of a fixed-term contract. 

Notice periods depend on employment contracts and the length of service and can range from 2 weeks to 7 months.

In any other circumstance, employers need just cause to terminate an employee in Germany. Just cause includes misconduct, operational requirements, or performance issues. In severe circumstances, employers may not be required to provide notice of dismissal.

Under the Dismissal Protection Act (DPA), redundancy is an ordinary termination. However, before carrying out mass redundancies, employers should consult with the German works council. 

Severance pay isn’t a legal requirement in Germany, though employers usually pay 50% of an employee’s monthly salary per year of service. 

Company registration in Germany

To set up a private limited company in Germany (Gesellschaft mit beschränkter Haftung or GmbH), you’ll need to:

1. Create the Articles of Association (Satzung)
2. Apply to the Commercial Register (Handelsregister)
3. Open a business bank account

Once registered, you’ll need to apply for business insurance, pay taxes, and more. 

For a simpler alternative, many businesses choose to partner with a licensed temporary work agency (AuG company) in Germany to engage local talent without going through the company registration process.

PEO in Germany 

Generally, a PEO (Professional Employer Organization) and an EOR (Employer of Record) both help with HR and payroll tasks when building an international team. However, there are some important differences to consider when it comes to Germany.

While PEOs are useful for outsourcing HR tasks, they won’t act as the legal employer for your employees in Germany. That means you still need to establish a legal entity in Germany if you want to engage employees there. 

In Germany, EORs are not valid; companies must engage talent through a licensed temporary work agency (AuG company) instead.

Plus, they offer support to handle HR, compliance, tax responsibilities, and more. 

Payoneer Workforce Management services in Germany

Payoneer Workforce Management operates in more than 160 countries as an Employer of Record. In Germany, we operate as a licensed temporary work agency (AuG company).

We help you onboard foreign talent, create localized contracts, and manage payroll in multiple currencies, while staying compliant with local labor laws. 

Partner with Payoneer Workforce Management support in Germany.

 FAQs

1) Is Employer of Record legal in Germany?

The EOR model is not valid in Germany. Companies can opt to work with a temporary work agency with an AuG license to engage local talent in Germany. 

2) Do companies do background checks in Germany?

Yes, it’s common for companies in Germany to conduct background checks on their employees. However, all background checks must comply with privacy regulations, such as GDPR and BDSG.

3) How much does an employer of record in Germany cost?

The EOR model is not valid in Germany; however, companies can use a licensed temporary work agency to engage local talent, and its cost varies with the provider. For instance, Payoneer Workforce Management, a licensed temporary work agency (AuG company) in Germany, offers services starting from around $299 per month per full-time employee.