As you embark on building your international remote team, you may be thrilled to discover that your Employer of Record (EOR) can legally hire employees in any country worldwide. This enables you to search for the best talent regardless of their location. However, when hiring a new employee in Germany, you might face some unforeseen limitations. In Germany, you can hire an employee using an EOR for a maximum of 18 months. Once this period expires, you cannot renew the contract or use another EOR. You have three options:
- Create an entity and hire an employee through it.
- Hire an employee directly using your foreign entity (e.g., a British company hiring in Germany).
- Hire an employee using a Consulting Entity.
This article focuses on hiring employees directly, although option 3 – using a Consulting Entity – is explored towards the end of the article.
Hiring employees in Germany using an Employer of Record is restricted to 18 months.
Although some EORs may insist that setting up a legal entity is the only option, there is another legal alternative for hiring an employee without incorporation. This option is viable as long as the German employee is not responsible for generating income in Germany. Therefore, if you’re planning to hire a back-end developer, HR manager, or designer, this option would be perfect. On the other hand, if you’re searching for a Country Manager responsible for developing your business in Germany, this option would not be suitable.
How can I legally hire employees in Germany without incorporating?
For a foreign employer, the process of hiring an employee in Germany is relatively straightforward. You only need to register for a Social Security Number (die Betriebsnummer). With regards to PAYE taxes, it is the responsibility of the employee to ensure that they are paid, as foreign companies cannot transfer the money directly to the tax office.
You will need to contract a German lawyer to prepare a bilingual employment contract and to assist you with any legal employment matters. Additionally, you will require a local payroll company to register you for social security payments and to manage monthly payroll, including issuing payslips.
Employment Contract in Germany
The contract must comply with German law. You can purchase a standard template of a German employment contract for approximately €350 + VAT. However, if you want to add extra clauses to align it more closely with the contracts you use in other countries, expect to be charged approximately €350/hour + VAT for any additions. Bear in mind that you can only modify the contract to the extent that it remains compliant with German employment law. For one of my clients, the total cost of getting the contract template sorted ended up being €800 + VAT.
Additionally, you will need to stay in touch with a lawyer for all local employment questions, such as handling disciplinary matters, maternity leave, etc.
What is included in the contract?
The contract should include the following sections:
1. Job Title, Manager Name and Place of Work: Clear name of the position, who the employee will report to, and where they will work from. In case of remote work, use the town where the employee is based.
2. Commencement Date & Contract Duration: Employment start date and confirmation whether the contract is for a definite or indefinite period of time. If the employee previously worked with you through EOR, you can also add a paragraph acknowledging the ‘continuity of employment.’
3. Working Hours: Confirm how many hours a week the employee is required to work.
4. Salary: Provide the employee’s monthly base gross salary and any benefits, such as health insurance, pension, or bonuses.
5. Expenses and Benefits: Specify how expenses are handled and confirm the taxation of any benefits.
6. Holidays: Confirm statutory holiday requirements plus any additional days that the employer decides to grant the employee.
7. Confidentiality Clause: The terms of a confidentiality clause that require the employee to keep confidential information about the company confidential.
8. Termination Clause: The circumstances under which the employment relationship can be terminated by either party, including the notice period
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Payroll & Social Security in Germany
The easiest way to manage payroll, issue payslips, and ensure that you are properly registered for social security is to use a local payroll expert. The company I work with charges a fixed fee of €100 + €30 per employee per month (so if you have one employee, your cost of running payroll will be €130). The cost of registering is approximately two hours of work, which is being charged at €120 per hour. There are no costs which German authorities charge. It takes a few weeks to have the company registered for social security.
Payroll usually needs to be confirmed before the 20th of the month so that the employee is paid on the last working day of the month. Social security must be paid two working days before the last working day of the month.
Side note – be careful in Germany with employee expenses (e.g., travel) – as there are very clear limits in terms of what and how much can be processed as expenses. There are also regular audits related to this.
Employee Taxes in Germany
As mentioned previously, a foreign employer cannot deduct employment taxes at source. These are paid to the employee, who is then responsible for filing/transferring them to German authorities. Once the first payslip is issued, the employee needs to contact their local tax office and explain that they work for a foreign entity and ask for the calculation of the tax. The employee will then have to submit their payslip to the tax office and within a few weeks, will receive a letter confirming how much taxes they owe and how frequently they need to pay. In most cases, the employee will pay taxes quarterly.
The employee should be prepared that in the first year, their tax calculation may be a bit higher than the actual taxes due. That’s why it’s very important that the employee files a tax return at the end of the year with the help of a qualified tax advisor to ensure that they can get the maximum tax refund. The cost of a tax advisor can vary greatly – from €1000 to €3000 + VAT. I always recommend that the employer offer to cover this cost for the employee.
If the employee feels uncomfortable with handling quarterly transfers to the tax office, the employer may assist by withholding the amount from the employee’s salary. However, based on my experience, I would recommend withholding exactly one-third of what has been calculated by the tax office versus the tax calculation which payroll company provides on the payslip. This is to avoid the situation where withheld amounts do not fully cover the tax advance that was calculated by the tax office.
Option 3: Using Consulting Entity
There is one more option for hiring in Germany without an entity. This arrangement allows international businesses to outsource work to a consulting company with a legal German entity, which then hires necessary full-time employees to deliver the projects. Unlike with the EOR (AUG license), there is no 18-month term restriction, and consulting services can last as long as needed. If you want to use a consulting company to hire an employee you currently work with or worked with in the past (e.g., because the EOR contract is reaching 18 months), you will need to allow a 3-month break before hiring this person via the consulting company.
The consulting provider, such as Safeguard Global (which also operates another business as an EOR), assumes 100% liability for employment, which is advantageous for businesses wanting to avoid employment liability while developing new projects in the local market. Consulting services also enable project continuity and help attract top talent by offering indefinite employment terms and benefits.
If you would like to explore this option in more detail, reach out to me via LinkedIn or via email (anna@annasieniawska.com), and I will introduce you to the right person within the Safeguard team. In terms of pricing, Safeguard prices each contract individually and does not provide any indication of cost. The company requires a job description to confirm if the person can be hired through the consulting entity and to assess any legal risks. Once this takes place, you will be priced individually.
Can I still use EOR in Germany for the initial 18 months?
Yes, if you prefer to hire an employee first using employer of record services, this is absolutely fine. However, note that your EOR will terminate the contract with the employee before the 18th month is due, and your only option to continue working with the employee will be to either create an entity or follow the direct hiring process. You will not be able to use Consulting Entity without taking a 3 months break in your relationship with the candidate.
Should you decide to hire an employee initially using EOR contact me and I can help you choose the best EOR for your specific needs.
If you are however keen to get started right this moment, I am running a special offer with Deel. Deel is one of the leading global EORs that hires and manages remote workers from over 150 countries. Prices start from $599 per month, and with my link, you will receive a 10% discount! Although it is an affiliate link, I have been using Deel personally for almost two years. It is a great solution that offers solid compliance, a straightforward setup, lots of automation and integrations, transparent pricing, a clear dashboard, and 24/7 support.
Reach out to me directly at anna@annasieniawska.com to ask any questions you have about Employer of Record, talent sourcing, or hiring in Germany. I work with excellent German employment lawyers, payroll providers, and tax advisors for your employees and would be happy to make introductions.
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