Hiring in Germany Without a Local Entity: AÜG Licensing & Works Council Compliance

1. The Legal Challenge of Hiring in Germany

Germany has one of the world's most sophisticated and protective labor systems. Foreign companies cannot simply issue a foreign employment contract to a resident living and working in Germany. Doing so violates German mandatory tax withholding obligations, mandatory social security contributions, and creates immediate Permanent Establishment (PE) exposure.

2. The AÜG License Requirement for German EOR

Under the German Employee Leasing Act (Arbeitnehmerüberlassungsgesetz, or AÜG), any company that employs an individual with the intent of leasing their labor to a third-party client must hold an official AÜG license issued by the Bundesagentur für Arbeit.

3. The 18-Month Maximum Assignment Rule

Under Section 1(1b) of the AÜG, an employee may only be leased to the same client company for a maximum of 18 consecutive months. To maintain long-term compliance beyond 18 months, companies must either:

1. Establish a local German corporate subsidiary (GmbH or UG) and transition the employee to direct employment.
2. Utilize recognized collective bargaining agreement exceptions where permissible.
3. Implement a statutory 3-month cooling-off break before re-engagement.

4. Mandatory Social Insurance Breakdown

In Germany, statutory social insurance contributions total approximately 40–42% of gross salary up to statutory contribution ceilings, divided almost equally between employer and employee:

• Pension Insurance (Rentenversicherung): 18.6% (Employer: 9.3% | Employee: 9.3%)
• Health Insurance (Krankenversicherung): 14.6% statutory baseline + ~1.7% average supplemental
• Unemployment Insurance (Arbeitslosenversicherung): 2.6% (Employer: 1.3% | Employee: 1.3%)
• Nursing Care Insurance (Pflegeversicherung): 4.0% (with childless surcharge)

See the Germany EOR Cost & Pricing Guide for employer contributions and total employment cost modeling.