Employer of Record & Professional Employer Organization in Germany
EOR and PEO in the context of temporary employment
Companies that want to deploy staff internationally or flexibly are increasingly encountering employment models such as Employer of Record (EOR) and Professional Employer Organization (PEO). Both models promise fast, legally compliant personnel deployment – but they harbour considerable pitfalls under German employment law.
Employer of Record (EOR)
If a company wants to employ staff aborad or from abroad but does not have a foreign branch or does not want to establish one, the EOR model is a good option. In the Employer of Record model, an external service provider based abroad formally assumes the role of legal employer for employees, while the work is carried out remotely for the client company. The company continues to manage the content of the work, while the EOR takes on the following tasks in particular:
- Concluding employment contracts in accordance with local law
- Payroll accounting
- Payment of taxes and social security contributions
- Compliance with local employment law regulations
- Communication with authorities and social security institutions
Advantages of the EOR model
The EOR model offers many advantages, but also some legal risks that need to be considered. One particular advantage is that the EOR model enables rapid market entry, as it does not require the establishment of a separate branch office or the hiring and administration of employees.
The EOR takes care of all administrative requirements and, as the employer, bears the majority of the risk. Time-consuming and labor-intensive tasks such as payroll, contract management, reporting, and communication with authorities are handled entirely by the EOR. The EOR also monitors compliance with local labor and social security requirements.
Employer of Record is considered temporary employment in Germany
Despite all its advantages, however, this model hides considerable legal pitfalls if it is not carefully implemented and reviewed in advance. Due to the strict employment law regulations in Germany and, in particular, the provisions of the Temporary Employment Act (AÜG), the EOR model is generally classified as temporary employment in Germany: The EOR acts as the “temporary employment agency” and the client company as the “hiring company.”
If the model is implemented without legal support, there is a very high risk of covert temporary employment, with comprehensive legal consequences.
Requirements for EOR services
In 2024, the Employment Agency still classified the EOR model as largely inadmissible according to its technical guidelines on the AÜG and declared that the AÜG was also applicable if both the EOR (temporary employment agency) and the employee were based abroad. With effect from October 1, 2025, the technical directive on the AÜG was amended and EOR services are now considered permissible again. However, this is subject to the mandatory requirement that both the EOR and the employee are based abroad and that the employee works exclusively online/remotely for the hirer (client company) in Germany.
As soon as physical work takes place in Germany, the EOR model must be classified immediately as temporary employment requiring a permit, with the result that all provisions of the AÜG apply. Business trips by the employee to Germany should therefore be avoided in this model.
Professional Employer Organization (PEO)
The PEO model originates from Anglo-American law and is based on the concept of co-employment: the PEO acts as a “co-employer” who shares the role of employer with the client company. Typically, the PEO takes on the following tasks:
- Payroll services
- Administration of social benefits
- HR administration and compliance support
- In some cases, support with recruiting and onboarding
The client company remains the actual employer and controls operational activities (work location, job content, instructions). This model is attractive because essential administrative tasks are outsourced, but operational control remains with the client company.
The PEO model provides easy access to expertise in employment law, social security law, and HR without having to set up your own structures, allowing you to keep your organization lean.
PEO for legal entities abroad
Unlike EOR, however, the classic PEO model usually requires the company to already have its own legal entity in the country concerned. The PEO primarily supplements and relieves the HR function, but the client company remains the contractual employer and also bears the associated risks; the PEO only becomes a “co-employer.”
A practical application of the PEO model is particularly relevant when a German company already has its own legal entity abroad but cannot or does not want to take on the complex administrative HR tasks there itself, for example because this would be uneconomical.
Rapid market entry without your own branch
A phased combination of the EOR and PEO models is also conceivable: for rapid market entry, an EOR model can initially be used in the first phase without your own branch abroad. As the company grows and establishes its own local company, it can then switch to a PEO model. This enables rapid market entry and expansion abroad without having to establish comprehensive administrative structures from the outset, while at the same time systematically leveraging local employment law expertise.
No co-employment in German employment law
In contrast, the PEO model is hardly feasible for the physical deployment of employees in Germany. The model of “co-employment,” i.e. shared employer status, is not provided for in German law. Although German employment law recognizes a division of authority to issue instructions, this only applies within the framework of a group of companies (e.g. matrix organization), temporary employment, or a contractual relationship (service or work contract).
The employer risk always remains with the contractual employer and is not shared between several employers. According to the German understanding, a PEO model would therefore regularly qualify as temporary employment, with the result that the provisions of the AÜG would apply.
We support your EOR and PEO project
EOR and PEO models can be efficient tools for companies to recruit and manage personnel, especially in the context of international growth and skills shortages. They offer flexibility, speed, and relief in the administrative area. Regardless of the product name (EOR, PEO, Global PEO, etc.), however, it is the actual practical implementation that determines the legal classification.
Companies should therefore conduct a review of employment law and, if necessary, tax law before introducing or using EOR/PEO models and design contract structures accordingly. Early legal support helps to avoid costly misclassifications and subsequent corrections – for example, due to illegal temporary employment or unexpected tax obligations.
Our legal services relating to Employer of Record and Professional Employer Organization
As a law firm, we provide you with comprehensive support, from strategic advice to legally compliant implementation:
- Employment law qualification review: Clarification of whether your EOR/PEO model can be classified as permissible temporary staffing or whether it requires a permit under the German Temporary Employment Act (AÜG); analysis of domestic relevance, authority to issue instructions, and actual integration
- Contract drafting and compliance roadmap: Review and optimization of service agreements, employment contracts, and internal guidelines; preparation for AÜG permit application procedures or confirmation of the scope of application
- Works council co-determination and equal pay compliance: Support with works council co-determination, information and approval requirements for the use of external personnel, as well as equal pay compliance and occupational safety coordination
- International structuring and posting compliance: Strategic advice on localization and posting alternatives, review of local employment law requirements, coordination with foreign legal partners, and monitoring of legal changes
Your attorney for Employer of Record in Germany
Our experts in Frankfurt/Main and throughout Germany are available to answer your questions about Employer of Record (EOR) and Professional Employer Organization (PEO), co-employment, and international personnel models.
The easiest way to reach us is by email (info@winheller.com) or by phone (+49 69 76 75 77 85 29).
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FAQ | Frequently asked questions about Employer of Record & Professional Employer Organization
What is an Employer of Record (EOR)?
An EOR is an external employer that handles employment contracts, payroll, taxes, and social security for your employees abroad.
What is a Professional Employer Organization (PEO)?
A PEO shares employer functions such as payroll, benefits, and HR administration with you in co-employment, usually for an existing entity abroad.
What is the difference between EOR and PEO?
EOR allows hiring without having your own branch abroad, while PEO typically requires your own company and primarily relieves the HR function.
Is EOR considered temporary employment in Germany?
Yes, when working for a German company, EOR is usually considered temporary employment, so the provisions of the AÜG apply.
When is an AÜG permit required?
A temporary employment permit is usually required for physical work or close integration into a German company.