Employer of Record and Co. abroad - a way out of the shortage of skilled labour?

For some years now, German companies have shown increasing interest in a new employment model in which a personnel service provider acts as an "employer of record" (EoR). The EoR hires employees abroad and transfers the employer's right to issue professional instructions to the German client.

Intermediaries in Germany are often commissioned to find suitable EoRs abroad or to coordinate the deployment of various EoRs.

A closer look shows that it makes no significant difference in terms of the legal challenges whether the companies involved, i.e. the EoR and the client, belong to a group or whether the EoR acts as an external service provider, as is traditionally the case.

Workplace mobility and technological progress

The increasing mobility of workplaces and technological developments in particular, which enable the efficient, standardised and interchangeable deployment of human resources regardless of distance and national borders, make this model a cornerstone of personnel management in all areas in which a presence in the operation is not absolutely necessary.

Solution to the skills shortage?

The attractiveness of the model currently results less from its cost efficiency or the supposed employee-friendliness of German labour law, but rather from the shortage of skilled workers. The use of freelancers abroad or cross-border direct employment abroad has a number of practical and legal disadvantages compared to the EoR model, although many legal issues have not yet been conclusively clarified.

Employer of Record: Legal classification

An important factor in the legal classification of the EoR model is the unclear question of whether the German Temporary Employment Act (Arbeitnehmerüberlassungsgesetz, AÜG) also applies if employees work exclusively abroad for a German client but are employed by the foreign EoR. Even if one takes the view that the AÜG does not apply, caution is required, as numerous compliance issues need to be taken into account even on the basis of this seemingly business-friendly view. For example, the AÜG, with all its restrictive regulations, can apply even to short assignments in Germany, such as for familiarisation periods or temporary mobile work in Germany. The use of intermediaries can also significantly increase the risk of the AÜG being applicable.

Moreover, the arguments of the currently prevailing opinion against the applicability of the AÜG in the case of exclusive work abroad are only partially convincing.

Finally, each implementation of the EoR model must also be examined in the respective country in which the employees work in accordance with the law of that country. It is conceivable, for example, that violations of foreign law on temporary employment could lead to the fiction of a cross-border employment relationship under foreign law.

Consequences of the Employer of Record model and outlook

The EoR model leads to jobs being cut in Germany or not being created at all. It therefore remains to be seen how the German authorities, legislators and employee representatives will react to this development. In our opinion, works councils already have the opportunity to influence this development.

It is important to keep a close eye on the legal assessment, further development and dissemination of the EoR model at national and international level. We will of course keep you up to date on these developments.

Contact us!

Deloitte Legal supports German companies in the introduction of new EoR models and the adaptation of existing ones. Please do not hesitate to contact us.

Published: May 2024