Are you looking to hire remote talent in Germany for your business? Germany, with its highly educated talent pool and robust economy, presents an excellent opportunity for international expansion in Europe.
However, the process of hiring remote workers in Germany is not always straightforward.
Germany has complex employment laws that can be challenging to navigate without expert guidance. While the Employer of Record (EOR) model is typically recommended to overcome global employment challenges, it's important to note that Germany's EOR legislation imposes certain restrictions that may pose unique obstacles for your business.
To help you overcome these hurdles and find the best approach to hiring remote talent in Germany, we have prepared a comprehensive guide. Whether you decide to pursue the EOR model or explore alternative solutions, our article will provide you with valuable insights and guidance to ensure a successful hiring process aligned with your unique business goals.
EORs in Germany: Navigating Long-Term Employment
The Employer of Record (EOR) model, also known as "labor leasing" ("Arbeitnehmerüberlassung") in Germany, is a popular choice for businesses worldwide. Similar to traditional EORs, labor leasing companies in Germany handle various crucial tasks such as onboarding, payroll, benefits, time off management, and offboarding on behalf of client companies. However, there is a unique aspect to Germany's EOR system that sets it apart from other countries - a time limitation of 18 months per employee.
After 18 months of employment through a labor leasing company, foreign businesses must make a decision regarding the retained team member. They can either let the individual go or hire them directly through their own local business structure. This time limitation introduces challenges for businesses that require long-term employment solutions.
Fortunately, there is a workaround available for those who wish to utilize labor leasing beyond the 18-month mark. However, it's important to note that while this workaround is compliant, it may not be the most practical option.
By allowing an employee to cease working for more than three months, the 18-month timeline resets, and businesses can re-hire them through a labor leasing company for another 18 months. While this method can provide a short-term fix for employment, it comes with its own set of drawbacks that can hinder long-term business growth.
Implementing the stop-start approach may lead to workflow disruptions, reduced engagement and productivity, and decreased employee retention due to periods of unemployment. Some may consider hiring independent contractors as an alternative solution, but this approach carries its own risks, particularly if misclassification occurs.
There is a simpler and more effective solution for businesses seeking long-term employment without resorting to hiring contractors.
Register as a Foreign Employer in Germany: Simplifying Your Expansion Expanding
Your business to Germany doesn't necessarily require the establishment of a separate legal entity or the need for a physical office. By registering your existing company as a "foreign employer" ("Ausländischer Arbeitgeber"), you can establish a virtual presence in the country. This allows you to hire talent in Germany without limitations on the duration of employment and, in many cases, without the obligation to pay corporate taxes.
However, navigating the complexities of being a foreign employer in Germany can still be challenging. You'll need to communicate directly with German authorities in their native language, ensure compliance with German employment law, and handle payroll and contributions according to local regulations. To simplify this process and ensure smooth operations, it's advantageous to partner with an experienced team like Consultinghouse. With their expertise and comprehensive administrative support, you can confidently navigate the entire registration process and focus on growing your business.
Limitations of Being a Foreign Employer in Germany:
The foreign employer model in Germany offers a convenient and compliant way to hire a small number of employees without the need for a local entity. However, it's important to recognize the limitations inherent in this approach.
Primarily, the foreign employer model is designed to facilitate the employment of individuals outside of a company's home country. It is not intended to support the establishment of a fully operational business in Germany.
As your German team expands, reaching a threshold of around 10 or more employees, local authorities may begin to question why you haven't established a local entity or started paying local corporate taxes. At this point, it becomes advisable to consider setting up a more formal and official local presence.
Transitioning to a local entity provides a stronger foundation for your international expansion efforts and ensures compliance with local regulations. It demonstrates your commitment to the German market and facilitates smoother operations as your business grows and evolves.
Setting up a Local Entity in Germany: Navigating the Process
Expanding your business in Germany often requires establishing a local entity, although it can be a time-consuming and costly endeavor. After validating the market, determining the next step in your expansion strategy becomes crucial
In Germany, two popular types of local entities are branch offices and foreign subsidiaries, typically in the form of limited liability companies (Gesellschaft mit beschränkter Haftung - GmbH). The choice between these options depends on your specific business strategy.
It's important to note that a foreign company remains liable for its branch offices, while a foreign subsidiary operates as a legally independent entity. Subsidiaries also have the advantage of conducting separate business activities from the parent company, unlike branch offices.
One significant advantage of establishing a branch office is that it does not require share capital (equity financing), making it appealing for startups and SMBs.
In Germany, there are two types of branch office structures: autonomous branches (Zweigniederlassung) and dependent branches (unselbständige Zweigniederlassung). Autonomous branches enjoy some level of independence from their foreign head office, allowing them to trade under a different name and open a German bank account.
On the other hand, dependent branches cannot engage in those activities or make business decisions without head office approval.
Depending on the type of local entity you intend to establish, you may need to undertake several tasks:
- Select the appropriate limited liability company for your subsidiary, such as Unternehmergesellschaft haftungsbeschränkt (UG) or Gesellschaft mit beschränkter Haftung (GmbH).
- Determine the minimum share capital required for your chosen legal entity.
- Register with the local Trade Office (Gewerbeamt), the German Commercial Register (Handelsregister), and the German Transparency Register (Transparenzregister).
- Prepare incorporation documents.
- Register for corporate tax, trade tax, and VAT.
- Obtain any necessary certificates and licenses.
- Cover expenses for translation, notarization, and professional fees.
- Establish payroll and bookkeeping systems.
- And more!
Given the complexity of the process, it is highly recommended to seek local expertise, such as legal and tax advice, to guide you throughout each step.
Which Remote Hiring Option Is Best for Your Business?
To recap, the three main ways for foreign businesses to hire talent in Germany are:
- Work with labor leasing companies (EORs)
- Register as a foreign employer
- Establish a local entity
Selecting one of these options will depend on your unique business goals and desired outcomes.
If you’re looking for a short-term solution to test out the market, labor leasing is a useful way of hiring local talent without spending time on administration.
Labor leasing companies (EORs) are responsible for creating compliant employment contracts, setting up payroll, and employing your chosen talent compliantly. It’s quick, easy, and cost-effective. As a result, labor leasing gives you the freedom to focus on higher ROI tasks.
However, labor leasing is just that: short-term. After 18 months, the contract must end - at least temporarily. That’s where registering as a foreign employer can support your retention efforts.
As a foreign employer, you can employ talent directly and for as long as you like. It’s usually the best option if your company wants to tap into and retain top talent, no matter where they’re based.
It’s worth noting that both labor leasing and registering as a foreign employer can put your business at risk of permanent establishment. However, if you’re aware of the main triggers, you can minimize this risk.
Finally, if your business is looking to expand into Germany and hire an extended team of local talent, establishing a legal entity in the country is likely your best option.
While you’ll be liable for paying corporate taxes, a legal entity will give your company much more freedom to sell your products or services in Germany, set up permanent operations, and continue to grow your business.
Consultinghouse Makes Hiring Remote Workers in Germany Simple
Consultinghouse supports your global teams and business growth. Whichever option you choose, our team of experts is on hand to help you every step of the way.
Our labor leasing service offers everything typical EORs do, including compliant employment contracts, payroll, and benefits.
However, if you’re interested in becoming a foreign employer in Germany, we can provide:
- A compliant employment contract, customized for the foreign employer structure.
- A Power of Attorney, which allows us to deal with the respective authorities like Labor Agency and Social Funds for you.
- Ongoing payroll assistance.