Direct employment in Germany
Is a payroll registration enough?
Foreign companies do not necessarily need to establish a German legal entity to employ someone in Germany. In certain cases, the foreign company can register as an employer, obtain a German company number for social security purposes and employ the individual directly.
At first sight, this may appear to be a simple and cost-effective alternative to using an Employer of Record. In practice, however, a German company number is only one part of a considerably broader employer setup.
The foreign company becomes the legal employer
Under a direct employment model, the foreign company remains the employee’s contractual employer. It is therefore responsible for complying with the German requirements applicable to the employment relationship.
Depending on the individual circumstances, this may include the points listed here. Obtaining a German company number does not magically absolve the company of these duties.
- registration with the German social security authorities;
- appointment of an authorised representative in Germany;
- German payroll and social security reporting;
- assessment of German wage-tax obligations;
- compliance with mandatory German employment law;
- maintenance of payroll records for social security audits;
- registration with the relevant accident insurance institution;
- management of sick leave, annual leave, and terminations.
The permanent establishment question
The employment of a person working from Germany may also have tax implications for the foreign company. Whether a German permanent establishment or taxable presence is created depends on the actual circumstances.
Relevant factors include the employee’s decision-making authority, involvement in contract negotiations, and role in developing the German market.
The worknow model avoids structural hurdles
Under the worknow model, we act as the German legal employer and manage the German employment contract, payroll, social security and ongoing employment administration.
An EOR arrangement avoids the need for the foreign company to establish and operate its own German employer payroll infrastructure.
When can direct employment be appropriate?
Direct employment may be suitable for companies that:
- want to become the employee’s long-term legal employer;
- are prepared to complete the necessary German registrations;
- have access to German employment and tax advice;
- are willing to assume the full employer responsibility.
When may an Employer of Record be more practical?
An Employer of Record may be appropriate where a company:
- does not have a German entity or employer infrastructure;
- wants to employ an individual without completing its own registrations;
- requires a German employment contract and local payroll;
- is testing the German market or employing only a small team.
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