Hiring in Germany Without a Legal Entity: EoR vs. PEO vs. Direct Employment Compared

International companies increasingly want to hire German talent without immediately investing in a German GmbH. Between “Employer of Record”, “PEO”, “non‑resident payroll” and “foreign employer registration”, the landscape can look fragmented and inconsistent – especially because German employment and tax rules do not map 1:1 to US/UK concepts.

This guide compares three practical options:

• Employer of Record (EoR) / labor leasing (AÜG)
• PEO (Professional Employer Organization)
• Direct employment as a foreign employer with German payroll

and explains when it makes sense to move from an EoR‑style setup to direct hiring without EoR in Germany, with Vectocon acting as integrated legal and tax advisor.

1. Quick overview: Three ways to hire in Germany without (immediately) forming a GmbH

If you do not yet have a German legal entity, you effectively have three strategic models:

1. EoR / Arbeitnehmerüberlassung (AÜG‑licensed labor leasing)
   • A third party is the formal employer in Germany.
   • You direct the day‑to‑day work; the provider runs payroll and carries most employment‑law compliance.
   • In Germany, “EoR” in marketing language usually means a licensed temporary work agency under the German Employee Leasing Act (Arbeitnehmerüberlassungsgesetz – AÜG).
2. PEO (co‑employment) – only if you already have a German entity
   • You are the German employer; the PEO runs HR/payroll “as a service”.
   • You must have a GmbH/branch; PEO is not a true alternative to a legal entity in Germany.
3. Direct employment as a foreign employer with German payroll (“non‑resident payroll” / foreign employer registration)
   • Your foreign company signs the employment contract directly.
   • You register as a foreign employer and/or for German payroll and social security, often with the support of a local payroll provider or advisor.

Cost reference points (typical ranges):

• EoR / labor leasing:
  ~€300–800 per employee per month in service fees is common in the market, on top of gross salary and employer social contributions.
• Direct employment via foreign employer registration + local payroll:
  Often ~€50 per employee per month for standard payroll processing with a German provider, plus one‑off registration/setup fees (significantly lower than setting up and maintaining a GmbH).

Exact pricing depends on provider, headcount, and complexity, but the order of magnitude is important for your business case.

2. EoR in Germany: fast and “low touch”, but with legal constraints

2.1. How EoR really works under German law

In Germany, the classic EoR model is treated as employee leasing (Arbeitnehmerüberlassung). The EoR (temp agency) employs the individual and “leases” them to you. You direct the work; the EoR handles payroll, social security, contracts and most HR compliance.

Key legal points:

• The EoR must hold an AÜG license from the German Federal Employment Agency (Bundesagentur für Arbeit).
• Without a valid license, the arrangement may be treated as illegal leasing, with the result that:
  • The employment relationship can be deemed to exist directly between you and the employee; and
  • Both you and the provider may face fines or, in serious cases, even criminal exposure.

In addition, leasing arrangements are usually subject to an 18‑month maximum assignment period per worker to the same end customer, unless sectoral collective bargaining agreements allow deviations.

2.2. Advantages of EoR / AÜG for Germany

EoR is attractive if:

• Speed of entry is critical – hiring can often be completed in a few days or weeks.
• Headcount is low and uncertain – e.g. 1–3 early hires to test the German market.
• You want to avoid dealing directly with German authorities (health insurers, tax offices, social security) in German.
• You have high internal sensitivity to employment‑law risk and want most risk and HR tooling outsourced.

For many US/UK HQs, this is the default first step: “turnkey” hiring with a single provider across many countries.

2.3. Limitations and hidden risks of EoR in Germany

However, in Germany EoR is not a universal solution:

• AÜG rules are strict:
  • Time limits (18‑month rule, unless validly extended).
  • Equal pay/equal treatment requirements after certain thresholds.
  • Co‑determination / works council issues if you scale.
• Tax “Betriebsstätte” (permanent establishment) risk remains:
  • If your leased employee habitually concludes contracts or significantly represents your business in Germany, German tax authorities may still treat this as a permanent establishment, triggering corporate income tax, trade tax and VAT registration obligations.
  • This risk is driven by facts on the ground, not the marketing label of the arrangement.
• Higher recurring costs:
  • The monthly fee differential versus a simple German payroll (often €300–800 vs. ~€50) aggregates quickly once you have several FTEs.
• Employee perception:
  • Many candidates prefer to be employed directly by the brand they work for, not by an unknown leasing company.

When EoR is sensible in Germany:
Short‑ to medium‑term market testing, low headcount, high speed requirement, and a willingness to accept the AÜG framework.

3. PEO in Germany: useful, but not a “no‑entity” alternative

In US terminology, a PEO is a co‑employment model: the PEO runs HR, payroll, benefits; you remain the legal employer and must have a local company.

3.1. What a PEO can do in Germany

• Operate payroll in Germany for your existing GmbH or registered branch.
• Manage HR processes (onboarding, contracts, time‑off tracking, benefits administration).
• Provide HR policies aligned with German employment law, collective agreements and works council rules.

3.2. But: you still need a legal entity

A PEO is not an alternative to company registration in Germany:

• You must still incorporate (GmbH, UG, or branch office), maintain statutory accounts, file German corporate and trade tax, comply with local director duties, etc.
• In other words, a PEO is an outsourced HR/payroll department, not a shield against German law.

This is why many international HR teams search for an “alternative to PEO Germany for payroll”: they want to avoid the entity altogether. In that scenario, you need either:

• EoR / AÜG labor leasing, or
• Direct employment as a foreign employer with German payroll (see next section).

4. Direct employment as a foreign employer: hire directly without EoR in Germany

The most overlooked option is often direct employment by your foreign entity with support from a German payroll and tax advisor.

4.1. Legal basis and practical setup

In many situations, you do not need a German GmbH to hire your own employees in Germany. You can:

• Use your foreign company as the employer in the contract; and
• Register for German social security and, where required, payroll tax obligations as a foreign employer – sometimes called “non‑resident payroll” or foreign employer registration.

Key building blocks:

1. Social security registration
   • An employee working in Germany is generally subject to German social insurance. Even a foreign employer must register and pay German contributions.
   • Foreign employers must appoint an authorized representative in Germany to hold payroll records in German; this can be the employee or a third‑party advisor.
2. Wage tax (Lohnsteuer) handling
   • If you have no office, management, or permanent establishment in Germany, you are not always obliged to withhold German wage tax. In some constellations, the employee instead files and pays their income tax via annual returns.
   • However, the assessment is fact‑sensitive (duration of presence, secondment vs. local hire, double tax treaty). In some cases, you may still be treated as a German employer for withholding purposes.
3. Payroll processing
   • You can mandate a German payroll provider or tax advisor to run monthly payroll, contributions and electronic filings for you.
   • Ongoing costs are typically modest relative to EoR fees – frequently in the ~€50 per month per employee range for standard cases (plus basic fixed fees).
4. Employment law compliance
   • German employment law (working time, vacation, termination rules, maternity protection, etc.) will generally apply because the place of work is Germany.
   • You need German‑law employment contracts and compliant policies, just as a local employer would.

Foreign companies can therefore, in many cases, hire employees directly in Germany without a German legal entity, provided payroll, social security and tax are handled correctly.

4.2. Advantages of direct foreign‑employer hiring

• Cost‑efficient:
  • Your main recurring cost is payroll Germany, not an EoR margin.
  • You avoid the costs of setting up and maintaining a GmbH (share capital, notary, annual accounts, local accounting/tax compliance).
• Better employee experience:
  • The employee is directly employed by your actual company – no temp agency “in between”.
  • Attractive for senior or strategic hires who expect a direct relationship.
• Fewer structural constraints:
  • No AÜG 18‑month lease limit.
  • No equal‑treatment rules that can become complex in multi‑tier setups.
• Scalable for small to mid‑sized teams:
  • For a small team (e.g. 1–10 employees) with long‑term perspective but still “test phase” revenue, foreign‑employer payroll often offers the best compromise.

4.3. Risks and administrative burden

Direct employment is not “risk‑free”; instead, you own more of the complexity:

1. Betriebsstätte (permanent establishment) risk
   • Even without a GmbH, repeated and significant business activity in Germany can create a permanent establishment from a tax perspective – for example, if a German‑based employee concludes contracts in your name or operates a fixed place of business.
   • This risk exists regardless of whether you use EoR or direct employment; EoR is not a “tax shield”.
2. German‑language administration
   • Registration with health insurers, social security institutions and (if needed) tax offices is largely in German.
   • You must meet filing deadlines and maintain records in prescribed formats.
3. Employment‑law complexity
   • German law places strict rules on probation periods, termination, and (after certain thresholds) works councils and collective bargaining.
   • You need to understand these or work with counsel who does.

This is precisely where an integrated legal + tax advisor like Vectocon fits: you keep control and cost advantages of direct employment while outsourcing German complexity.

5. Side‑by‑side comparison: EoR vs. PEO vs. direct employment (foreign employer)

6. When should you move from EoR to direct employment?

Many international groups follow a phased approach:

1. Phase 1 – Market test (0–3 employees)
   • Use EoR to hire one or two sales or pre‑sales staff quickly.
   • Focus: speed and minimal internal effort.
2. Phase 2 – Validation & scale (3–10+ employees)
   • EoR fees now become material.
   • More strategic roles (country manager, lead engineers) prefer direct employment.
   • At this point, you typically evaluate:
     • Direct foreign‑employer payroll vs.
     • Full GmbH (with or without PEO).
3. Phase 3 – Established presence (>10–20 employees, local revenue)
   • A German GmbH becomes attractive for operational, tax and governance reasons.
   • You may transition existing staff from EoR or foreign‑employer contracts into the GmbH.

Direct employment via foreign employer registration is often the “bridge” between Phase 1 and Phase 3:

• It lets you hire directly without EoR in Germany, keep ongoing costs down and build a track record;
• When the business case for a GmbH is clear, you can migrate employees with managed legal and tax planning.

7. How Vectocon typically structures a transition from EoR to direct hiring

Vectocon’s integrated legal + tax model is designed for exactly these cross‑border scenarios. A typical project looks like this:

Step 1 – Situation and risk assessment

• Review current EoR / AÜG contracts, including assignment durations and any upcoming 18‑month limits.
• Map German employees’ actual activities against permanent establishment (Betriebsstätte) indicators and VAT obligations.
• Check headcount forecast, revenue expectations, and group structure to determine whether:
  • Foreign‑employer payroll,
  • Branch office, or
  • Direct GmbH incorporation
    is economically and tax‑efficient.

Step 2 – Choose the target model

Together with your GC/CFO we define:

• Short‑ to medium‑term model:
  • Direct foreign‑employer employment with payroll Germany for a lean, low‑overhead solution; or
  • If you already have an entity, possible optimization with or without a PEO.
• Long‑term model:
  • GmbH or other permanent presence once scale justifies it.

We present cost bands, timelines and risk points instead of abstract doctrine.

Step 3 – Implement foreign‑employer payroll Germany

If you opt for direct hiring without a German entity, Vectocon typically:

• Registers your foreign entity with:
  • Relevant social security institutions,
  • The authorities needed for electronic payroll filings, and
  • If required, the German tax office for payroll or corporate income tax.
• Prepares German‑law employment contracts and remote‑work clauses; aligns benefits and policies with local standards and your global frameworks.
• Coordinates with a German payroll provider (or operates payroll on your behalf where within our license framework) so that payroll Germany runs in a stable, repeatable process.

Step 4 – Employee transfer from EoR

• Design a transfer concept that respects local employment law (including potential transfer‑of‑undertaking‑style considerations in certain constellations).
• Align communications so employees understand:
  • They become direct employees of your group, and
  • Pay, benefits and social security remain at least equivalent.
• Implement the transfer on a fixed cut‑over date, minimizing double‑cost or gaps.

Step 5 – Ongoing compliance and roadmap to GmbH

• Vectocon can provide continuous counsel on:
  • German employment law topics (termination, bonus plans, working‑time rules).
  • Payroll and tax questions (e.g. travel cost treatment, benefits‑in‑kind, PE monitoring, VAT registration).
• If and when you decide to establish a German GmbH, we handle:
  • Notary, Handelsregister, share capital, bank KYC.
  • Tax and VAT registrations.
  • Migration of existing employment contracts to the new entity, including pension/benefits continuity.

Throughout, you have one partner for both legal and tax aspects, rather than separate law and accounting firms.

8. Choosing the right model: practical decision checklist

Use the following questions to narrow down your model:

1. How many employees will you have in Germany in the next 12–24 months?
   • 1–3, uncertain growth → EoR or direct foreign‑employer payroll.
   • 3–10, stable pipeline → Strong candidate for foreign‑employer payroll Germany.
   • 10+, clear long‑term presence → Plan for GmbH (with or without interim foreign‑employer stage).
2. How fast do you need people on the ground?
   • Days → EoR is often fastest.
   • 4–8 weeks acceptable → Foreign‑employer registration plus payroll setup is realistic.
3. What is your risk appetite and internal capacity?
   • Minimal internal HR/Legal bandwidth, strong preference for one vendor → EoR to start, then staged exit.
   • In‑house legal/tax that can partner with external advisors → Direct foreign‑employer model often most cost‑effective.
4. Is tax “Betriebsstättenrisiko” manageable?
   • If German staff merely support marketing / non‑contractual roles, PE risk may be lower.
   • If they negotiate and sign contracts, operate a quasi‑office or store goods, you need a coordinated PE analysis and tax plan, regardless of the model.
5. How important is employer branding for you?
   • If senior talent or government clients are involved, direct employment (foreign employer or GmbH) is often preferable to a leasing construct.

9. Frequently asked questions

Is Employer of Record legal in Germany?

“Employer of Record” as a marketing term is not a German legal category. In practice, most EoR offerings operate as licensed temporary work agencies under the AÜG (employee leasing). This is legal if the provider holds a valid license and complies with AÜG rules (including time limits and equal treatment).

Unlicensed or non‑compliant EoR models carry significant risk for both the provider and the client.

Can I hire employees in Germany without a GmbH?

Yes. Foreign companies can in many cases hire employees directly in Germany without a German legal entity by registering as a foreign employer and/or setting up German payroll for social security and (where required) wage tax.

You still need to comply with German employment law and manage tax/PE risks.

Is direct foreign‑employer payroll really cheaper than EoR?

For more than a handful of employees, the answer is usually yes:

• EoR fees of €300–800 per month per employee add up quickly.
• A local payroll Germany solution often costs around €50 per employee per month, plus moderate advisory fees and one‑off registration work.

The breakeven point depends on your volume and complexity; we typically model this with you across a 2–3 year horizon.

Does using an EoR protect me from permanent establishment risk?

Not automatically. German tax authorities look at substance – where key people are and what they do. If your German‑based staff effectively run core business functions, negotiate and conclude contracts or operate a fixed place of business, a Betriebsstätte may be assumed, regardless of whether they are leased via EoR or directly employed.

PE risk should be analysed separately from your hiring model.

When does a German GmbH make sense?

Common triggers for incorporating a GmbH include:

• Headcount of 10+ employees in Germany.
• Significant local revenue or long‑term contracts with German customers.
• Need for local banking, tenders requiring a local legal entity, or regulated‑industry requirements.
• Desire to ring‑fence liability and formally recognize a German business unit.

Vectocon can design a roadmap so that your transition from foreign‑employer payroll or EoR to a GmbH is legally secure and tax‑efficient.

10. How Vectocon can support your hiring in Germany

Vectocon combines employment law, corporate, and tax advice under one roof, with a strong focus on international groups and technology‑driven businesses. For companies evaluating an alternative to PEO Germany for payroll or wanting to hire directly without EoR in Germany, we typically provide:

• Strategic option analysis: EoR vs. foreign‑employer payroll vs. GmbH, including cost bands and PE/VAT implications.
• Employment law implementation: German contracts, policies, remote‑work frameworks, and transfer concepts from EoR to direct employment.
• Payroll & tax onboarding: Support with foreign‑employer registration, social security and payroll Germany, and coordination with local providers.
• Ongoing integrated counsel: One partner for employment law, payroll questions, corporate housekeeping, and tax compliance as your German footprint grows.

If you are planning to hire in Germany without a legal entity – or you want to reduce your dependence on EoR providers – a short, structured assessment is usually enough to define a safe and cost‑sensible path.

This article provides a high‑level overview and cannot replace tailored legal and tax advice. Before taking decisions on hiring structures, permanent establishment, or company registration in Germany, you should obtain advice that reflects your specific group structure, activities and double‑tax treaty position.