AUG License Germany: What to consider when hiring in Germany through an EOR

Are you planning to hire employees in Germany through an EOR? If yes, it is essential to follow specific rules defined by the German Temporary Employment Act and to select a provider who holds a valid AUG license.

What is AUG

AUG (or correct AÜG) is the abbreviation of the German word “Arbeitnehmerüberlassungsgesetz” – the Act on Temporary Agency Work. It regulates the leasing of employees from one company (the EOR provider) to another company (the client). The primary aim of the law is to protect the rights of temporary workers and ensure fair working conditions.

Key provisions of the AUG include:

• Equal Treatment: Temporary workers must generally be treated the same as permanent employees in terms of pay and working conditions after a certain period.
• Maximum Assignment Period: The law limits how long a temporary worker can be assigned to the same company (usually a maximum of 18 months).
• Employment Contract Requirements: Contracts between the employer and temporary worker must be in writing and clearly outline the terms of the employment.
• Licence Requirement: Employers providing temporary workers must hold a license issued by the German Federal Employment Agency (AUG license)

The AUG License

§1 of the Act on Temporary Agency Work states that the assignment of employees as part of a commercial activity is subject to authorization. This means an EOR provider must hold a so-called AUG license. This also applies to providers based abroad. The authorization is granted by the Federal Employment Agency.

If an EOR provider operates without authorization, the contracts agreed with the temporary employees and the client companies are invalid, and an employment relationship is automatically established between the client and the employee.

Violating AUG regulations can result in severe penalties, including fines up to €500,000 and criminal charges.

What are the implications of AUG for using an EOR in Germany

Hiring employees in Germany using an EOR is legal, but certain rules need to be followed:

• AUG license: An EOR provider must hold a valid AUG license. This is also valid for providers from abroad.
• No chain leasing: Some EOR providers use local “in-country partners” and subcontract the hiring to their local partner. German law demands a direct contractual relationship between the “borrower” and “lender” of the employee.
• Equal treatment: Leased employees are entitled to the same pay and benefits as comparable permanent employees of the hiring company after nine months of employment.
• 18 months regulation: there is a cap on the leasing duration.

The 18-month regulation

Leased employees can be assigned to the same client for a maximum of 18 months under German law. This limit applies specifically to the employee-client relationship, meaning the duration is counted regardless of any changes to the EOR provider company. Simply switching to a different EOR does not reset the 18-month limit.

The Federal Ministry of Labor regularly audits AUG license holders. During the audit, they specifically look for violations of the 18-month rule.

What to do after 18 months

When hiring staff through an Employer of Record (EOR) in Germany, continuing employment beyond the 18-month limit can be managed in several ways:

1. Direct Employment
   The simplest solution is for the client company to hire the employee directly after 18 months. This transitions the employee from the EOR’s payroll to the client’s permanent staff, ensuring compliance with the AUG.
2. Employee Rotation
   If direct employment isn’t an option, companies can rotate employees. By replacing the current temporary worker with another, businesses can continue their operations without breaching the 18-month rule. After a designated break, the original employee may be reassigned to the same client.
3. Reassignment After a 3-Month Break
   To reset the 18-month limit, a 3-month plus 1 day waiting period can be applied. Once this break has been observed, the same employee can be re-engaged under the EOR for another 18 months, remaining compliant with AÜG regulations.

What are alternatives to AUG

Not all companies want to adhere strictly to the regulations of the Arbeitnehmerüberlassungsgesetz (AÜG), the German Temporary Employment Act, and may look for alternative solutions. While there are indeed legal alternatives, it is essential to carefully assess whether these alternatives fully comply with the relevant employment laws. This ensures that the company avoids “hidden employee leasing”, which can lead to legal complications and penalties.

Before opting for an alternative model, businesses must ensure that they understand the nuances of employment law and work closely with legal experts to guarantee compliance. This is crucial not only for protecting the company but also for ensuring the fair treatment of workers involved.

Service or Works Contracts

A service or works contract is not considered employee leasing if it is between a business (the employer) and a third party. If the business organizes all the necessary actions to achieve the desired economic outcome independently, it remains responsible for fulfilling the services or producing the agreed-upon work specified in the contract with the third party. The business may use employees under its direct instructions as fulfillment agents.

The key factor for distinguishing a service or works contract is the presence of genuine entrepreneurial risk on the contractor’s side. Indicators of such risk include a detailed description of the tasks or work to be performed in the contract, performance-based compensation (e.g., payment per piece produced), and the assumption of warranty obligations. Additional factors, such as providing one’s own work clothing or tools, may also play a role in determining the contract’s classification.

What happens when a company does not comply with AÜG regulations?

Non-adherence to AUG regulations results in serious legal repercussions, including substantial fines and potential criminal charges. Companies can face fines of up to EUR 500,000 for failing to comply with AUG regulations, highlighting the severity of these legal obligations.

If agencies violate the AUG, contracts and assignments may be considered invalid. This can lead to significant legal consequences.

If an agency provides a temporary worker without an AUG license, the employment contract is deemed invalid. Therefore, it holds no legal effect. This results in a direct employment relationship between the client company and the worker, complicating legal and financial matters

Frequently Asked Questions

What is the 18 month rule in Germany?

The 18-month rule in Germany mandates that temporary agency workers can be assigned to the same company for a maximum of 18 months, after which they must either be offered a permanent position or reassigned to a different company. This regulation aims to ensure job security and fair treatment for temporary workers.

What is the German AUG license?

The German AUG (Arbeitsnehmerüberlassung) license is a mandatory permit that allows EOR providers to lease workers to companies. This arrangement ensures that employees remain contracted with the agency rather than the client company.

What are the consequences of non-compliance with AUG regulations?

Non-compliance with AUG regulations can lead to severe consequences, including fines of up to €500,000, legal liabilities, invalid contracts, and potential criminal charges. It is crucial to adhere to these regulations to avoid significant repercussions.

How long can a temporary worker be leased to the same company?

A temporary worker can be leased to the same company for a maximum of 18 months before they must either be directly hired or replaced.