The idea to hire employees in Germany without a GmbH sounds appealing. Many international tax advisory firms promote it as a cost-effective option for foreign employers in Germany, promising lower costs and faster onboarding.
The problem is that while direct employment without a German entity can work for some companies, it carries hidden obligations, unexpected costs, and German HR compliance risks that are often overlooked. Payroll mistakes, safety violations, or tax missteps can quickly become costly for unprepared businesses.
Here’s what we’ve learned from helping hundreds of companies navigate German employment law: seeing the full picture upfront is crucial, and this article will guide you through the real risks, costs, and why EOR is often the safer path.
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The idea to hire employees in Germany without a GmbH sounds appealing. Many international tax advisory firms promote it as a cost-effective option for foreign employers in Germany, promising lower costs and faster onboarding.
The problem is that while direct employment without a German entity can work for some companies, it carries hidden obligations, unexpected costs, and German HR compliance risks that are often overlooked. Payroll mistakes, safety violations, or tax missteps can quickly become costly for unprepared businesses.
Here’s what we’ve learned from helping hundreds of companies navigate German employment law: seeing the full picture upfront is crucial, and this article will guide you through the real risks, costs, and why EOR is often the safer path.
Author
Co-author
Registering as a foreign employer in Germany allows international companies to hire staff without establishing a local GmbH.
While this approach sounds simple, it involves specific legal, tax, and compliance requirements that must be met to operate smoothly and avoid penalties.
Understanding these requirements upfront will save time, reduce risk, and ensure full compliance with German employment law.
Key Requirements:
Meeting these requirements is essential before you hire any employee in Germany as a foreign employer.
To simplify this process, we’ve outlined a complete 7-step guide that walks you through every stage of registering and hiring as a foreign employer in Germany.
Before you can register as an employer, German authorities require you to appoint a permanent representative (Empfangsbevollmächtigter) with a German address.
Options include:
Critical risk most tax advisors downplay: The permanent representative can face personal liability for your company’s tax and social security obligations.
Under German law (§69 Fiscal Code), managing directors and representatives are personally liable for unpaid wage taxes. This applies if they act with willful intent or gross negligence. The same liability applies to missed social security contributions.
This creates a big problem. Qualified professionals often refuse to be permanent representatives for foreign companies they don’t fully control. Some charge high fees to take on this risk.
Direct employment triggers registration obligations across multiple German authorities:
Trade Office (Gewerbeamt) Registration:
Tax Office (Finanzamt) Registration:
Social Security Registration:
Accident Insurance (Berufsgenossenschaft):
With complete documentation and professional support, expect 4-6 weeks from initiation to first employee onboarding. Delays are common if documentation is incomplete or authorities request clarifications.
Understanding German payroll requirements is essential, as payroll isn’t just about calculating gross-to-net salaries. It requires:
Monthly obligations:
Annual obligations:
Your tax advisor handles the technical submissions, but you remain ultimately liable for accuracy and compliance. If your advisor makes mistakes, you pay the penalties and back payments.
German work contract rules require specific formalities that differ significantly from other jurisdictions:
Mandatory written documentation:
Common pitfalls:
You can be fined up to €2,000 for missing required documents. If a fixed-term contract has the wrong signature, it automatically becomes a permanent contract.
Under German time tracking law, all employers must implement systematic working time recording for employees, including remote workers, following the Federal Labour Court ruling of September 13, 2022.
Requirements:
What tax advisors often don’t mention: This is a separate obligation from payroll. You need to invest in compliant time tracking software (€5-15 per employee monthly) and ensure disciplined daily compliance.
Penalties: Fines up to €25,000 for non-compliance, plus inability to defend against employee overtime claims.
Under German occupational safety law (Arbeitssicherheitsgesetz), every employer must appoint:
Cost implications:
Germany faces a significant shortage of occupational physicians. Companies, particularly in rural areas, often struggle to find available physicians despite legal obligation to appoint one.
Penalties: Fines up to €25,000 for failure to appoint required personnel.
Important note: These obligations apply equally to remote workers and office-based employees. The fact that your employees work from home does not exempt you from appointing occupational physicians and safety specialists.
Every employer must conduct comprehensive workplace risk assessments (Gefährdungsbeurteilung) regardless of company size – including for home office workplaces:
Requirements:
Documentation:
Special considerations for remote workers:
Professional help for the first risk assessment usually costs €500–2,000. The price depends on how complex the workplace is and how many remote locations you have.
Here’s the critical tax issue that deserves far more attention than it typically receives:
Direct hiring without a German entity can trigger permanent establishment (Betriebsstätte) status, subjecting your foreign company to German corporate taxation.
Tax consequences:
PE triggers include:
It is uncertain if your setup triggers PE. Home offices alone usually do not create PE. But having German employees combined with business activities can cause exposure.
Professional advice is essential: You need tax experts to assess your specific situation and structure operations to minimize PE risk. But even with careful structuring, uncertainty remains.
Let’s start by acknowledging why this approach gets recommended so frequently:
Lower initial costs: Compared to EOR services charging €600+ per employee per month, tax advisors typically charge €50-150 per employee monthly for payroll processing. The math seems compelling.
No entity establishment required: You avoid the €25,000 minimum share capital, notary fees, registration processes, and timeline associated with forming a German GmbH (German limited liability company).
Direct employment relationship: You maintain the direct employer-employee relationship without an intermediary, and there’s no 18-month maximum deployment limitation like EOR arrangements under Germany’s employee leasing regulations (AÜG).
Recurring revenue for advisors: Tax advisors secure ongoing monthly payroll work, creating a steady income stream from your engagement.
These advantages can make direct hiring appealing, but what’s often missing is the full picture of compliance obligations and risks, even without a local German entity.
Let’s break down the actual monthly cost per employee:
| Cost Category | Monthly Cost per Employee |
|---|---|
| Tax advisor payroll processing | €50-150 |
| Occupational physician (annual cost amortized) | €5-15 |
| Safety specialist (annual cost amortized) | €5-15 |
| Time tracking software | €5-15 |
| First aid training & supplies (amortized) | €3-8 (€0 for fully remote) |
| Data protection compliance support | €10-30 |
| Risk assessment & documentation | €5-15 |
| Professional HR/legal advisory retainer | €50-150 |
| Total recurring cost | €133-398 |
Additional one-time costs:
This does not include the time you spend managing all these obligations. You still need to coordinate service providers and respond to authorities in German.
Compare to EOR:
The cost difference narrows significantly when you account for all obligations. And EOR transfers compliance risk entirely to the specialist provider.
Direct employment can be the right choice for:
Medium-term commitment (1-3 years) with 3-5 employees:
Testing specific arrangements before entity formation:
Companies with robust compliance capabilities:
EOR works best in situations where compliance, costs, or speed create challenges. Here are the main cases to consider:
1. Short-term arrangements (6-18 months):
2. Small teams (1-3 employees):
3. Fully remote teams:
4. Companies wanting to focus on business, not compliance:
5. Rapid market entry:
Here’s what many companies don’t realize: You don’t have to choose one approach forever.
A smart progression for many international companies looks like this:
Phase 1 (Months 0-12): EOR
Phase 2 (Months 12-24): Evaluate options
Phase 3 (Months 24+): Entity establishment
This approach de-risks your entry while maintaining flexibility to transition as your situation evolves.
After helping hundreds of international companies establish German operations, our recommendation for most foreign employers is:
Start with an EOR in Germany solution.
Here’s why:
Ensure your EOR provider holds a valid AÜG license (employee leasing authorization) from the Federal Employment Agency.
Operating without this license can result in fines up to €500,000 and automatic establishment of direct employment relationships.
Also be aware of the 18-month maximum deployment rule – you’ll need to transition to direct employment or entity formation before this limit.
Once you’ve established stable German operations with 5+ employees and a proven business model, then evaluate whether entity establishment (GmbH) makes sense for your long-term strategy.
Direct employment in Germany without a local entity is possible, but the compliance risks, costs, and administrative burden are high. For small teams, remote workforces, or companies testing the market, registering as a foreign employer in Germany can work, but an Employer of Record offers a safer, simpler solution.
Take action now: Book a free 30-minute consultation with FMC’s experts. With 15+ years of EOR experience, full compliance with German laws, Germany-based operations, and service in 50+ countries, we’ll help you hire safely and efficiently.
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