Since October 2024, the Technical Instructions (Fachliche Weisungen) of the German Federal Employment Agency (Bundesagentur für Arbeit) assume that temporary employment requiring an official permit regularly also exists when employees work exclusively remotely from abroad for a client based in Germany via a foreign temporary employment agency. The view of the Employment Agency is controversial and creates new compliance issues for companies, particularly with regard to the popular Employer of Record (EoR) model. The Technical Instructions have now been updated again as of 1 January 2025. The Employment Agency is sticking to its critical legal opinion and is thus missing the opportunity for a quick correction.
Employment of temporary employees abroad / Employer of Record
The scope of the German Temporary Employment Act (Arbeitnehmerüberlassungsgesetz, AÜG) is limited to the Federal Republic of Germany. Accordingly, the Temporary Employment Act applies if the temporary employment has sufficient “domestic reference”.
It is generally assumed that the Temporary Employment Act does not apply in the absence of a domestic reference if only the client is based in Germany and the employee performs the work exclusively abroad. This becomes relevant, for example, in the case of the EoR model, which is becoming increasingly popular. In this case, the client is based in Germany, but the employee works exclusively abroad on the basis of an employment contract with the foreign EoR. The EoR handles the processing of the employment relationship and the administration abroad, while the employee works remotely and in accordance with the instructions of the German client.
The Employment Agency has also previously assumed that the Temporary Employment Act does not cover such temporary employment. This is convincing, because the client’s registered office in Germany cannot be relevant for the justification of a permit requirement if only foreign law applies to the temporary employment. Nevertheless, compliance considerations had to be taken into account in these cases of an EoR, for example with regard to national regulations in the country in which the employee worked or if the employee was to travel to Germany (even if only temporarily, for a business meeting) and thus possibly established a domestic reference.
“Virtual domestic reference”
Since the Technical Instructions of 15 October 2024, the Employment Agency has deviated from its previous legal interpretation and further increased the legal risks of the EoR model. The Technical Instructions are internal guidelines that describe how the provisions of the Temporary Employment Act are interpreted and applied by the Employment Agency. According to these, the Temporary Employment Act should now also cover situations in which the employee provides services abroad that do not require them to be present at the company or at a specific location and that can be carried out entirely using modern communication and information technology. If the employees work for the client abroad in a location-independent and virtual manner, this should regularly constitute temporary employment requiring a permit.
Legal consequences of illegal temporary employment
The new perspective of the Employment Agency would significantly expand the scope of the Temporary Employment Act. Many temporary employment agencies and EoR providers from abroad will not possess a permit for temporary employment under German law. If this results in an unauthorized temporary employment, the client based in Germany faces a fine of up to EUR 30,000 per individual case and possibly a negative entry in the German Commercial Central Register. The legal consequences are mitigated to some extent by the fact that, according to established case law, no deemed employment relationship arises between the employee and the client (Sections 9 (1) no. 1, 10 Temporary Employment Act) if the temporary employment relationship is subject to the law of another country (German Federal Labor Court, judgment of 26 April 2022 – 9 AZR 228/21).
Conclusion
The legal opinion of the German Employment Agency is not convincing. Not least because the authority’s interpretation would effectively deprive companies of the opportunity to deploy skilled employees from third countries outside the EU/EEA remotely, because the contractors there are generally not allowed to apply for a temporary employment permit (Section 3 (2) Temporary Employment Act). There is no legal basis for such a restriction. The Technical Instructions are internal guidelines for authorities that are not binding on courts. However, the Employment Agency is responsible for monitoring the Temporary Employment Act alongside the German customs authorities and will presumably base its approach on audits. It is recommended that employers review their use of external staff abroad in order to counter risks arising from the changed interpretation by the authorities. This may also include examining alternative arrangements, such as global payroll or freelancer models.
