EoR in Spain and Germany: What Employers need to know
What is an Employer of Record (EoR)?
An Employer of Record (EoR) is a third-party provider that formally hires employees on behalf of a client (real employer) in a country where the client does not have a legal entity. This model allows mainly companies to hire employees abroad (who usually work remotely) on a long-term basis without setting up a local legal entity or managing complex administrative requirements to register the employee in the country where they is going to render their services.
How does an EOR work?
The EoR is a model based on a three-party structure involving a client company, an employee located abroad, and a local EoR provider in the employee’s country.
The EoR provider acts as the formal (“legal”) employer of the employee and enters into a local employment agreement. The EoR is responsible for all employer’s administrative obligations, including payroll, tax withholdings, and social security contributions. From a legal perspective, it therefore bears responsibilities for day-to-day employment administration and statutory employer obligations under local law.
The EoR transfers however the right to give instructions to the client company, which manages and directs the employee’s day-to-day work.
At the same time, the EoR and the client company enter into a service agreement. Under this agreement, the client company anticipates the employee’s salary and pays a service fee.
What does a company want to achieve using an EOR?
Using an EoR is a fast and cost-effective solution for companies seeking to expand internationally. The model enables companies to hire employees abroad in foreign jurisdictions without establishing a local legal entity and without having to deal themselves with all the administrative requirements. As the EoR acts as the formal employer and payroll provider and handles social security registration and employment-related administration, internal workload and operational costs can be significantly reduced. The EoR model offers companies an attractive way to access international talent, addresses skills shortages and explore new markets while keeping personnel costs and administrative burdens under control.
Is an EOR regulated?
SPAIN
An EoR is not expressly regulated in Spain but it is often considered non-compliant under Spanish labor law because the only companies legally allowed to hire employees to assign them later to a third-party are the Temping Agencies. However, these temping agencies are strictly limited to assign the employees on a short-term relationship. EoR providers are not Temping Agencies, consequently, attempting to operate under this model places both the EoR provider and the client company at legal risk.
GERMANY
There is no specific statutory regulation governing the EoR model under German law. However, if an employee is based and performs work in Germany, the arrangement will typically fall within the scope of the German Law on Labour Leasing (Arbeitnehmerüberlassungsgesetz). This is because the EoR, acting as the formal employer, places the employee at the disposal of the client company, the foreign company seeking to engage staff in Germany. Since the employee performs the work in Germany, a sufficient domestic relevance (in German: Inlandsbezug) is established, triggering the application of German law and, in particular, the German Law on Labour Leasing.
As a consequence, the strict requirements of the German Law on Labour Leasing apply in full. Most notably, the EoR provider must hold a valid labour leasing permit issued by the Federal Employment Agency. Without such a permit, the arrangement is unlawful under German law, with significant consequences for both the EoR provider and the client company, including the statutory fiction that an employment relationship is deemed to exist directly between the employee and the client company abroad.
In the outbound model, where the employee is employed by a foreign EoR provider and works exclusively from abroad for a German company, the situation differs fundamentally. In principle, the EoR model is permissible under German law in such constellations, as no sufficient domestic relevance is established and the German Law on Labour Leasing therefore does not apply. According to the professional guidance issued by the German Federal Employment Agency on 1 October 2025, domestic relevance is generally considered absent in case the employee works exclusively and remotely from abroad.
Caution is nonetheless required if the employee enters Germany, even temporarily. Short business trips, meetings, or training sessions may be sufficient to establish domestic relevance and bring the arrangement within the scope of the German Law on Labour Leasing. While German courts are not bound by the Federal Employment Agency's guidance, it is primarily the Agency that supervises compliance with the German Law on Labour Leasing in practice. Its guidelines should therefore be carefully observed.
What is the difference between a temping agency and an EoR?
SPAIN
A temping agency (“ETT” in Spanish) is a company legally authorized to hire employees and assign them to a client company. This model is commonly used and it has a long track record.
They are expressly regulated and permitted by Law 14/1994, which provides that only temping agencies are entitled to hire employees for the purpose of assigning them to a client company, and further it requires that:
They are duly authorized by the competent administrative authority, and
They must be registered within the corresponding labour authority
To sum up: the Spanish legislation allows a company to “lend” employees to another company, but only if it is an authorized “ETT” and under very specific conditions (temporary nature, justified reasons, equal treatment, etc.).
Therefore, they are designed for temporary needs: temporary replacements of employees on leave, peaks in workload, or specific projects, based on what is regulated by law.
In addition, the client company can legally give instructions, organizing the work, and supervising the employee. However, there are some limits to take into consideration:
-The client company may not:
- alter essential terms that fall within the remit of the temping agency (including the employment contract, base salary, etc.).
- assign to the employees duties other than those agreed in the assignment contract.
- treat the employee less favorably than its own employees in respect of fundamental working conditions (principle of equal treatment).
By contrast, an EoR is a more recent and global concept. Formally, the employer is the EoR, but the entity that actually exercises managerial power/control is another company (the client company), usually a foreign one, which in practice directs their work. This is precisely what may trigger the risk of illegal transfer of employees.
Because EoRs are not regulated in Spain, they are neither registered nor legally authorized.
Moreover, they are typically used for stable or long-term employment relationships. For that reason, temping agencies are not a suitable solution as they are not intended for this purpose, but for short-term engagements/assignments.
GERMANY
From a German legal perspective, labour leasing can be provided by temporary work agencies and any company that hires employees and assigns them to a third party to perform work under that party's directions and is therefore subject to the German Law on labour Leasing regardless of whether it operates as a dedicated temping agency.
The German Law on Labour Leasing imposes strict requirements on labour leasing arrangements. Most notably, any entity engaging in labour leasing must hold a valid labour leasing permit (in German: Arbeitnehmerüberlassungserlaubnis) issued by the Federal Employment Agency. Further mandatory requirements include the principle of equal treatment and equal pay, a maximum assignment period of 18 months and a prohibition of chain assignments (in German: Kettenüberlassung).
The EoR model follows a comparable triangular structure: the EoR acts as the formal employer and makes the employee available to the client company, which directs the employee's work in practice. There is, however, no specific statutory framework governing the EoR model under German law. Where the arrangement falls within the scope of the German Law on Labour Leasing, which will typically be the case if the employee works in Germany, the EoR provider must nonetheless obtain a labour leasing permit. This is a critical point that is frequently overlooked in practice.
Furthermore, traditional temporary agency work is generally used to meet short-term needs, whereas EoR arrangements are generally geared towards stable, long-term employment relationships. This creates a structural conflict with the maximum assignment period of 18 months stipulated in the German Law on Labour Leasing, which is unsuitable for permanent EoR assignments and requires careful monitoring in practice.
Non-compliance with the German Law on Labour Leasing carries severe legal consequences. The most far-reaching is the statutory fiction whereby the employment relationship is deemed to exist directly between the employee and the client company, unless the employee elects to maintain the employment relationship with the EoR provider by filing a declaration of continuation.
Beyond this, the client company becomes exposed to full employer liability, including responsibility for social security contributions and wage tax. The evasion of social security contributions constitutes a criminal offence under German law, punishable by imprisonment of up to five years or a fine. Violations of the German Law on Labour Leasing may further give rise to administrative fines of up to EUR 30,000, applicable not only to operating without a permit, but also to breaches of the maximum assignment period or the prohibition of chain leasing. Additional legal consequences, including claims based on equal treatment requirements, may also arise.
What are the consequences of using an EOR?
SPAIN
Firstly, the Spanish labor legislation imposes strict protections for employees, including rules on contract types, termination procedures, and severance payments. These protections apply regardless of how the employment relationship is managed. Hiring employees through an EoR does not eliminate legal obligations; in fact, obligations may increase, particularly if the arrangement is subsequently reclassified as unlawful.
Secondly, Spanish law prohibits separating the entity that directs the employee’s work from the entity that formally employs them. If such separation occurs, it will be deemed an illegal transfer of employees, exposing both the client company and the EoR provider to substantial sanctions.
Therefore, in the event of a claim/complaint by an employee seeking recognition as a direct employee of the client company, Spanish labor courts consistently rule in favor of the employee, prioritizing the actual employment relationship over formal arrangements/structures.
Both the EoR and the client company are jointly and severally liable. This means that Spanish authorities or employees may pursue either party, or both, for any labor law infringements.
Nonetheless, employees rarely file complaints before the Labour Inspectorate, as no financial compensation is typically awarded to them, and therefore the risk of receiving a sanction is minimized. Moreover, ex officio inspections by the Labour Inspectorate are highly unlikely when the client company has no presence in Spain and employees work remotely. However, the risk cannot be entirely disregarded, and penalties range from €7,501 to €225,018, with the highest fines probably applicable in cases where client companies frequently use the EoR model or have prior sanctions or have diminished employee’s rights, etc.
Notwithstanding the foregoing, employees’ rights would be better protected under an EoR, as they may pursue claims against both the client company and the EoR (in case, for example, that one of the two companies is declared insolvent, the employee might be able to recover whatever amount owed from the other company).
On one hand, being subjected to Spanish employment law (through an EoR instead of being hired by the client company directly under the application of a foreign law) would be most of the time more beneficial for the employee, as the Spanish employment law is very protective of employees. On the other hand, the client company may benefit as well, as a foreign judgment against, it is not immediately enforceable in Spain, although it may ultimately be required to satisfy the employee’s claim at a later stage (it would be though more costly for the employee and it would take longer).
GERMANY
Where the employee is employed by a German EoR provider (inbound model) and performs the work in Germany, German Law on Labour Leasing is applicable. In the case of non-compliance with the law, strict consequences apply, such as the presumption of an employment relationship with the client company. This includes the resulting implications under labour and social security law (see question 4 and 5).
The legal situation differs when it comes to the outbound model, where the employee is employed by a EoR provider abroad and works for a German company: In this context, the EoR model enables rapid market entry, low administrative burdens and, where applicable, lower personnel costs.
However, German labour leasing law may still apply if a sufficient domestic connection exists.
The German Federal Labour Court has clarified for these constellations that a violation of the German Law on Labour Leasing does not automatically lead to the statutory establishment of an employment relationship with the German client company. The Court held that the relevant provisions do not constitute overriding mandatory provisions within the meaning of Article 9 of the Rome I Regulation, which would apply irrespective of the law governing the employment relationship.
Accordingly, the statutory fiction of an employment relationship arises only where the employment contract between the EoR provider and the employee is governed by German law. Where the employment contract is subject to the law of another EU Member State, the employment relationship with the EoR generally remains valid, even if German Law on Labour Leasing requirements are breached. Nevertheless, breaches may still give rise to administrative fines and supervisory sanctions. Consequently, the German client company is not liable (retrospectively) for the payment of social security contributions.
By contrast, the Federal Social Court assumes unlawful labour leasing in cross-border constellations with the established consequences: nullity of the leasing agreement, a deemed employment relationship with the German Client Company and liability for social security contributions.
As no decision by the Joint Senate of the Federal Supreme Courts has been obtained yet, the practical outcome currently depends on the approach taken by the competent authorities (Federal Employment Agency, Customs, collection agencies of the health insurances and the German Pension Insurance).
Is it possible to transfer an employee’s contract from the EoR to the client company?
SPAIN
It is generally not possible to directly transfer an employee´s contract from an EoR to the client company in Spain, for instance, when the client company does not need the EoR anymore as there is finally a legal entity in the country because of a growth of the market and/or of the workforce in Spain.
Why? Because under Spanish law, an employment contract is tied to a specific employer with agreement of the employee, so, moving an employee from an EoR to a client company cannot be done without the employee’s consent unless there is a Transfer of Undertakings (TUPE). However, a true TUPE , regulated in Article 44 of the Spanish Workers’ Statute (hereinafter `WS´), only occurs when there is a transfer of a business unit or economic activity and the employees are part of that transferring unit.
When transferring an employee from an EoR to the client company, there is no real business unit being transferred, only individuals, so article 44 WS usually does not apply and therefore the consent of the employee is needed because it is just a transfer of contract, but not a TUPE.
As a result, what actually happens in these cases is:
-The EoR terminates the employment contract, but this termination must be mutually agreed, otherwise, it could trigger the unfair dismissal risk for the EoR. Afterwards, the client company hires the employee directly, or
- The employee voluntarily resigns from the EoR and signs a new contract with the client company.
Employees are quite reluctant in both scenarios because when mutually terminating a contract or when resigning, the employee loses all rights to unemployment benefits and possible severance compensations. Therefore, both the possible mutual termination / voluntary resignations are signed at the same time as the new contract with the client company. In addition, the employee would probably require the client company to acknowledge in writing the continuous employment, keeping the seniority as of the first day of service with the EoR.
GERMANY
In Germany, an employment relationship cannot, in principle, simply be ‘transferred’ from the EoR to another entity. An automatic transfer is possible in the event of a transfer of business under Section 613a of the German Civil Code (BGB), i.e. when an economic entity (an undertaking or part thereof) is transferred to the German company and the employee is assigned to that entity. However, this scenario does not typically apply in EoR structures, as only individual employees change employers, rather than an organisationally distinct entity being transferred.
In the absence of such a transfer of business, the only option is a contractual solution: the existing employment relationship with the EoR must be terminated and a new employment relationship established with the German entity. A ‘takeover’ of the contract is only possible with the employee’s express consent. In practice, this usually takes the form of a termination agreement with the EoR and a seamlessly following new contract with the German company, often accompanied by agreements on the recognition of length of service to avoid disadvantages for the employee.
AUTHORS
Nuria Naranjo is an attorney-at-law at álvarez lentner, the Spanish member of Ellint based in Madrid.
She is qualified to practice law in Spain, after doing her legal practice studies at Carlos III University. She provides assistance, both in and out court, and in most cases to companies but also to employees. And last but not least, she is willing to write appealing juridical articles for other lawyers colleagues and clients to keep them up to date.
Dr. Luise Brunk is an Attorney at Law at Altenburg, the German member of Ellint. She is espesialized on Social law (company audits, status determination procedures), New work models (mobile working, workation)
Labour and employment contract law, Dismissal protection law, Works constitution law,
She studied in Freiburg and Paris and Doctorate on 2020.
