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Christine Wahlig
Attorney at law
Editorial Management
Alice Tanke
Marketing Manager
The Federal Employment Agency (Bundesagentur für Arbeit – “BAA”) has updated its Technical Instructions (“TI”) on the German Temporary Employment Act (Arbeitnehmerüberlassungsgesetz – “AÜG”), which have been in effect since October 15, 2024, and are now authoritative for legal application. One practically relevant adjustment is the clarification of the territorial scope of the AÜG in cases of cross-border leasing. The BAA unequivocally expands the reach of the AÜG. This is particularly relevant for companies in the so-called new economy and for the business model of Employers of Record (EoR).
In the so-called “new economy,” characterized by digitalization and technology (i.e., companies in fields like IT, e-commerce, software development, telecommunications, fintech, etc.), the EoR model has become established in personnel management.
In this form of indirect staffing, the client company and the employee (also called “talent”) are typically located across national borders but agree that they wish to collaborate. To avoid corporate tax implications at the talent’s work location (keyword: “taxable permanent establishment”) and to outsource the administration of the employment relationship according to local social security, tax, and labor law requirements, an EoR is engaged to formally employ the talent and lease them to the client company as the actual employer.
From the perspective of contracting companies, the EoR model is attractive because it enables access to international specialists who may be scarce domestically and lowers market entry barriers at the foreign work location of the talent. This is achieved without the need to establish and maintain a foreign subsidiary.
According to German interpretation, this generally constitutes employee leasing within the meaning of § 1 (1) AÜG. For EoRs based abroad, it is uncommon to hold a German employee leasing permit, nor do the parties typically refer to the contractual relationship as such or submit it to the provisions of the German AÜG. It is also usually not in the parties’ interest to limit the contract duration to a maximum of 18 months.
In cross-border cases involving German stakeholders, the question of the extent of German regulatory requirements naturally arises from a compliance perspective.
The AÜG itself does not define its territorial scope.
According to the Technical Instructions (TI), the “scope of the licensing requirement under the AÜG” (as stated in the heading of section 1.1.1 and in the first sentence of paragraph 1) or the “applicability of the AÜG” (from paragraph 1, sentence 2 of section 1.1.1) is territorially limited to the Federal Republic of Germany. According to the so-called principle of territoriality, public law applies insofar as it pertains to the territory of the state that enacted it.
Anyone who concludes from this that the AÜG is only relevant if employee leasing occurs entirely within the physical presence of all parties in Germany is mistaken.
Previously, according to section 1.1.1, paragraph 2, of the former Technical Instructions (TI prev.), the following applied to cross-border leasing:
“Within Germany, the AÜG applies equally to the activities of domestic and foreign lessors. This includes leasing within Germany, into Germany, and out of Germany.” (continued in section 1.1.1, paragraph 2, of the updated TI rev.)
This means that for leasing abroad (“outbound,” i.e., where the contractual employer (e.g., a German EoR) is based in Germany, the employee resides in Germany, and the client company is located abroad), the territorial scope of the AÜG is applicable even if the employee does not physically cross the border. If the respective employee is assigned by their contractual employer within the framework of the latter’s economic activity to the client and is integrated into the client’s work organization, following the client’s instructions (material scope), then the AÜG and its regulations generally apply to the leasing arrangement. Specifically, the contractual employer must be officially permitted to lease employees.
Even in cases of leasing into Germany (“Inbound,” i.e., where the contractual employer (e.g., a foreign EoR) is based abroad, the employee resides abroad, and only the client company is based in Germany), it was already recognized under the previous version of the Technical Instructions (TI prev.) that a domestic reference, in the sense of the principle of territoriality, is established by the location of the client.
However, in this context, the following sectoral exemption was previously provided: “Leasing by a foreign lessor to a domestic client is not covered if the temporary worker is exclusively deployed abroad.” Considerations regarding the material scope (see above) were therefore only necessary if the employee at least occasionally (e.g., for meetings) entered Germany.
This exemption was mainly due to the fact that it was historically intended for work that required the performance of duties in a specific foreign location with mandatory physical presence (e.g., work on an oil rig in waters outside German territory). The fact that this exemption gained relevance in a changing work environment, where German companies began to meet their needs for intellectual, non-location-dependent activities abroad (sometimes by preference, sometimes out of necessity), was simply not anticipated at the time the former version of the Technical Instructions (TI prev.) was published.
In this context, the sectoral exemption described above has increasingly been viewed critically by some employment agencies for some time. With the new Technical Instructions, the Federal Employment Agency (BAA) has now, in its own words, “clarified” the scope of the AÜG—although from the perspective of those subject to the law, this is more likely seen as an expansion.
The BAA places the purpose and intent of the AÜG at the forefront and derives its clarification of the territorial scope, partially discarding the previous sectoral exemption. The BAA notes the following:
“With the AÜG, the goal is to socially structure temporary employment. The AÜG implements the European Directive 2008/104/EC on temporary agency work.” (Introduction to § 1 TI rev.).
Furthermore, the BAA, referring to the explanatory memorandum of the first version of the AÜG from 1972 – which preceded the enactment of the Temporary Agency Work Directive in December 2008 (Directive 2008/104/EC) by 36 (!) years and is now 52 years old – states:
“The primary objective of the AÜG is to create a legal framework for temporary employment that meets the requirements of a social state governed by the rule of law (BT-Drs. VI/2303, pp. 9-10).” (Section 1.1.1, paragraph 1 TI rev.)
The fact that the regulatory framework has since changed multiple times due to European legislation and continually evolving labor market conditions is not acknowledged (see, in contrast, the excerpt from the last comprehensive reform in BT-Drs. 18/9232, p. 1: “The present law aims to refine the function of temporary agency work as an instrument for meeting temporary staffing needs, prevent misuse of temporary agency work, strengthen the position of temporary agency workers, and facilitate the work of works councils in client companies. Temporary agency work is to be maintained as one of the flexible instruments for workforce deployment, along with its positive employment effects. At the same time, the importance of collective bargaining agreements as an essential element of reliable social partnership is to be reinforced.”).
Now, even activities performed independently of location have a connection to Germany if only the productive work output, and not the individual, crosses the border. The BAA states:
“What is decisive for the applicability of the AÜG is whether the leased employee’s activity takes place in Germany. It is irrelevant whether the lessor has a business presence in Germany (BT-Drs. VI/2303, p. 10). According to the protective purpose of the AÜG, it also does not matter whether the client has a business presence in Germany.” (Section 1.1.1, paragraph 1 TI rev.)
It is made unequivocally clear that even an intellectual connection of the employee to Germany can trigger the applicability of the AÜG. This applicability remains closed only when the employee is physically located abroad while performing work due to objective constraints, not by choice:
“Leasing by a foreign lessor to a domestic client is not covered if the leased employee is exclusively employed abroad. This refers to cases in which the performance of work fundamentally requires the employee’s presence at a specific location.” (Section 1.1.1, paragraph 2 TI rev.)
To explain why it considers this approach correct, the BAA further elaborates:
“To safeguard the protection of the temporary employment sector, it cannot be solely based on the employee’s physical location when work is performed independently of location, exclusively in a home office, or as remote work. For permit requirements, what is crucial is whether the leasing arrangement has a domestic reference. This is regularly the case with location-independent work if the leasing originates domestically or if the leased employee works virtually for a domestic client.” (Section 1.1.1, paragraph 3 TI rev.)
This naturally qualifies the statement that the client’s business location is irrelevant. At least where the employee’s work location is only virtually based in Germany, there must be a domestic client to establish this connection. Where mobile work is particularly widespread, and work products (e.g., software) can be easily exported, companies within a corporate group may immediately see an appealing “workaround”:
To avoid a so-called “chain leasing”, however, this is likely only practical where, within Germany, the focus is exclusively on the usability of the work product rather than on ongoing personal collaboration with the talent. Additionally, the regulatory framework of the respective foreign client company must itself be sufficiently flexible regarding the deployment of third-party personnel.
Compliance risks related to temporary employment are varied and often feared. For ongoing contracts based on an EoR (Employer of Record) model (inbound), German clients now face the urgent question of how the adjustment of the Technical Instructions (TI) will impact them.
The AÜG imposes the most severe legal consequences when the lessor does not hold the required permit under § 1 (so-called “illegal temporary employment,” § 1 para. 1 sentence 1 AÜG), when the temporary employment is not explicitly labeled as such, and when the identity of the temporary employee is not specified (so-called “covert temporary employment,” § 1 para. 1 Sentences 5 and 6 AÜG), or when the maximum allowable leasing period of 18 months is exceeded (§ 1 para. 1b AÜG). Under §§ 10 Para. 1 Sentence 1 in conjunction with 9 para. 1 Nos. 1 to 1b AÜG, an employment relationship is considered to exist between the client and the temporary employee if the contract between the lessor and the temporary employee—typically invalid under these circumstances—is indeed invalid. In such cases, a legally mandated employment relationship between the client and the temporary employee replaces the invalid contractual relationship between the lessor and the temporary employee.
According to the highest court ruling (see Federal Labor Court (BAG), decision of April 26, 2022 – 9 AZR 228/21, concerning a case of unauthorized cross-border temporary employment), a violation of these obligations does not render the temporary employment contract invalid if the temporary employment relationship is governed by the law of another state—due to an explicit or implicit choice of law. In such cases, the employment relationship between the lessor and the temporary employee is not subject to the invalidity provision of §§ 9 para. 1 nos. 1 to 1b AÜG, which is instead determined by the employment contract’s governing law. § 10 Para. 1 Sentence 1 AÜG does not provide for a coexistence of a continued temporary employment relationship and a presumed employment relationship.
The provisions in §§ 9 para. 1 nos. 1 to 1b AÜG are also not mandatory rules that a state considers so essential for protecting its public interests—particularly its political, social, or economic organization—that they must apply to all relevant cases, regardless of any choice of law.
Assuming the employee performs work exclusively at their place of residence abroad, there is no risk of the domestic client incurring subsidiary liability for any unpaid social security contributions pursuant to § 28 Para. 2 SGB IV. An employee is generally subject to the insurance regulations of the state in which they work. This applies even if the employer is located or headquartered in another state (in this case, Germany). For this reason, there is no obligation to contribute to the German social security system.
In its above-mentioned ruling, the BAG emphasized that the public interest in enforcing § 1 para. 1 sentence 1 AÜG in cases of unauthorized temporary employment from abroad is sufficiently safeguarded by § 16 para. 1 No. 1 and para. 2 AÜG, which penalizes violations of the permit requirement as an administrative offense. However, this decision involved a case where the territorial scope of the AÜG clearly applied, as the plaintiff was leased from Illkirch (France) to Karlsruhe (Germany) and worked on-site there.
The updated TI can only be interpreted to mean that disciplinary action through threatened fines should now also be applied to domestic clients under the regulatory supervision of the BAA, should they be held responsible for a violation. This will typically be the case in EoR scenarios (cf. sec. I above). Possible charges include leasing without a permit (§ 16 para. 1 No. 1a AÜG), violation of the labeling requirement (§ 16 para. 1 No. 1c AÜG), or the specification requirement (§ 16 para. 1 No. 1d AÜG). The above-mentioned administrative offenses can be punished with fines of up to thirty thousand euros per offense.
Assessing whether such a de facto expansion of the conditions for administrative offenses through internal administrative regulations is compatible with the principle of legality and the essentiality doctrine of the Federal Constitutional Court (BVerfG) – which requires the legislature to make all essential decisions in fundamental normative areas – would go beyond the scope of this article. Nevertheless, this seems questionable, as the legislature expressed its intent regarding the protection of cross-border posted temporary workers in § 2 para. 2 of the Posted Workers Act (AEntG), stipulating that the general and mandatory working conditions apply to them only when they are employed within Germany. However, these considerations do not provide immediate assistance to clients, as they would first have to challenge a fine imposed on them in court, assuming the associated litigation risk.
If a fine of EUR 200 or more is imposed, there is an additional risk of a negative entry in the Central Trade Register.
Providers of EoR (Employer of Record) services targeting the German market face the challenge of finding creative and legally compliant solutions.
Companies based in Germany could consider directly employing the worker and outsourcing only the payroll administration of the employment relationship to a service provider under the law of the employee’s country of residence. However, this requires that the conditions allow for direct employment without unintentionally establishing a taxable permanent establishment.
EoRs based in the EU or EEA could theoretically apply for a German temporary employment permit and carry out the contractual relationship as explicit temporary employment. However, this is rarely feasible, as the limitation on the maximum duration of employment is directly opposed to the desire for a long-term relationship between the client and the talent. Additionally, the local EoR would have to comply not only with German regulations on temporary employment but also with those of the (European) country abroad. The effort is very high, and the benefit is low. Moreover, EoRs based outside the EU/EEA cannot be granted a German temporary employment permit.
It is likely that companies will shift to a secondary defense line focused on the material scope of application (see Section II above). Moving forward, it will be crucial to ensure that the talent is neither integrated organizationally into the German client’s structure nor receives instructions from them, so that the contractual relationship between the EoR and the talent can be structured as a contract for work or services. Although this approach may not fully align with the interests of the parties, it comes reasonably close and is workable. Particular attention should be paid to avoiding the risk of false self-employment under the legal system of the employee’s country of residence (if relevant there).
The clarification on the scope in the updated Technical Instructions (TI rev.) appears to pursue the labor market policy objective of incentivizing German companies to meet their labor needs domestically. However, the much-discussed skills shortage makes this mostly unfeasible. While protectionism regarding the local labor market is a legitimate regulatory goal, the executive branch oversteps its authority by effectively creating new regulations—a responsibility that lies with the legislature. If the clarification is intended to protect (temporary) workers, it is a double-edged sword. In EoR models, the proportion of low-skilled workers—who are particularly in need of protection, as recognized by the legislature—is already minimal. Additionally, the revised administrative practice forces parties into a consultancy model.
The rigidity of German regulations and their legal consequences are outdated and worsen Germany’s attractiveness as a business location. Companies that are not bound to a specific location for achieving their operational goals, especially in dynamic sectors like IT or the start-up scene, may choose to avoid the German market altogether if more market-liberal alternatives are available.
In attempting to address the realities of a digitized working world, the BAA has succumbed to its own concerns about losing regulatory control and has, unfortunately, missed the opportunity to ensure legal certainty in a timely manner. Whether a court or the legislature will intervene remains to be seen.
