Meanwhile, the hiring company (the ‘host employer’) retains operational control. The model is especially useful when time constraints, immigration procedures, or limited administrative capacity make establishing a local branch unfeasible.

The employment contract is concluded between the EoR and the employee, making the EoR the formal employer. The hiring company enters into a labour leasing agreement with the EoR. This agreement outlines among others the deployment of the employee, payment terms, and liability provisions.

While the AÜG model requires prior authorization and involves strict employment law requirements (e.g. maximum leasing periods and equal pay obligations), the EoR model remains largely unregulated under current German law. According to the territoriality principle, the AÜG only applies if there is a domestic connection, such as performing work within Germany. In typical EoR arrangements, this is not the case, meaning the AÜG regularly does not or at least did not apply.

As of October 15, 2024, the German Federal Employment Agency has issued its first official guidance on the EoR model. According to these guidelines, even purely virtual work from abroad for a German-based client can establish a domestic connection, potentially bringing the EoR model under AÜG regulation. This interpretation marks a departure from previous legal understanding and is currently the subject of legal debate. Although these guidelines are not legally binding for courts, in the context of the largely used ‘remote working’, companies should be aware of the heightened legal risk.

A key legal aspect is whether the operational control exercised by the German host constitutes employee leasing under the AÜG, which can trigger labour and social security law consequences. This may become problematic not only if the employee is physically present in Germany – even if only for a short period, as just a few days of work on German soil may trigger a licensing requirement under the AÜG - but also for employees working remotely. A violation may result in the legal presumption of a direct employment relationship between the host employer and the employee, and fines of up to EUR 30,000 (§§ 9, 10, 16 AÜG).

There are also risks of false self-employment or non-recognition of the EoR as a legitimate employer, particularly if contractual relationships are unclear or if the EoR lacks substantive operations in the host country. Additionally, data protection concerns - especially regarding cross-border transfers of employee data - must be addressed.

If a company wishes to hire a non-EU employee in the Netherlands, it must be listed as a recognized sponsor (‘erkend referent’) by the Dutch Immigration and Naturalization Service (IND). Obtaining this status could take up to six to nine months. These waiting times are not feasible for many businesses or prospective employees. In this context, an EoR may offer a practical and immediate solution, allowing companies to maintain operational momentum and onboard talent without delay. In addition to handling administrative tasks, the EoR also acts as a recognized sponsor in these situations.

According to Article 8a of the Waadi (Dutch Act on the Allocation of Labour by Intermediaries), a payroll employee is entitled to the same employment conditions as employees hired directly by the host company. This applies to both primary and secondary employment conditions, including pension if offered, under the same terms as for employees directly employed by the host employer. This also includes the relevant collective labor agreements.

The host employer must treat payroll employees the same as regular staff. However, under the recognized sponsor scheme in case of non-EU employees, highly skilled migrants aged 30 and above must earn at least €5,688 gross per month in 2025, which may result in higher pay despite the equal treatment principle under the Waadi. If the host employer has no employees in the Netherlands, the applicable employment conditions must be compared to those commonly applied within the relevant occupational group or industry sector.

For individual terminations not related to redundancy—such as those based on performance or workplace conflict— in most cases, the matter will be resolved through a settlement agreement. If the parties are unable to reach an agreement, the EoR must submit a request for termination of the employment contract to the subdistrict court, again relying on facts provided by the host company. In both scenarios, the interests of the EoR and the host company may not always be fully aligned, which can complicate the process.

It is therefore essential to establish clear contractual agreements that specify which party is responsible for managing the termination and who bears the associated legal and financial risks. Although the EoR is formally responsible for compliance with labour law and the payment of wages, taxes, and social security contributions, the host company could still be held liable by the employee and tax authorities. To mitigate this risk, adequate contractual safeguards should be put in place.

The EoR model offers companies a more flexible way to employ international talent, in Germany, the Netherlands and abroad. It can significantly enhance efficiency while establishing business in Germany and the Netherlands, but it also carries legal risks. Therefore, sound legal structuring and awareness of costs is essential.