October 28, 2021
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✨ NEW: Have multiple entities? Manage payroll for every country in one place
In an increasingly global world, companies have to tap into foreign talent pools in order to stay competitive and get fresh talent to drive their business forward. While building a globally distributed team is an exciting and promising venture, it also comes with numerous challenges, including the multitude of compliance requirements that can make hiring abroad quite tricky.
In many cases, there are a myriad of rules and regulations to comply with and several unfamiliar concepts HR teams and decision-makers first have to get used to. One of those is the German AUG license (short for Arbeitnehmerüberlassung). When talking to clients who are either based in Germany or want to hire there, we often notice that many of them seem to confuse AUG (the German labour leasing license) with EOR (Employer of Record).
In this blog article, we will shed some light on the difference between EOR and AUG and look at different scenarios where the two concepts actually overlap. A quick note before we dive right in: There are many countries in Europe that operate labour leasing licenses - you will find the complete list at the bottom of the article - which follow similar rules. However, the information provided in this article specifically refers to the German AUG license and cannot be transferred 1:1 to other hiring destinations.
AUG and EOR are two completely separate concepts. While AUG is a country-specific labour leasing license, EOR is a service model for global hiring. Here is a brief overview of what EOR and AUG are used for.
An Employer of Record is a service provider who allows you to hire remote employees abroad without having to set up a local legal entity. As the legal employer of your employees, the EOR partner takes on all the administrative charges of the employment such as drafting a compliant employment contract, registering the employee with social security and paying their salary.
An EOR partner can therefore be seen as a third party in the employment relationship who takes on all the legal responsibilities while you remain in full control of your employee’s day-to-day activities.
Find out more about why and when to hire talent globally with an Employer of Record in our related blog post.
AUG (short for German Arbeitnehmerüberlassung - AÜG) is the labour leasing license operated in Germany. Labour leasing has become increasingly popular with companies who are looking to fill short-term positions or to cover temporary employment needs as it allows them to hire workers without having to commit to long-term employment.
An example situation of when labour leasing is a practical alternative to regular employment is when the company requires the services of a specialist for a single project only. Under these circumstances, offering them a full-time position would be too costly. Labour leasing licenses generally fulfill two main purposes:
Remove chain law: As the employing company has a direct contract with the end client - i.e. the business that the service is delivered to - there are only two, and not multiple entities involved in the process which makes it easier to solve any issues that may arise during the duration of the service agreement.
Establish a legal base for short-term employment and provide legal protection for contractors: The licenses enable companies to hire short-term staff without having to take them on as full-time employees with a direct employment contract.
The maximum duration of the employment relationship depends on the country’s labour leasing policy. In Germany, the maximum contract duration permitted under the AUG license is 18 months - 24 months for some major organizations.
In most cases, there is no need for AUG when hiring full-time employees in Germany via an EOR provider if they are not being leased to another client (most likely working remotely) and the employment agreement is typically open-ended - instead of being contracted out to German-based clients and working onsite.
However, there are a couple of scenarios where an AUG license will be required. In order to determine whether this is the case or not, you have to consider several different factors:
Where is your company (which is the employing company) based?
Where will you hire your employees?
Where will your employees be working? Remotely? On a client site? From an office? And in which country?
What is their type of employment, i.e. full-time employee or contractor?
Please note that there is no need for AUG when working with freelancers as the responsibility of classifying the worker falls on the end client. If the role they are carrying out doesn’t meet the requirements linked to freelancing, or if there are other employees working for the end client who perform similar tasks, they will need to be employed either directly (i.e. by end client) or via a management company (AUG set-up).
In general, the need for an AUG license when employing through an Employer of Record only applies if at least the following conditions are met:
It’s a short-term employment.
Both the worker and the end client, i.e. the company which leases the worker, are based in Germany.
In case the worker is contracted via EOR by a company which isn’t based in Germany, the need for an AUG license only arises if the worker is permanently working on a client site in Germany.
Let’s look at two different scenarios which will explain this in more detail. In both cases, we will assume your company is hiring a worker based in Germany via an Employer of Record. The main difference is that in the first case, your company will be registered in Germany, and in the second case, your organization will be based in a foreign country.
Under normal circumstances, a German-based company won’t need an Employer of Record to hire employees or contractors in Germany. However, if, under whatever circumstances, a local organization decides to hire a German-based worker through an EOR provider, the latter will need to have an AUG license. Regardless of whether the worker will be hired to work remotely or onsite.
In this case, the AUG license automatically limits the employment to a duration of 18 months. If, on the other hand, a German-based organization uses an EOR solution to hire a remote employee who lives and works abroad, there is no legal requirement for an AUG license as the worker is generally hired under the foreign country’s labour law.
However, many other countries also have labour leasing regulations and licenses. So if, for any reason, the worker is contracted out to a third party which is based in the same country as the worker, local regulations may require the EOR provider to hold the necessary labour leasing license.
The second scenario is more of a traditional use case for EOR. An organization based outside of Germany wants to hire workers in Germany without setting up a local legal entity. The way to do so is via EOR. As long as the workers are working remotely all the time, AUG isn’t required because the labour leasing takes place between the EOR provider who has a legal entity in Germany and the EOR client who is based abroad.
This changes as soon as the worker is required to work onsite in Germany, for example if the hiring organization from France has clients in Germany to whom they lease their EOR hires and who request the workers to work onsite. This also applies if only 50 percent of the work is conducted onsite and the rest of the time is spent working remotely.
In this case, the AUG law would further require the labour leasing contract to be concluded directly between the EOR provider and the end client, i.e. the German client to whom the French company provides its services.
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Labour leasing licensing is a common practice in Europe and there are only some countries that don’t work with labour leasing licenses, for example the UK, the Netherlands and Scandinavia. The list of countries which follow the licensed labour lending model includes:
Please note that labour leasing licenses do not only exist in Europe but also in other parts of the world, e.g. in South America.
AUG is the German labour leasing license which is needed for short-term labour leasing within Germany, i.e. German-based worker and German-based end client to whom the worker is leased.
AUG mainly covers contractors. As freelancers own their own entities, labour leasing doesn’t apply to them.
In case an AUG license is needed, the employment duration is automatically limited to 18 months - 24 months in some cases.
EOR is a solution to hire remote full-time employees in foreign countries without having to set up a local legal entity.
In most cases, you don’t have to worry about AUG licenses when hiring remote employees in Germany via EOR.
There are a couple of scenarios where your EOR provider needs to hold an AUG license to hire workers in Germany on your behalf. These mainly involve short-term assignments and onsite working for a German-based third party.
Many European countries have labour leasing licenses.
Depending on the scenario, labour leasing may have a direct impact on the EOR contract as the agreement needs to be concluded between the EOR provider as the legal employer and the end client to whom the workers are leased.
AUG is one of the lesser known compliance pitfalls when hiring employees and contractors in Germany. Foreign organizations intending to lease their German-based short-term hires to clients with offices in Germany need to carefully analyse each scenario when deciding whether an AUG license will be required or not. The easiest way to deal with this pitfall - and avoid possible fines - is to contract an experienced Employer of Record partner and get expert advice.
At Lano, we work with a network of top tier EOR providers in over 150 countries who will ensure compliance for all your global hiring projects. Not only do most of them hold necessary labour leasing licenses such as AUG, but our expert team can advise you with regard to which EOR partner to choose and whether an AUG or similar license will be required for your venture or not.
Get in touch with us today to discuss your hiring needs in Germany.
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