The 18-Month Rule and AÜG Compliance: How Long Can You Use an EOR in Germany?

Germany remains one of Europe’s most attractive markets for international hiring. However, it is also one of the most highly regulated. Therefore, companies using an Employer of Record (EOR) in Germany must master local labor law. Specifically, you must understand the 18-month rule under the German Employee Leasing Act (AÜG).

If your business ignores this rule, it creates serious legal, financial, and operational risks. This guide explores how to navigate these regulations successfully.

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Defining the 18-Month Rule Under AÜG

The Employee Leasing Act (AÜG) governs temporary labor and leasing arrangements throughout Germany. Under these rules, a company can lease an employee for a maximum of 18 consecutive months. Once this period ends, the client must alter the arrangement.

Furthermore, this rule applies regardless of whether you label the service as EOR, PEO, or labor leasing. German authorities assess the substance of the working relationship rather than just the contract name. Consequently, most EOR setups fall under this scrutiny.

When does the 18-Month Rule Apply to an EOR in Germany?

German labor law treats most EOR arrangements as employee leasing if the worker integrates into your daily business operations. In these cases, the EOR must hold a valid AÜG license. Furthermore, the 18-month limit applies strictly to the duration of the assignment.

Several factors typically trigger AÜG coverage:

• Your managers direct the employee and set internal policies.

• The worker utilizes your internal systems to achieve business goals.

• You control daily tasks, project deadlines, and performance expectations.

While the EOR acts as the licensed provider, the time the employee spends with your business still counts toward the 18-month threshold.

What Happens if You Exceed 18 Months?

Exceeding the 18-month limit is more than a technical error; it carries heavy consequences. If the arrangement continues past the limit without change, your company faces these risks:

• Direct Employment: German law may suddenly view the worker as your direct employee.

• Contract Invalidity: The authorities may invalidate your existing service agreements.

• Financial Penalties: Your organization could face fines, back taxes, and social insurance liabilities.

• Equal Pay: You may trigger retroactive equal pay and benefits obligations.

Because Germany enforces labor regulations strictly, these missteps often occur right as a business begins to scale.

Strategic Options After 18 Months

Reaching the 18-month threshold does not mean you must lose a valuable team member. Instead, it requires you to make a strategic decision about your employment model.

Transition to a Local Legal Entity

A common approach involves moving the employee into direct employment through a German subsidiary. Establishing a local entity allows you to:

• Hire and manage your staff directly.

• Manage German payroll and statutory compliance in-house.

• Administer benefits and tax reporting under local law.

Setting up a local entity usually takes several weeks or months. Consequently, you should start this transition early to eliminate AÜG exposure.

Redesign the Employment Model

In limited situations, you can redesign the employment structure, so it no longer falls under leasing rules. This requires the employee to maintain genuine independence from your daily direction. However, you should always involve legal counsel before choosing this path.

End the Assignment

For short-term or project-based roles, the most compliant choice may be ending the relationship at the 18-month mark.

Choosing Between EOR, Payroll, and Entity Hiring

While an EOR helps you hire quickly, it is not the only route. You might consider Outsourced Payroll if you already have a local entity but need help with tax compliance. Alternatively, Direct Hiring through a German entity offers full control over your HR policies and contracts. Understanding these options is vital for long-term planning.

Why You Must Plan Early

German labor authorities are increasingly active in reviewing cross-border arrangements. Organizations that start planning by month 12 or 15 enjoy significantly more flexibility. By aligning your strategy with regulatory timelines, you protect your business from penalties and operational disruption.

Conclusion: Thinking Beyond the EOR

Using an EOR in Germany is an effective way to hire talent quickly. However, the AÜG 18-month rule proves that EOR models should be a bridge, not a final destination. Thoughtful organizations use this time to explore managed local entities or direct hiring. Early planning ensures you remain competitive in one of Europe’s most strategic talent markets.

Contact our German expert for more information.