Common Compliance Mistakes When Expanding into Germany

Most serious compliance problems for new entrants stem from everyday employment decisions in Germany—how you hire, contract, classify, and pay people. When teams move quickly without local advice, the same employment mistakes in Germany appear again and again, often with costly consequences.​

Germany employment compliance: where companies slip up

One of the biggest employment compliance mistakes in Germany is assuming that contracts and policies from other countries can simply be reused. German employment law on written terms, probation, notice, working time, vacation, and dismissal protection is specific, and clauses that work elsewhere may be unenforceable or even unlawful in Germany.​

Companies also underestimate how quickly German employment rules apply when employees are habitually working in Germany, even if their employer is foreign. Treating employment in Germany as an “offshoot” of another jurisdiction often leads to gaps in contracts, handbooks, and disciplinary or redundancy processes.​

Misclassifying workers and misusing contractor models

A recurring Germany employment mistake is using contractor or freelancer arrangements where the underlying relationship is really employment. Authorities and courts look at how work is performed in practice—who controls it, how integrated the worker is, and whether they have multiple clients—rather than what the contract says.​

If a supposed contractor is effectively an employee, German authorities can reclassify them, triggering back payments of income tax, social security contributions, holiday pay, and other entitlements. Similar risks can arise if businesses use agency or EOR-style arrangements without complying with Germany’s labor leasing (AÜG) and equal treatment rules.​

Payroll, tax, and social‑security errors

Many first-time entrants treat employment costs in Germany as just gross salary, overlooking wage‑tax rules and social‑security contributions. Common mistakes include failing to register correctly for payroll, applying the wrong tax class, or ignoring caps and rates for health, pension, unemployment, and long-term care insurance.​

Running employment in Germany from a foreign payroll without proper local registration is another frequent error. This can lead to underpaid payroll taxes, missed Social Security contributions and penalties, and problems for employees who later need accurate records for benefits or pensions.​

Working time, leave, and documentation gaps

German employment law places strong emphasis on working‑time limits, rest periods, and paid leave. New entrants sometimes adopt informal overtime or “always on” cultures that clash with the Working Time Act and caselaw on time recording and rest.​

Insufficient documentation is another pattern: missing working‑time records, incomplete personnel files, and vague policies on flexible work or remote work. These gaps make it harder to defend decisions and compliance during inspections or disputes, particularly around working hours, vacation, and sickness.​

Permanent‑establishment, immigration, and undeclared work risks

Compliance mistakes in Germany employment can also trigger tax and immigration consequences. For example, building a local team without considering permanent establishment risk may expose the group to corporate tax registration and retroactive assessments.​

Undeclared or irregular work is a growing focus of enforcement, especially where foreign nationals work in Germany without the correct employment, registration, or permits. Authorities have increased penalties in cases involving foreign workers, making informal arrangements especially risky.​

How an EOR reduces Germany employment mistakes

Using an Employer of Record in Germany is one way to reduce Germany employment mistakes when expanding. An EOR such as Agility provides locally compliant contracts, runs German payroll with the correct tax and social security treatment, and operates in accordance with the AÜG and other local rules.​

This allows you to test the market and build a German team without immediately mastering every aspect of employment law in Germany and HR compliance in-house.​