New regulations on use of external personnel in Germany

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The law to amend the German Employee Lending Law (Arbeitnehmerüberlassungsgesetz - AÜG) will come into effect as of 1 April 2017. This not only restricts the use of leased employees (Leiharbeitnehmer) for companies; the risks of deploying external personnel using contracts for work or service contracts also increase. The most relevant modifications are:

(Sham-)contracts for work and service contracts: Anticipatory Personnel Leasing Permit no longer eliminates risk

Several contracts for work and service contracts include the assignment of external personnel. But this could actually constitute personnel leasing requiring a personnel leasing permit (Erlaubnis zur Arbeitnehmerüberlassung), in particular if such personnel is subject to instructions of the principal or if the personnel is integrated in the operations of the principal. Up until now, an anticipatory personnel leasing permit (Vorratserlaubnis) protected the agent from legal sanctions.

Starting 1 April 2017, this is no longer legally possible. A principal can continue to hold an anticipatory personnel leasing permit but this permit no longer applies if a contract labelled as a “contract for work” or “service contract” actually constitutes a personnel lending contract. In the future, the lending company (Verleiher) and hirer (Entleiher) must explicitly label the lease of employees as “personnel leasing” (Arbeitnehmerüberlassung), rather than a “contract for work” or “service contract”. This is also true for framework contracts regulating a certain quota of manpower. In addition, the lending company as well as the hirer need to specify the concrete name of the leased employee prior to the commencement of the personnel leasing.

The risk of an infringement of these new labeling and concretization obligations is mainly on the hirer: an employment relationship between the employee of the (presumed) lending company and the hirer will be established based on statutory provisions. Additionally, an infringement is subject to fines of up to € 30,000.

We therefore advise to review contracts for work and service contracts in order to see whether they practically constitute a personnel leasing contract. As of 1 April 2017, new contracts must then be labeled as personnel leasing contracts and the leased employees concretely specified by name. In the event of any doubt, which is not uncommon, risks can be minimized through optimal contractual drafting. Companies using external personnel via contracts for work and service contracts, need to more closely ensure that no instructions will be given to such personnel and that such personnel will not be integrated in the operations (to avoid hidden personnel leasing). If this is not possible, another option is to actually hire the personnel as leased employees in observance of the following new rules.

Maximum duration of employee-related personnel leasing: 18 months

Even though personnel leasing was only allowed on a “temporary” basis up until now, it was not precisely regulated and the specific duration of use of leased personnel was thus a controversial issue.

The change of the law now provides legal certainty: in the future, leased employees may be employed by the hirer for a maximum of 18 consecutive months only. The maximum duration of personnel leasing only applies to the individual employee, not the specific position. This practically allows employers to employ leased employees in the very same position for a longer period of time but the individual employee must be replaced after the expiration of the 18 months period. After a break of three months, the 18 months term commences once again and the individual can once again be hired as leased employee. Depending on applicability of Collective Bargaining Agreements (Tarifvertrag) and existence of a Works Council (Betriebsrat), a deviation from the maximum duration of personnel leasing of a maximum of 24 months may be allowed.

Periods of employment with the hirer prior to 1 April 2017 will not be taken into account when calculating the maximum duration period. Thus, currently employed leased employees may generally be employed by the hirer for at least 18 months after that date, i.e. until 1 October 2018. The privilege to use leased employees within the corporate group without requiring a personnel leasing permit remains in place (although with legal concerns on a European law level).

Tightening equal pay doctrine

To date, leased personnel had to be paid the same as a company’s own employees. However, in some industries the Equal Pay doctrine (i.e. same remuneration/working conditions for the same work) could be deviated from by Collective Bargaining Agreements for an indefinite term. Thus, personnel leasing was a financially attractive alternative for a company to hire its own employees.

From 1 April 2017 on, such deviation is no longer possible for an indefinite term but only for the first 9 months of the lease. Further exceptions can be agreed upon in a Collective Bargaining Agreement but are subject to some limitations. Any collective agreement providing further exceptions has to explicitly stipulate that (1) equivalent remuneration will be attained within 15 months and (2) after an induction period of, at most, six weeks, the leased employee’s remuneration will gradually increase towards the regular remuneration. Consequently, personnel leasing becomes a lot less attractive, at the latest 15 months after its commencement.

For previously leased personnel such terms of 9 resp. 15 months commence on 1 April 2017, so the Equal Pay doctrine applies without exceptions for such employees on 1 January 2018 resp. on 1 July 2018.

Strike Breaker

Hirers may not use leased employees as strike breakers. They may only employ leased employees during strikes if they just carry out tasks that were not to be regularly carried out by striking employees or their respective replacement employee during the strike.

Stricter legal consequences following a breach of the Act

A breach of these new regulations, except for the strike breaker rule, leads to the transfer agreement (Überlassungsvertrag) being void. As a consequence, a direct employment relationship between hirer and leased employee materializes. Hirers can face fines of up to € 30,000.00 (due to breach of obligation to label contract / obligation to specify concrete employee, breach of maximum duration of personnel leasing) or even of up to € 500,000.00 (due to breach of Equal Pay doctrine or breach of strike breaker rule).

The hirer and the lending company will be jointly and severally liable for any payment obligations for social security contributions deriving from the fictional employment contract established with the hirer as a consequence of the breach.

With regard to wage tax, the lending company as employer is generally solely responsible. However, under certain circumstances, the hirer may be held liable for non-deducted income tax.

Extended co-determination rights and company co-determination rights

In addition, the amending act also increases the rights of Works Councils by amending the Works Constitution Act (Betriebsverfassungsgesetz - BetrVG). The hire of leased personnel not only requires the consent of the Works Council. The Works Council does have a right to be informed by the employer specifically, in particular regarding the scope and duration of the work (including working days and working hours), work location and work assignments of the external personnel. Additionally, Works Councils may request the underlying contracts, e.g. the contract for work, to check whether the subject is actually personnel leasing.

Also, leased employees do generally count with regard to corporate co-determination (Unternehmensmitbestimmung) thresholds of the hirer, e.g. for a board of directors according to such rules, as long as the total duration of the lease is longer than six months.

Consequences following the amendments for companies using external personnel

There is significant need for new contracts between lending companies and hirers, in particular regarding the allocation of liabilities.

Contracts for work and service contracts should be drafted differently in the future, and more importantly, the actual execution of such contracts should be monitored more thoroughly in regard to avoidance of hidden personnel leasing. In order to minimize liability risks, the use of external personnel needs to be reviewed constantly and continuously. This also triggers training of executive employees how to observe such rules.

Companies using external personnel should discipline themselves further to not inadvertently make personnel working on a contract for work or service contract basis into leased personnel. After the transfer periods at the latest, the Equal Pay doctrine must be followed and the use of the individual leased employee must be terminated.

Eventually, the extended rights of co-determination of the Works Council are also to be observed and it should be checked whether due to exceeding thresholds for corporate co-determination additional burdens apply.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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