Increased regulation for staffing companies in Germany – how much does this reform the German system?

Written on 8 Nov 2016

On 21 October 2016, the German lower house of Parliament (the Bundestag) passed a law which will increase regulation for staffing companies. Now the German upper house (the Budesrat) has to consider the law – probably at the end of November 2016 – following which it will come into effect. We expect that no changes will be made. The law would then come into force on 1 April 2017.

The most important points of the new law are as follows:

1.  Assignment limits

Assignments of temporary workers will be limited to 18 months. After that it may then be possible to place another temporary worker in that workplace.

If the intervals between two assignments of the same temporary worker at the same hirer are less than three months, then the assignments shall be counted as the same assignment.

Collective bargaining agreements (Tarifverträge) may permit longer assignment periods in the industry in which the temporary worker is placed. This also applies to hirers that are not bound to collective bargaining agreements, but only for an assignment period of up to 24 months. This all depends on adoption of the collective bargaining agreement in a “local” works agreement (Betriebsvereinbarung). However hirers that have no works council and are not bound by collective bargaining agreements cannot extend the limit beyond 18 months.

Staffing companies will face costs and legal uncertainty because they will have to verify if and to what extent each individual client/hirer is bound by collective bargaining agreements.

It seems that the limit to the assignment period may not apply where, shortly before reaching the limit, the assignment of the temporary worker is terminated and another temporary worker is placed in the same workplace. Therefore, one and the same role can be permanently occupied with temporary workers. The rules in the UK which prevent this “churning” look like they will not apply in Germany.

This is notwithstanding that an expert report by the Scientific Services (Wissenschaftliche Dienste) of the German Bundestag identified the so-called rotation solution in their report dated 14 October 2016:

“As a result, it will be possible, according to the legislation proposal, to fill workplaces with temporary workers on a long term, provided that they are exchanged every 18 months. A temporary worker can be repeatedly placed at the same workplace of the hirer, if at least three months have elapsed since his last assignment with the hirer. The extent to which abuse can nevertheless be prevented by the planned regulation remains to be seen in practice.”

Assignment periods prior to 1 April 2017 will not be taken into account in the calculation of the maximum assignment period. Therefore, the assignment limit of 18 months can be reached for the first time on 1 October 2018.

Where the assignment limit is exceeded in relation to a particular temporary worker, that temporary worker will be deemed to have a direct employment relationship with the hirer.

2.  Equal treatment/equal pay

Temporary workers will have equal treatment rights – including but not limited to equal pay rights – from day one. Where a collective bargaining agreement is applicable and covers equal pay, equal pay rights can be excluded for up to nine months of continuous work at the same end-hirer. (The UK rule under the Agency Workers Regulations (AWR) is 12 weeks, so the German law is “better” for staffing companies and hirers.)

It is still unclear, however, which parts of the remuneration should be taken as a benchmark in order to assess equal pay. There was confusion about this in the UK when the AWR was first introduced.

An extension of this period of up to 15 months is possible if additional conditions are met.

Short-term interruptions of the assignment period of less than three months are not taken into account for the purposes of the calculation of the “continuous work”.

Assignment periods before 1 April 2017 will not count towards the limitation periods for deviations from equal pay.

The report by the Scientific Services of the German Bundestag states that “[…] a rotation solution is conceivable, if a lessor, for example, places two temporary workers alternately at two companies every six months.”

3.  No use of temporary workers as strike breakers

The assignment of temporary workers as strike breakers is prohibited if the operational unit (Betrieb) of the hirer is directly affected by a strike. Temporary workers may only be employed during a strike if the hirer ensures that temporary workers do not undertake activities which have been carried out before by the employees who participate in the strike.

4.  Temporary workers count towards thresholds

Aggregate numbers of temporary workers at a hirer will generally count towards the thresholds at which certain legal obligations will apply under the Works Constitution Act (Betriebsverfassungsgesetz). (This broadly reflects the position in the UK for similar purposes.)

5.  Ban on chain leasing

There must not be more than one supplier between worker and end-hirer. This so-called ban on chain leasing (Verbot des Kettenverleihs) is in line with the practice of the Federal Employment Agency (Bundesagentur für Arbeit), and makes the MSP contract structures usually used in the UK and USA illegal in Germany (although there is an alternative MSP model which can work).

6.  Rights of the works council

Hirers have to inform works councils on scope, place, and time of the placement of temporary workers. This is merely an obligation to provide information; it is not – as trade unions and works councils had sought – a genuine right to have any say in the use of those workers.

7.  Definition of “employee”

Whether someone is an employee (as opposed to a genuine independent contractor) governed by relevant German labour law, tax law and social security requirements is largely determined by whether they are deemed to be “dependent”. What dependent work is shall be set out in a new sec. 611a German Civil Code (Bürgerliches Gesetzbuch).

According to the new sec. 611a German Civil Code, the following criteria apply in order to determine whether or not a person is an employee:

  • A decisive factor will be whether a person is obliged to perform work bound by instructions and directed by others in a personally dependent way.
  • The authority to give instructions may concern the content, carrying out, time, and place of the work.
  • A person will be considered as an employee when he or she is not essentially free to arrange his or her work and his or her working hours.
  • The degree of dependence also depends on the nature of the work.
  • An evaluation is required on the basis of an overall view. It is not decisive how the parties label the contract.

Sec. 611a German Civil Code is obviously supposed to govern how cases are decided. However, the statutory definition is helpful only to a limited extent:

  • An overall view will still be required,which will involve a relatively subjective judgment.
  • There will be a very broad scope for interpretation.
  • It will continue to be difficult to know for sure whether an individual is or is not a genuine independent contractor without looking at the details of his or her assignment.

Some fear that under the new law, it may be more likely that statement of work (“SOW”) type consultancy could be interpreted as dependent work. This is an important topic for many suppliers who have previously relied on SOW to avoid the application of German labour law, tax law and social security requirements.

8.  No more “parachute solutions”

The “parachute solution” shall no longer apply.

Example: Customer and supplier agree in their written contract on the performance by the supplier of independent services on a normal commercial basis in which the customer pays for a defined deliverable and has not say in how the work is performed. The contract, however, is performed as employee leasing, with the customer exercising a degree of control over how the services are performed by individuals engaged by the supplier. Under the current law the legal consequences of illegal employee leasing, such as section 10 AUG (deemed employment relationship between end client and worker), can be prevented if the supplier has an AUG license.

However, it is now intended that the mere possession of an AUG license shall no longer prevent the legal consequences of illegal employee leasing. The legal consequences will be as follows: An employment relationship arises between worker and end client, irrespective of whether the supplier is in the possession of an AUG license or not. Further, there may be administrative and criminal offences by not disclosing the employee leasing.

9.  Temporary worker’s right of objection

In case of an illegal employee leasing or a hidden employee leasing, and in the event of exceeding the assignment limit, the employment relationship between the staffing company and the temporary worker will generally pass on to the hirer. However, this does not apply if the temporary worker disagrees with the transfer of the employment relationship and declares that he / she adheres to the employment contract with the staffing company. The requirements of this so-called adherence declaration have been tightened in October 2016. Thereafter, the adherence declaration is only valid if:

  • the temporary worker submits the declaration personally to the competent employment agency;
  • the employment agency adds the date when the declaration has been submitted and a note that the identity of the temporary worker was checked, and
  • the declaration is delivered to the staffing company or the hirer no later than the third day after submission to the employment agency.

10.  Outlook

The legislative amendments have been made in order to “re-focus employee leasing on its core functions, to prevent abuse and to strengthen the position of temporary workers“. There is room for doubt as far as the achievement of these goals is concerned. The law itself leaves considerable room for interpretation.