Pseudo-contracts for work: provision of temporary-employment no longer ‘plan B’

The hitherto widespread practice of advising the client to obtain a temporary-employment permit for all eventualities, thereby preventing the establishment of employment relationships between the work contractor’s employees and the ordering party (“reserve parachute”) appears to be at an end – this, at least, is what a recent decision (3 December 2014; file no. 4 Sa 41/14) by Baden-Württemberg Regional Labour Court (“LAG”) suggests. Whilst it is a little early for panic stations just yet, caution is nevertheless advisable both for industry and legal advisors.

Decision by Baden Württemberg Regional Employment Court

The decision of the Baden-Württemberg Regional Labour Court, which is currently only available as a press release, was based on the following case: The plaintiff was deployed at the client company in fulfilment of “framework contracts for work” between the third-party companies and the client company. The plaintiff was, as planned from the outset, integrated fully into the operations of the client company and was subject to the functional authority of the client company to issue instructions. The plaintiff’s claim that this mere “pseudo-contract for work” constituted an employment relationship with the client company was countered with the argument that all third-party companies had permission to hire out temporary staff.

Unlike the previous instance, Baden-Württemberg Regional Labour Court deemed this to be inconsistent behaviour (“widersprüchliches Verhalten” – Sec. 242 of the German Civil Code (“BGB”)). The parties were said to have been intent on placing themselves outside the scope of the German Act on Temporary Employment (“AÜG”) for the entire term of the agreement, in a conscious attempt to prevent the social protection that AÜG affords the employee. As the service provider was thus unable to rely on the temporary-employment permit, the employment agreement between it and the employee was said to be null and void, with an employment agreement with the customer enterprise materializing instead.

Criticism

Contrary to what would usually be applicable under employment law, the LAG holds the contractual parties to what was intended and agreed rather than to practical implementation of the agreement. Only in this way the LAG was able to construe that subsequently relying on the existence of a temporary-employment arrangement was inconsistent and thus an abuse of law.

In so doing, the court ignores that – irrespective of the specific type of contract between client and contractor – a temporary-employment permit is generally issued to a particular contractor. Ultimately, this issuing of this permit is not concerned with the hiring out a particular employee and certainly not with the contractual basis for this hiring out, but rather with the reliability of the temporary-employment provider itself (cf. Sec. 3 AÜG).

In addition, the LAG puts itself at odds with the fundamental grounds of the decision of 10 December 2013 – 9 AZR 51/13 – by the Federal Employment Court (“BAG”) in which the BAG rejected the legal fiction of employment relationships existing alongside a temporary-employment permit. The LAG thus disregards the legislator’s express desire to provide for this legal consequence only where lack of a temporary-employment permit invalidates the employment relationship between the provider of temporary employment and the temporary employee. This is because only in this case is there any need at all to protect the employee confronted with a legal fiction of an employment relationship with the temporary-employment provider. The employee hired on the basis of a pseudo-contract for work or services, on the other hand, would still have access to employment via the permitted form of hired labour with equal pay and equal treatment.

That the consequence of this legal fiction in law is currently ineffective and thus goes against the legislator’s desire – confirmed by the BAG – is also shown by the forthcoming draft law that aims to sanction pseudo-contracts for work and services where these are accompanied by the legal fiction of employment relationships with the client (see also draft law by the German Bundesrat dated 28 October 2013 on combating the misuse of contracts for work […], Bundestag Printed Matter 18/14 p.5; Coalition Agreement). This would be a superfluous idea if the current legal situation already provided for this consequence in law, even if it did so circuitously via “good faith”.

Implications for legal practice

The use of external personnel on the basis of contracts for work is widespread and only seldom is it actually intentionally misused. Nevertheless, the LAG judgement ahead of the planned change in the law makes clear yet again that action (often more politically than factually motivated) is being taken on all fronts to counteract the improper use of contracts for work.

The generalized nature of this action, however, does not meet the needs of legal practice. The problem does not stem from individual and specific issues but rather from the – in theoretical and practical terms – often difficult differentiation between contracts for services or work and the provision of temporary labour. In the light of this, uncertainties can only result in an “either/or” situation for those involved and not in the sanction-like assumption of the effect of a legal fiction which also considerably limits the contractual freedom of the employee affected.

As long, however, as the grounds for the decision have not been published, there is still hope that this is an individual case that cannot be generalized. In any event, there are considerable misgivings as to whether the BAG will uphold this decision in the event of an appeal. Lasting legal clarity and certainty will come only with the heralded change in the law. Yet, none of this alters the fact that before external personnel is deployed, it must – already for compliance reasons – be ensured that the relevant types of deployment are precisely defined and that regular checks are performed.