Federal Cabinet adopts rules on agency work and contracts for work and services

On 1 June 2016, the German Federal Cabinet adopted the draft Act on the regulation of temporary agency work and contracts for work and services. This represents another major step in implementing the German government’s initiative.

The planned changes will not only affect pure agency work. They will have an impact wherever work is performed by external staff – whether on maintenance contracts, IT development or logistics; in short, on practically all contracts for work or services. Drawing a clear line between the various forms of assignment and making sure that they are carried out and monitored in accordance with the law will become more important than ever.

According to the updated plans, the draft is set to come into force on 1 January 2017 after all. This means that it is even more vital for companies to take a critical look at ongoing collaborations and to design projects in such a way that they will remain viable in the future. Our HR Compliance Healthcheck is there to help you do this.

We have summarised the most important changes below:

Anticipatory licence (so-called “Vorratserlaubnis”)

Companies will be exposed to even greater risk when making use of external staff due to the difficulties that often exist when deciding what type of contract is appropriate. These difficulties are especially apparent during complex project work which aims to bring together know-how providers for a limited period of time. New forms of collaboration such as “scrum” also pose real challenges in practice when deciding what type of contract should be taken as a basis.

Current legal situation	Planned changes	Legal consequences
Maintaining a licence for hiring out temporary employees prevents employment relationships from being formed with the user company (borrower) if contract for work or services is in fact regarded as supply of temporary agency staff.	Supply of temporary agency staff has to be explicitly described as such in the contract and agency worker’s identity has to be specified. ->This is missing in contracts for work or services that are to be assessed as supply of temporary staff due to the way they are actually carried out. It is not important whether the alleged agency (lender) has a licence for hiring out temporary workers (“anticipatory” or “back-up” licence“) for the legal consequences on the right to occur.	Administrative offence: fines of up to €30,000 Employment relationship is created with user company Exception: Employee states within a period of one month that he wants to retain his employment contract with the agency (lender).

Maximum duration of assignments

Since the introduction of a maximum period of 18 months for an assignment was originally agreed in the Coalition Agreement, we can assume that there is a high likelihood that it will be set down in law. At the same time, a legal consequence will be introduced for use of agency workers that is not just temporary. One noteworthy point in this context is the new legal tool offering an option to appeal against the legal fiction of employment with the user company.

The basis used for the maximum assignment period is the individual employee’s own assignment. This opens up the possibility of simply swapping the agency worker after 18 months. After a “break” of three months, it is also possible for the worker to take up another assignment at the same user company.

For the time being, the maximum assignment period will not have any effect on placements of temporary staff that are currently ongoing because placement periods before 1 January 2017 will not be taken into when calculating the maximum assignment period.

Current legal situation	Planned changes	Legal consequences
The assignment may only be “temporary”, i.e. not permanent. There are no sanctions if the assignment is not just temporary.	“The same agency worker may not be hired to the same user company for more than 18 consecutive months” Deviations as a result of a collective agreement for the sector concerned are possible, both upwards and downwards. Limited scope for deviations for user companies not bound by collective agreements.	Administrative offence: fines of up to €30,000 Employment relationship is created with user company Exception: Employee states within a period of one month that he wants to keep to the employment contract with the agency (lender).

Equal pay

The system of gradually adjusting agency workers’ rights is certainly nothing new. Only time will tell whether the absolute nature of the equal-pay rule will achieve the desired aims or create an incentive to swap agency workers after nine months. Assignment periods before the changes enter into force will not be counted.

Current legal situation	Planned changes	Legal consequences
Compensation is paid based directly on equal pay. Deviations possible by collective agreement.	Agency worker receives same pay as equivalent member of regular workforce at user company (borrower) after nine months. If a collective agreement provides for top-up wages after a maximum of six weeks, equal pay has to be granted no later than after an assignment of 15 months.	Administrative offence: fines of up to €500,000 Legal action can be taken to claim equal pay if not granted. Licence for hiring out temporary employees can be revoked/is not extended.

Chain hiring

“Chain hiring” takes place in particular – often unintentionally – when contractors and sub-contractors are involved on the basis of service agreements or contracts for work if the subcontractor’s employees are integrated into the operations of the party originally ordering the work or benefiting from the services. If the draft bill is taken as a basis, such hidden chain hiring may now have particularly serious consequences, creating employment relationships with the party ordering the work or benefiting from the services. This can no longer be protected against by maintaining a licence for hiring out temporary employees.

Current legal situation	Planned changes	Legal consequences
Prohibited by the Federal Employment Agency, but no sanction if the original agency (lender) at least has a licence for hiring out temporary staff.	Employees may only be hired out by their contractual employer as an agency. ->Thus, chain, intermediate or sub-hiring is prohibited	Administrative offence: fines of up to €30,000 In case of cumulative breaches (e.g. no licence, only “anticipatory licence”, exceeding maximum assignment period), the legal consequences are cumulative.

Definition of employee

The key aim of setting down the definition developed by case law is to help the authorities responsible for monitoring investigate cases of abuse more easily. However, the value of this provision is questionable because in unclear cases the definition may create misunderstandings rather than facilitate assessments.

Current legal situation	Planned changes	Legal consequences
The assessment of whether the worker qualifies as an employee takes place on the basis of an overall evaluation.	The term employee will have a statutory definition, although the assessment criteria and benchmarks are not to be changed. An overall evaluation will still be used.	Risk of incorrect classification of contractual relationships, especially on the borderline between employee/freelancer.