Previous legal situation

Until April 1, 2017, the following will continue to apply: If the company concludes a contract for work or services and the situation actually turns out to be supply of temporary employees, it will be construed as unlawful unless the provider has a leasing license. One of the legal consequences of an unlawful temporary employment arrangement is the institution of an employment relationship between the deployed temporary employee and the company using his/her services. To avoid this legal consequence, contractors often obtain a permission to supply temporary employees by way of precaution. This precautionary permission is used to serve as a parachute in case the contract for work or services is transformed into a supply of temporary employment, ensuring a soft landing for the parties involved.

New legal situation

From April 1, 2017, the precautionary permission to supply temporary employees will no longer fulfill its purpose as a parachute. From then on, supply of temporary employment will be permitted only if the arrangement is designated as such from the outset and the employees to be supplied are named in the contract between the lessor and the host company prior to the deployment. If this is not done, a (precautionary) permission to supply temporary employees will no longer protect the provider as the lessor in the case of a failed work or service agreement. As a result, an employment relationship will be assumed between the employee and the host company unless the employee objects to this within one month of the start of the unlawful employee deployment. Furthermore, fines of up to €30,000 may be imposed on the companies involved in the unlawful deployment.

Could contracting be the solution?

Before concluding a contract, this amendment will require both the customer company and the provider to check carefully whether the contract for work or services truly is a suitable contract type. A contract for work is appropriate whenever the customer wants to purchase an achievement for which the provider is to be liable. Temporary employment is the right solution if the customer merely needs personnel which he wants to deploy according to his own instructions and integrate in operational workflows. For example, if a customer needs a new software tool that must be programmed by a certain deadline, a work agreement with guaranteed delivery dates and warranty claims would be the right type of contract. By contrast, temporary employment would be suitable if the customer needs a programmer in the company for a certain period to handle various recurring IT tasks. In practice, both contract types are used for the maintenance of existing IT. When concluding a contract for work or services, the customer usually does not require the work to be done by a particular person. Rather, the customer expects the services owed to be duly performed by the contracting partner. This can be achieved in two ways: On the one hand, the customer can directly commission a service provider or work contractor as a natural person. In this constellation, it is important to clarify whether this would result in false self-employment. Contracting, on the other hand, refers to the following situation: The customer concludes a contract with a company, which in turn engages sub-contractors for the performance instead of directly performing the services with its own employees.

Case law on contracting

Surprisingly, there are very few court decisions concerning this constellation, which is frequently encountered in practice.

The Federal Labor Court last handed down a decision on this subject in 1994 (decision of November 9, 1994, 7 AZR 217/94), determining that "self-employed persons cannot be leased to lessees as temporary employees." For the German Temporary Employment Act (AÜG) not to apply, the contractual relationship between the provider and the sub-contractor sub-commissioned by him must not turn out to be an employment relationship. This demarcation takes place according to the demarcation criteria developed by case law, which are set forth in the new statutory definition of an employment relationship as of April 1, 2017. If the contractual relationship is "clean", the regulations of the German Temporary Employment Act (AÜG) are not applicable. This decision is appropriate, as the arrangement would otherwise amount to "de facto temporary work", for which the law does not provide any basis. In its decision of August 1, 2013 (2 Sa 6/13), the Regional Labor Court of Baden Württemberg took a different view. However, the decision of the Federal Labor Court was recently confirmed by the Regional Labor Court of Düsseldorf (decision of July 21, 2015, 3 Sa 6/15). The case under examination by the Regional Labor Court of Düsseldorf concerned a self-employed IT specialist whom a company deployed to the customer for the performance of IT services. The contractual relationship between the IT specialist and his customer was deemed to be a self-employed activity, and the Regional Labor Court of Düsseldorf also aptly qualified the contractual relationship between the customer and the company as a service agreement. As a result, the IT specialist was unable to substantiate his claim of having an employment relationship with the customer. The company did not have and did not need any permission to supply temporary employees. Had the IT specialist been an employee of the company, the decision could have been different if the contractual relationship between the company and the customer had turned out to be supply of temporary employees.

Details of contracting

The decisions of the Federal Labor Court and of the Regional Court of Düsseldorf show that on the condition that the provider deploys self-employed service providers instead of his own employees, it will still be possible to make use of contracts for work or services even without keeping permission to supply temporary employees by way of precaution.

Legally clean contracting requires the two relevant contractual relationships to be designed carefully and then be implemented in accordance with the requirements of case law. The contractual relationship between the provider and the self-employed service sub-contractor must be designed in such a way that he is not required to work according to instructions given to him, neither at the customer nor at the provider. According to a recent decision of the Federal Labor Court, the mere fact that a consulting activity usually requires the person to work in the customer's business does not institute any personal dependence (Federal Labor Court, decision of August 11, 2015, 9 AZR 98/14). Therefore, working on site for the customer does not in itself represent work that is subject to instructions and that is externally directed. Furthermore, the sub-contractor himself must be liable toward his contractual partner and must also be entitled to commission sub-contractors.

The service to be performed must be clearly defined in the contractual relationship between the customer and the provider, e.g. in the form of deadlines, milestones and specifications. Furthermore, the contractual relationship between the customer and the provider must be arranged in such a way that the customer cannot freely manage a certain person of the provider, giving him instructions like his own employees (e.g. by means of a contractually agreed right of call-off or replacement). Of course, (functional) instructions that are required for the fulfillment of the contract are permissible. Moreover, the contract should contain the liability and warranty claims typical of a contract for work or services. Last but not least, it is important to ensure that the contractual relationship abides by the contractual agreement, as this is critical for the legal evaluation.

Conclusion

Though the parachute solution will no longer be available as of April 1, 2017, customers will continue to have access to suitable solutions to fill their need for human resources. This requires careful drafting of the contract, due application of the contractual regulations, and making sure that the executives are aware of the dos and don'ts.