Deployment of employees in group company structures - labour law related risks and solution approaches

Risk of (hidden) employee leasing

As soon as employees of a company work for a third company, there may be a risk of (hidden/illegal) employee leasing. Within a group this may occur, for example, when employees are posted from one group company to another or in the case of so-called "secondments".

Classification as employee leasing

According to the established case law of the Federal Labour Court (Bundesarbeitsgericht), employee leasing exists when employers temporarily assign employed workers to a third party who are integrated into the third party's business and carry out their work according to the hirer's instructions and in the hirer's interest.

Typical for the existence of an employee leasing is therefore the triangular relationship between employees who have concluded an employment contract with a company ("lender") and their integration into the work organisation of a third company ("hirer") to whom they have no contractual relationship.

Distinction between service contracts and employment contracts

Activities under contracts for work or contracts for services must be distinguished from the supply of temporary workers. The decisive difference is that the persons employed are neither integrated into the operational structure of the "hirer" nor are they subject to the latter's instructions under labour law. Rather, the employees act as vicarious agents of the contractor and are therefore exclusively assigned to the contractor under labour law.

Differentiation criteria

There are a number of differentiation criteria that have been developed by the courts over the years to differentiate between activities within the framework of a contract for work or contract for services and (hidden) employee leasing. On the one hand, it is important to note that it is the actual implementation of the personnel deployment that is important and not the contractual arrangement. On the other hand, the various criteria always have to be weighed up in each individual case.

Indications that speak in favour of a (hidden) employee lease include, among others

• Issuing of contractual instructions regarding the content of the activity by the hirer (but not result-oriented and factual instructions related to the service to be provided). The right to issue instructions under the employment contract is individual-related, process- and procedure-oriented.
• Instructions by superiors of the hirer regarding place and time of performance, e.g. regarding granting of leave, start and end of work.
• Integration into the hirer's work organisation, e.g. by coordinating leave with other workers, reporting incapacity for work or participating in the hirer's rosters.
• Integration into day-to-day business, e.g. by participating in team meetings or internal events.
• Work of the employee on the premises of the hirer.
• Cooperation with the employees of the hirer.
• Taking over activities previously carried out by the hirer's employees.
• Use of work equipment of the hirer.

Permit to supply temporary workers, maximum duration of lease

If there is an employee lease / a supply of temporary workers, the hirer must apply to the competent employment agency for a permit. In addition, the Temporary Employment Act (Arbeitnehmerüberlassungsgesetz, "AÜG") provides for certain protective regulations for temporary workers: In principle, the hirer may not assign them to the same hirer for more than 18 consecutive months (exceptions may only be regulated by collective bargaining agreements). In addition, the employee leasing must be expressly described as such in the so-called employee leasing contract between the hirer and the lender. In addition, the so-called "equal treatment" and "equal pay" principles, according to which temporary workers are entitled to the same working conditions and payment as the permanent workers of the hirer, must be applied.

Legal consequences of illegal employee leasing

The legal consequences of illegal employee leasing include in particular:

• Fictitious employment relationship with the hirer

In the case of ineffective employee leasing, an fictitious employment relationship between the employee and the hirer is being established pursuant to section 10 AÜG.

If a fictitious employment relationship between the hirer and the leased employee is established, the hirer takes the position of the employer. An employment relationship within the meaning of section 7 para. 1 sentence 1 Social Code IV (Sozialgesetzgebuch IV – “SGB IV”) is established between the two parties. The hirer is obliged to pay the total social security contribution for the temporary workers in accordance with section 28e para. 1 s. 1 Social Code IV.

If the lender pays the agreed remuneration in full or in part despite the invalidity of the employee leasing contract, the lender remains obliged to pay the remuneration, in particular the total social security contribution, to third parties in addition to the hirer. The hirer and the lender are jointly and severally liable.

• Regulatory and criminal consequences

In case of an unlicensed supply of temporary workers, if the obligation to designate workers is violated or if the maximum lease period of 18 consecutive months is exceeded, both the hirer and the lender could be liable to fines of up to EUR 30,000.

Failure to pay social security contributions may also result in criminal liability under section 266a of the Criminal Code (Strafgesetzbuch – “StGB”).

Participation of the works council

Furthermore, if employees are leased or posted to another group company, the works council has co-determination rights in both the hiring company and the lender company pursuant to section 99 of the Works Council Constitution Act (Betriebsverfassungsgesetz – “BetrVG”).

Individual contractual risks

The risk of hidden employee leasing has to be separated from the fundamental question of the permissibility of the assignment in a group company under the terms of the employment contract. This assignment may not be based on the employer's right to issue instructions. The performance of work in a group company therefore requires the consent of the employees concerned or - if consent cannot be obtained - the issuing of a notice of dismissal for variation of the contract (Änderungskündigung). It could also be possible to include a group transfer or group secondment clause in the employment contract.

Alternative arrangements

There are various possible arrangements for short-term employment in a group company. This does not affect other options that may be available for longer-term employment in different group companies.

Invoking the so-called group privilege

Pursuant to section 1 subsection 3 no. 2 AÜG, most of the provisions of the AÜG (with the exception of the 18-month maximum duration of temporary employment) do not apply if employees are leased within a group and are not hired and employed for the purpose of temporary employment. In particular, there is no need for a permit for the supply of temporary workers.

• Group companies

In order to be covered by the group privilege, the lender and the hirer must belong to the same group. According to section 18 Stock Corporation Act (Aktiengesetz – “AktG”), a controlling company and one or more dependent companies must be combined under the uniform management of the controlling company.

Not hired and employed for leasing purposes

A further prerequisite for the application of the group privilege is that the leased employees are not hired and employed exclusively for the purpose of leasing. Employees are hired or employed for the purpose of leasing if the regular purpose of their employment relationship, which legally or factually characterizes their employment relationship, at the time of leasing also includes the activity under the right of instruction of a third party and not only the activity under the right of instruction of the lender. The following rule of thumb applies: If the employees are never employed elsewhere than at the other group company, this usually means they are employed for the sole purpose of hiring out employees. As a result, the group privilege does not exempt permanent secondments of workers from one group company to another or pure leasing companies within a group from the application of the AÜG.

• Risk of unlawfulness under European law

The question of whether the group privilege is consistent with the underlying EU law is also controversial in literature and has not yet been clarified by the highest courts. Doubts exist insofar as Directive 2008/104/EC of the European Parliament and of the Council on temporary agency work, which is based on Article 153 (2) TFEU, does not contain an (explicit) group privilege. It is, therefore, often argued that the group privilege is contrary to European law. However, case law has not yet followed this opinion.

Employee leasing permit

An obvious solution, but one that would involve a corresponding administrative effort, would be to apply for a permit to lease employees for a group-internal leasing company from the competent employment agency and then to employ employees as temporary workers who are leased out to group-internal companies by way of licensed employee leasing. It should be noted that even if a permit is in place, the maximum period of lease of 18 consecutive months must not be exceeded.

Inactive employment relationship and fixed-term employment contract

An alternative to employee leasing would be to suspend the employment relationship with the previous employer for the duration of the posting/secondment and to conclude a fixed-term contract with the company taking over. Since the employees enter into an employment relationship with the acquiring company, the risk of a hidden employee leasing may be ruled out. Furthermore, employees can be employed by another company beyond the 18-month period stipulated in section 1 para. 1b AÜG.

The suspension of the previous contract and the secured return conditions as well as any other special benefits are to be regulated in the agreement on the suspension of the employment relationship. Where, according to the principle of contractual freedom, the suspension can ususally be agreed without problems, the fixed-term employment, on the other hand, must be measured against the requirements of the Part-Time and Fixed-term Employment Act (Teilzeit- und Befristungsgesetz –“TzBfG”). In principle, a fixed term of up to two years agreed in writing with new employees is permissible pursuant to section 14 para. 2 sentence 1 TzBfG if the end of the term can be determined by calendar. If this time limit is to be exceeded or if a fixed-term or unlimited employment relationship already existed with the employee, there must be an objective reason for the time limitation. For example, a posting to another group company could be justified under section 14 para. 1 sentence 2 no. 1 TzBfG. To do this, it would have to be based on project-related additional personnel requirements and the employees would have to be predominantly occupied by the project activities. If a posting abroad is intended, the continuation of social security entitlement under section 4 SGB IV can be cited as an unwritten justification within the meaning of the TzBfG, which requires a time limitation for the work abroad. Furthermore, the guaranteed possibility of returning to the previous employment relationship has been recognized as an objective reason for a fixed-term contract, which is agreed upon when suspending the employment relationship.

Joint enterprise

In a joint enterprise, the employees are not integrated into the hirer's work organisation, but into a joint work organisation of the employer and a third party, albeit under uniform management. This can prevent an employee lease.

According to the established case law of the Federal Labour Court (Bundesarbeitsgericht, BAG), a joint operation is deemed to exist if the tangible and intangible assets available in an operation are combined, ordered and used in a targeted manner for one or more work-related purposes and the use of human labour is controlled by a uniform management system. For this purpose, the companies involved must have at least tacitly formed a legal link in a joint management. The unified management must extend to the essential functions of an employer in social and personnel matters (e.g. hiring, dismissals or transfers). The employer's right to issue instructions is not split. If there is a joint enterprise, the employees may be exchanged within the joint enterprise without the risk of employee leasing. When examining whether there is a joint operation, it always depends on the overall circumstances of the individual case. In particular, it must be taken into account whether the management consists of representatives of the involved companies with regard to essential personnel and social matters, so that it is clear that both companies are involved in the management of the joint operation. Beyond the mere provision of staff, one or more operational purposes would have to be pursued in the joint operation. In addition, the involvement of one employer should not be limited to supply its employees to another employer, as this would normally constitute an employee leasing. A written management agreement between the two companies should express the points described above and in particular document the operational purpose(s) of the joint enterprise.

Conclusion

Companies wishing to make the short-term deployment of employees flexible must check any risks at an early stage in order to be able to organise their deployment in a legally secure manner in individual cases. The unchecked secondment to companies within a group can sometimes has considerable economic and legal consequences for the companies involved.