Will the German group employee leasing model soon become obsolete?

Group employee leasing – what is it?

Group employee leasing exists if employees are leased between (at least) two legally independent companies that are combined under a uniform management. Whether the companies are in a relationship of equivalency or subordination to each other is just as irrelevant as their legal form. Unity of management is characteristic for the existence of a group. 

The lease of employees between group companies is not privileged if the employee is "hired and employed for the purpose of employee leasing". The decisive factor here is the focus of the employment relationship. The group privilege is applicable if, despite the lease, the focus is on the (contractual) employer. The actual deployment of the employee is decisive for this. The mere agreement of a group transfer clause in the employment contract, which can serve as the contractual basis for group employee leasing, is therefore harmless in itself. It merely enables the employer to deploy the employee across the group.

Within the scope of application of the group privilege, the employer benefits from far-reaching facilitations compared to "usual" employee leasing. For example, group employee leasing does not require a permit. The rigid 18-month maximum lease period does not apply. The strict formal requirements in connection with the lease and the equal pay principle are also not applicable. The privileged group employee leasing therefore proves to be attractive for employers because it creates entrepreneurial freedom in the human resource area. This can be used to react comparatively spontaneously to changes in operating conditions.

And is the group privilege then contrary to European law?

In the initial legal dispute, the plaintiff argues that the Temporary Agency Work Directive does not provide for any exception in the area of group employee leasing. Therefore, the group privilege of the German Act on Temporary Agency Work in its current form is contrary to European law. Sec. 1 para. 3 no. 2 of the German Act on Temporary Agency Work must be interpreted in such a way that a privilege is already excluded if the employee is "hired or employed for the purpose of employee leasing". With such an interpretation, no group employee leasing would be privileged; the group privilege would completely run to nothing.

The Regional Labour Court of Lower Saxony ("Regional Labour Court") (judgment of 12 January 2023 – case no. 5 Sa 212/22) saw this differently – as did the labour court of first instance – and rightly did not follow the plaintiff's opinion. It is true that the Temporary Agency Work Directive must be given the best possible effect. National law – in this case the group privilege from sec. 1 para. 3 no. 2 of the German Act on Temporary Agency Work – must therefore in principle be interpreted in conformity with European law. However, the Regional Labour Court correctly recognized that the interpretation in conformity with European law has its limits in terms of the wording and the legislative intent. An interpretation of national law that completely reverses its wording and legislative intent is therefore not permissible. In spite of that, this is precisely what the interpretation adopted by the plaintiff would result in. Exceeding these limits is only permissible in the relationship between employee and (non-governmental) employer in very narrow exceptional cases. For example if the directive with which the national legal provision is not in conformity puts legal principles enshrined in European primary law into concrete terms. However, this is not the case with the Temporary Agency Work Directive, so that the group privilege can continue to apply.

In this case, the Regional Labour Court of Lower Saxony did not deal with the unconformity of the group privilege with European law. Consequently, it did not address the strong concerns raised in the literature regarding the unconformity with European law, which were also submitted by the plaintiff, since this is not relevant in the case. As the Temporary Agency Work Directive could not supersede the claim to application of sec. 1 para. 3 no. 2 of the German Act on Temporary Agency Work, the group privilege would continue to apply even if it was not in conformity with European law.

Where do we go from here?

The plaintiff's appeal is currently pending before the Federal Labour Court, but a decision is not expected before the end of the year. 

The proceedings could be considerably lengthened by a referral to the ECJ. Although, it is questionable whether a referral will be made. In case of doubts about the conformity of national law with European law, the Federal Labour Court can (and must) refer cases to the ECJ. However, this only applies if it is relevant in the decision of the specific legal dispute, which in turn the Federal Labour Court assesses on its own responsibility. This is exactly what the Regional Labour Court of Lower Saxony and the labour court of first instance denied. The Federal Labour Court could follow this point of view and thus reject a referral. At least it could then be expected that the Federal Labour Court would clarify in a supreme court ruling that the group privilege is not open to an interpretation that conforms with European law. This would gratifyingly create clear conditions for the practice that only the legislator could eliminate with a new regulation.

Conclusion

In this respect, employers should closely monitor developments and in particular keep an eye on whether the Federal Labour Court refers the matter to the ECJ. In any case, there is no threat of the group privilege being "abolished" in the short term – even if the Federal Labour Court decides to refer the matter to the ECJ. Nevertheless, blind faith in the fact that the group privilege will be available to employers in the medium, long term or even indefinitely is not appropriate in view of the criticisms raised against it and the particular practical relevance of group employee leasing. At the latest, in the event (which is rather unlikely, at least in view of the current legal dispute) that the issue is referred to the ECJ, alternative options should be examined in order to be prepared for a possible loss of the far-reaching facilitations of the group privilege.