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Contracts for work and services/subcontractor agreements in the political spotlight

The outsourcing of processes to external companies has come to the fore of politics more strongly once again having been sparked off by the coronavirus cases in meat production plants. Lawmakers are planning to completely outlaw such models for the meat industry from 1.1.2021. In view of these current developments we have provided an overview here of the current legal situation and we have outlined the changes that can be expected.

The background to the problem

Essentially, the issue is about the allocation and outsourcing of responsibilities for people who ultimately work in a factory, particularly with respect to working conditions and compliance with legal minimum standards. The involvement of subcontractors engaged to carry out specific stages of production (e.g.: slaughtering, dismembering and processing) means that responsibilities are delegated away from the actual company (slaughterhouse operator) and become fragmented; accordingly, this then makes it more difficult to monitor compliance with regulations.

Legal Framework

Engaging subcontractors to fulfil specific operational functions is generally permitted by law and is common practice in a wide variety of industries. This ranges from contracts for specific project phases being awarded by general contractors in the construction sector through to the outsourcing of IT services and subcontracting the running of a company’s canteen. Frequently, this is a way to meet the increased requirements with respect to the specialisation of operating processes in a more flexible manner.

Whether or not such agreements actually constitute contracts for works and services within the meaning of the German Civil Code – where there is a commitment to execute works, thus to provide a specific outcome – does not ultimately play a decisive role. It is likewise possible to engage subcontractors on the basis of service agreements or similar types of agreements where, essentially, there is no undertaking to provide an outcome but instead to carry out an activity.

Please note: Admittedly, the term “contract for work and services” is rather more suitable for disguising that the actual undertaking is to perform work and that, in fact, temporary workers are being illegally hired out.

The hiring out of temporary workers – distinguishing features

The hiring out of temporary workers (“subcontracted labour”) is subject to the special rules of the German Temporary Employment Act according to which, in particular, it is necessary for the staffing agency to obtain authorisation from the competent office of the German Federal Employment Agency. If this has not been provided then the contractual relationships between the staffing agency and the hiring company would be rendered null and void and, according to German law, it would be assumed that there is an employment relationship between the hiring company and the subcontracted worker; this would come with all the usual tax, social security and employment law consequences.

The designation of the contract does not matter here. Even an agreement that is termed a contract for work and services, according to factual circumstances, can be based on an (illegal) hiring out of workers. It is here that we start getting into a grey area and it is frequently difficult to draw a clear dividing line. The questions that need to be asked, among others, are:

  • Who plans and organises the workflows – the client or the contractor?
  • Does the contractor’s organisational business structure make it even possible for the contractor to fulfil the contract for work and services autonomously?
  • Does the contractor bear the commercial responsibility for a specific outcome?
  • Is the contractor exposed to warranty claims in this regard?
  • Have the subcontracted personnel been integrated into the client’s operational processes or operational structures?
  • Who is able to exercise the authority to issue instructions to the subcontracted personnel?
  • Who supervises and monitors attendance and work performance?
  • Who provides the requisite work equipment (tools, devices)?

The specific criteria may be weighted differently depending on the individual case and the court so that, in many cases, there will still be legal uncertainty.

Recommendation: At any rate, for ambiguous cases we would recommend commissioning an assessment by an expert consultant.

Possible changes to the law

Lawmakers have likewise known about the current legal uncertainties and the grey areas for a long time, although no appropriate solutions have yet been found. In 2017 already, the “Act to secure employee rights in the meat industry” was passed. The introduction of a type of general contractor liability was aimed at addressing the improper use of subcontractors. However, the new rules would appear not to have had the desired effect.

Following the recent public debate sparked by the conditions in individual factories, the deployment of subcontractors will now generally be declared to be illegal, in the meat industry at any rate, starting from 1.1.2021. As a result, even officially hiring out workers (with authorisation) will no longer be an option.

Outlook: Apparently, the goal is to achieve direct permanent employment with the respective slaughterhouse operators for all those working in the meat industry. Only micro-entities with up to 30 employees would be exempted. Furthermore, the draft law to this end developed by the Federal Ministry of Labour requires there to be a considerably greater number of checks. It remains to be seen whether the desired goals will be achieved in this way or whether new grey areas will open up.

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