The draft bill to amend the German employee lending law and its consequences on the IT-Consultancy industry

Table of contents

1 Introduction

2 Current situation in Germany
2.1 Forms of contract
2.1.1 Personnel leasing
2.1.2 "Werkvertrag"
2.1.3 "Dienstvertrag"
2.2 Bogus self-employment
2.3 IT-Consulting services

3 The draft bill
3.1 Purpose
3.2 Significant changes
3.3 Consequences on the IT-Consulting industry
3.4 Consequences for companies human resource planning

4 Conclusions

List of References

List of abbreviation

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1 Introduction

Over the past two decades the employment contracts in Germany have a tendency of getting more flexible. In order to lower the unemployment rate and to increase the competitiveness of the German economy, the federal government adopted a new law for modern services on the labour market (Erstes Gesetz für moderne Dienstleistungen am Arbeitsmarkt) at the end of 2002. This law opened up new possibilities for the usage of personnel leasing, since it loosened the conditions of personnel leasing.¹ On the other hand however it implemented the restriction to treat a temporary worker equal to an equivalent permanent worker in the hiring company concerning the conditions of work and payment.²

In this way the special development of the 1990s, an increasing temporary employment market in the low-skill sector with a simultaneous reduction of permanent workers subject to social security contributions to the economy as a whole, should be counteracted. Unfortunately, the expansion of the personnel leasing contracts was accompanied by an increasing deterioration of the average income of temporary workers in proportion to the employees in the rest of the economy.³ It was therefore obvious, that permanent workers were replaced by more poorly paid temporary workers.

Notwithstanding, the companies developed new solutions in order to bypass the restrictions set forth by the new guidelines. Instead of hiring personnel via personnel leasing, they used service contracts, so-called “Werkverträge” or so- called “Dienstverträge”, which are much more flexible. But apart from the title of these contracts, the changes in the execution were marginal.⁴ However, the workers were actually paid much worse, since the “equal pay” did not apply to these contracts and they were additionally often hired on an uncertain self- employed basis. By this means it was possible to bypass statutory minimum wages and in addition social security contributions.

With a new draft bill to amend the law for personnel leasing and including more regulations, the German Ministry of Labour and Social Affairs now wants to eliminate the possibilities of abuse by assessing this construction as a so-called “hidden personnel leasing” and equating it with a normal personnel leasing including all rights and obligations. The act should further also include a differentiation between dependent employment and self-employment to prevent also this possibility of its circumvention. In general there is no legal definition of independent work in Germany. The Social Security Code only defines dependent employment.⁵ This means, that everything else is self-employed work. A self- employed worker that fulfills the definition of dependent employment can be classified as bogus self-employed. As a result, such an employee then becomes a mandatory social insured person and he and his client have to pay social security contributions.⁶ However, this distinction is often difficult.

In the meantime however, a parallel job market has developed next to the classical labour market, providing companies with highly specialized self-employed experts for a specific defined period of time, in order to execute special project-related tasks. Upon completion of the projects, these highly paid specialists move on in order to apply their know-how for new tasks for other customers. Especially within the IT business, with its rapid pace of technological change, this is very common. The number of freelancers in Germany in this sector is estimated at about 100.000 (as of 2014).⁷ Since the hiring is usually made by a service contract as well, this professional group is also affected by the new law - even though these workers are usually not underpaid and have chosen the status of being self-employed and flexible for themselves.

The concerns are great at the moment, that many IT freelancers will be classified as bogus self-employed in the future and that it will be even harder for companies to find and hire such suitable experts. For this reason, the purpose of this assignment is to evaluate the consequences of this draft bill on the IT Consultancy industry and the human resources departments of companies from all sectors.

2 Current situation in Germany

In order to analyze the relationship between the draft law and the IT-Consultancy industry, some legal aspects concerning labor laws need to be defined.

2.1 Forms of contract

There are various contracts that a company can use to hire workers outside of a common permanent employment.

2.1.1 Personnel leasing

Personnel leasing is an arrangement in which a firm (so-called subscribing firm) transfers its employee to another firm (so-called leasing firm). For the leasing firm it is an easy way to react to short-term needs due to special projects or production peaks without the necessity to hiring a permanent employee, and with the possibility to dismiss the worker without being bound by a notice period. In return it usually pays more for this service than the salary the employee gets from the subscribing firm. Since the adoption of a new law⁸ at the end of 2002, a temporary employee has to receive equal pay as his permanent counterpart in the leasing firm. The supplier must possess a license to supply temporary workers.

2.1.2 "Werkvertrag"

A so-called "Werkvertrag" (§631 ff. BGB) (from here on called Werkvertrag) is a contract of service concerning an one-off-service and not a permanent task. The customer does not pay for the working hours, but for a clearly defined result at a fixed date. The contractor is responsible for the supply of the product or service both in time and quality.

2.1.3 "Dienstvertrag"

In the case of the so-called "Dienstvertrag" (§611 BGB) (from here on called Dienstvertrag) on the other hand, the customer pays the contractor a compensation for a defined service. This can be the contractual relationship with an employee as well as with a freelancer (in this case it is called a free Dienstvertrag). In contrast to the Werkvertrag, the contractor is bound by the instructions of the customer and is not obliged to fulfill a clearly defined result. But this contractual form has a substantial disadvantage: A freelancer who is involved, can be classified as bogus self-employed. If a company is commissioned and sends consultants in to its customer, this can be classified as hidden personnel leasing.

2.2 Bogus self-employment

Since there is no clear definition between an employee and a self-employed person, it is sometimes difficult to distinguish between these two types of workers. This is particularly the case if a freelancer, such as a consultant or a lawyer, works predominantly for one company. Due to the fact that in Germany only an employee and its company have to pay social security contributions, this differentiation can be critical and can lead to the company's attempt to fire an employee and hire him as a freelancer, among other things, in order to save these costs. A self-employed person that operates more like an employee, can be classified as bogus self- employed, and thus be equal to a normal employee with social insurance obligations. This is regulated in §7 (4) of the social code book IV.⁹ Indicative for the existence of an employment contract can be for example the limitation of freedom of the person in choosing the place of work or to independently organize the working time, and the possibility to execute hierarchic control over that person.¹⁰

2.3 IT Consulting in Germany

There are approximately 100.000 IT freelancers in Germany¹¹, who work via Dienstvertrag or Werkvertrag for different companies. In addition there is a large number of IT-consulting companies, who work entirely or in part with permanent employees. These have the additional possibility of working with personnel leasing, if they have the legal permission. Due to the already mentioned disadvantages of the Dienstvertrag more and more companies have a tendency to prefer working with personnel leasing or Werkverträge.

3 The draft bill

On May 11th 2016 the German government coalition agreed on a draft law to amend the law for personnel leasing and additional regulations

3.1 Purpose of the law

The purpose of the law is to restrict the companies possibilities of using personnel leasing and to prevent malpractice of the Werkverträge, for example by using it as a kind of personnel leasing, but without following its terms and conditions.

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¹ cf. Erstes Gesetz für moderne Dienstleistungen am Arbeitsmarkt.

² cf. Burda M. & Kvasnicka M. (2005), P. 2.

³ cf. Burda M. & Kvasnicka M. (2005), P. 12.

⁴ cf. Reiserer K. & Bölz V. (2014), P. 5.

⁵ cf. SGB IV (2015), §7.

⁶ cf. Deutsche Rentenversicherung (n.d.): Scheinselbständigkeit. URL: http://www.deutsche-rentenversicherung.de/Allgemein/de/Inhalt/2_Rente_Reha/01_rente/01_grundwissen/01_wer_ist_pflic htversichert/01a_selbststaendige/04_personen_mit_einem_auftraggeber.html, accessed on 05.06.2016.

⁷ Förster M. (2014). Bitkom: Anzahl der Freelancer in der ITK-Branche steigt. URL: http://www.heise.de/ix/meldung/Bitkom-Anzahl-der-Freelancer-in-der-ITK-Branche-steigt- 2470194.html, accessed on 05.06.2016.

⁸ cf. Erstes Gesetz für moderne Dienstleistungen am Arbeitsmarkt (2002).

⁹ Bieback, K.-J. (2001), P. 30.

¹⁰ cf. Deutsche Rentenversicherung (n.d.): Scheinselbständigkeit. URL: http://www.deutsche-rentenversicherung.de/Allgemein/de/Inhalt/2_Rente_Reha/01_rente/01_grundwissen/01_wer_ist_pflic htversichert/01a_selbststaendige/04_personen_mit_einem_auftraggeber.html, accessed on 05.06.2016.

¹¹ Förster M. (2014). Bitkom: Anzahl der Freelancer in der ITK-Branche steigt. URL: http://www.heise.de/ix/meldung/Bitkom-Anzahl-der-Freelancer-in-der-ITK-Branche-steigt- 2470194.html, accessed on 05.06.2016.