Insight: Lost in translation

UK recruitment businesses need to be aware that the complexities of operating in Germany have grown and added to some existing issues 

Since the UK has now left the European Union, recruitment businesses need to be clear about some critical points when working in Germany.

1. Business protection

Business protection is a hot topic for every recruitment company. There are many aspects to consider, including data protection, cybersecurity, confidentiality clauses, the protection of trade secrets, and engaging external workforce on business critical positions. Restrictive covenants are especially important to the recruitment sector.

Types of protection include in particular:

  • Non-competition during employment
  • Post-contractual restrictive covenants
  • Client protection clauses
  • Candidate protection clauses
  • Non-solicitation clauses.

Under German law, it is important to check which protection is required by the company and also what is permitted under German law. Since the employer has to pay compensation for a post-contractual restrictive covenant amounting to at least 50% of the benefits the employee last received, it should be checked in every individual case whether such covenant shall be agreed. Employers often assume that they can agree very comprehensive post-contractual restrictive covenants because they have to pay compensation. However, this is not correct. If the protection is too wide, it will not be effective – irrespective of compensation payment.

Recruitment companies often argue that they need a post-contractual restrictive covenant, a client protection clause and a candidate protection clause. This is reasonable with respect to the business model of a recruitment company. However, there is a risk that under German law the protection is too wide.

A post-contractual restrictive covenant is subject to a statutory written form requirement. Therefore the agreement that includes the post-contractual restrictive covenant has to be physically signed by both parties. The post-contractual restrictive covenant is legally ineffective if the written-form requirement is not met. In particular in the recruitment industry, time is key and this written-form requirement is often not met.

2. Assignment limits under the AÜG

A recruitment company that wishes to place temporary workers (Zeitarbeitnehmer) in Germany needs to obtain a licence, the so-called AÜG (Arbeitnehmerüberlassungsgesetz) licence.

2.1 General rule

Since 1 April 2017, there has been an 18-month limit on the assignment period. This means that, as a general rule of law, an employee in Germany cannot be assigned to the same customer (to work under the customer's supervision) in the same position for longer than 18 months.

The assignment limit applies to individual employees, not to a specific position. In practical terms, this means a recruitment company can assign different employees to a position at a client company for longer than the 18-month limit, as long as each individual is replaced after 18 months.

Furthermore, the respective employee who has reached the assignment limit can be assigned (again in principle for 18 months) to another customer. On expiry of the assignment limit, the employee cannot be re-assigned to the same customer within three months on expiry of the assignment limit, as the interim period would be considered too short and therefore both assignment periods would be deemed to count as one and the same assignment period.

2.2 Exceptions to the assignment limit

Exceptions to the assignment limit may be included in collective bargaining agreements or be agreed with a works council (Betriebsrat) established at the client. Such agreements may permit assignment periods to exceed the assignment limit in the industry the client operates in.

For example, there is a limit of 48 months in the metal and electrical industry. Furthermore, if the collective bargaining agreement has a so-called escape clause, it is possible for the customer to agree a longer assignment limit with its works council.

However, if the client is not bound by a such an agreement, they may choose to adopt one, if their operational unit (Betrieb) falls into the scope of one within their industry or sector. In the case of a so-called escape clause, it is possible for the company and works council to agree on the length of the assignment limit, however only up to 24 months.

Clients with no works council and are not bound by a collective bargaining agreement cannot extend the assignment limit beyond its limit.

2.3 Consequences of a breach of the assignment limit

If and to the extent that an employee would be assigned to a client for a longer period than the assignment limit applicable (either by law or by a collective bargaining agreement), the employee would be deemed to have a direct employment agreement with the client. However, this does not apply if the employee disagrees with the transfer of the employment relationship and declares that they adhere to the employment contract with the recruitment company.

In addition, both the recruitment company and the client face a fine of €30,000 on breaching the assignment limit. They are also liable for paying social security contributions deriving from this de facto employment agreement that has been established between the recruitment company’s former employee and the client.

Further, the AÜG licence for conducting business in Germany can be revoked upon breaching the assignment limit.

3. Professional employer organisations

A professional employer organisation (PEO) is an outsourcing firm that provides services to small and medium-sized businesses. Typically, the PEO offering may include human resource consulting, payroll processing, tax filing, workers' compensation insurance, health benefits, regulatory compliance assistance, etc. The PEO enters into a contractual co-employment agreement with its client. Through co-employment, the PEO becomes the employer of record for tax purposes through filing payroll taxes under its own tax identification numbers. As the legal employer, the PEO is responsible for withholding proper taxes and social security contributions.

Co-employment or employer of record services are normal in the US. There is no direct equivalent of the US model in Germany and in most parts of Europe. A PEO model has to be implemented properly in Germany in order to avoid the following risks:

  • From a regulatory perspective, there is a risk of hidden employee leasing, which is prohibited in Germany.
  • From a tax perspective, possibly the most serious problem is that if a PEO supports its client avoid permanent establishment in Germany, the PEO model does not work and may possibly be deemed to be tax evasion by the tax authorities. 

Power points

Business protection is a hot topic for every recruitment company. In particular, post-contractual restrictive covenants are important. The main issue is to find the right balance between a proper protection and a legally effective clause.

If a recruitment company places agency workers in Germany under the Employee Leasing Act, the Arbeitnehmerüberlassungsgesetz assignment limits have to be met. There is a general 18-month limit on the assignment period.

This means that, as a general rule of law, an employee in Germany cannot be assigned to the same customer (to work under the customer's supervision) in the same position for a period longer than 18 months.

The services of professional employer organisations (PEO) are becoming more and more attractive. When offering such services in Germany, certain pitfalls must be observed, in particular regulatory and tax risks.

Thomas Leister is a lawyer / partner and a specialist lawyer for labour law at Osborne Clarke, Munich

Image credit | Shutterstock

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