German labour law follows the “all or nothing” principle: Labour law regulations presume an existing employment relationship between employer and employee. If no such relationship exists, protective labour law regulations cannot be applied (with a few exceptions e.g. in the case of managing directors of a “GmbH” (limited company)). Assessing whether an employment relationship exists requires evaluating the nature of the relationship in question and assessing it against the legal definition of “employment”.

As in many other countries, Germany witnessed the trend of reducing core workforces in favour of a more flexible use of external resources. This in particular lead to an increase of temporary work by personnel leasing. In response to this phenomenon, the government passed new regulations regarding personnel leasing with the aim of preventing its abuse (Arbeitnehmerüberlassungsgesetz, in effect since April 2017). Under such regulations personnel leasing is now limited to a maximum duration of 18 months and requires equal pay and equal treatment of leased personnel in comparison the core workforce. It also severely sanctions any hidden temporary work. Especially the last regulation is able to influence the common practice in those businesses that are interested in covering their – possibly – temporary personnel requirements by hiring external personnel. Any personnel leasing must explicitly be designated in the contract, concretizing the person of the worker. As legal consequence of hidden personnel leasing the agreement between the temporary worker and its lender is void and an autonomous employment relationship between worker and borrower will be created by law. This increases the borrower´s responsibilities, who now will have to play the role of an employer including obligations such as e.g. the payment of social security contributions and income tax. In addition the law provides for fines of up to EUR 30,000 for a hidden personnel leasing and up to EUR 500,000 for a breach of the equal pay and equal treatment obligation.

Also, the term “employment agreement” has finally been codified in the German Civil Code (§ 611 a BGB) for the first time. As the definition refers to the distinction between an employee that is dependent on instructions and an independent self-employed worker that was already used by German courts it does not offer any new conclusions. The main question still is whether the relevant contract is a contract for a work result or specific services (Werk- or Dienstvertrag), or rather an employment contract. If a contract is misclassified as independent, it will lead to a case of pseudo self-employment (Scheinselbstständigkeit).

In a systematic view a parallel exists for the distinction between personnel leasing (splitting-up the position of the employer between lender and borrower) and other forms of outside personnel deployment in the triangular relationship (external contractor – external contractor’s employees – host company). In both cases the definition of the actual status requires an evaluation of how the relevant contract is performed in practice, paying particular regard to, for example, how the worker is integrated into the company, the level of the worker´s personal dependence on the company, and the extent to which the worker is bound by the company’s instruction. The determination of an existing employment relationship ultimately depends on the actual performance of the relevant contract rather than on the written agreement signed between the parties.

The risks for a company working with an external contractor in an agreement that indeed should be classified as a personnel leasing are identical to those in the case of a pseudo self-employed worker: The company will be treated as the worker’s employer and therefore will be liable for wage taxes and social security contributions and responsible for the applicability of protective labour law regulations such as the Maternity Protection Act (Mutterschutzgesetz), the Act on Part-Time Work and Fixed-Term Employment (Teilzeit- und Befristungsgesetz), the claim to paid holidays according to the Federal Leave Act (Bundesurlaubsgesetz) and other employee rights.