Corporate Governance Reform – new disclosure requirements

Following on from it proposals for reform, which we reported on at the end of last year (Corporate Governance Proposals), the UK Government has now published draft regulations, (the draft Companies (Miscellaneous Reporting) Regulations 2018) . The draft regulations will implement some of the proposals, in particular in relation to holding larger companies to account for the salaries they pay and to consider employee representation.

  • Publication of CEO’s pay ratio: UK quoted companies with more than 250 UK employees will be required to publish the ratio of their CEO’s total remuneration to the median (50th), 25th and 75th percentiles pay remuneration of their UK employees in their directors’ remuneration report. Where the reporting company is a parent company, the pay ratio must relate to the whole group. This is to ensure that a fair reflection is given, even where more junior staff are outsourced to a service company. Such companies will also have to publish supporting information, including the reasons for changes to the ratios from year to year and, in the case of the median ratio, whether this ratio is consistent with the company’s wider policies on employee pay, reward and progression. There are various options for identifying the relevant employees and for the methodology in calculating the pay ratios, which do allow the company to use previously calculated gender pay gap information as a starting point. As with gender pay gap reporting, the narrative will be key, as the ratio will very much vary depending on sector, size of the company and variable remuneration structure of the CEO.
  • Statement about engagement with employees: Companies with more than 250 UK employees will be required to include a statement as part of their directors’ report summarising how the directors have engaged with employees, how they have had regard to employee interests and the effect of that regard, including on the principal decisions taken by the company in the financial year. The aim is to ensure that UK employees are provided with information on matters which concern them as employees. There will be an exemption if the information is about developments which are in the course of negotiation and which, if disclosed would be seriously prejudicial to the company’s interests. Companies will also have to report on wider engagement with suppliers, customers and others in a business relationship with the company. This is limited to large companies (as defined in the draft regulations).
  • Share price impact reporting: UK quoted companies will need to include some additional provisions in their directors’ remuneration report, including an illustration of the possible impact of future share price increases on executive pay outcomes linked to performance periods or other executive incentive periods of more than one financial year.
  • Section 172 Statement: Companies which are already required to produce a strategic report, will need to include a statement in their strategic report of how the directors have complied with their duty to have regard to the matters in section 172(1) (a) to (f) Companies Act 2006 (CA 2006) (duty to promote the success of the company).
  • Statement of corporate governance arrangements: Very large companies will be required to include a statement in their directors’ report about which corporate governance code, if any, has been applied by the company and how.

Subject to Parliamentary approval, the new requirements will apply to company reporting on financial years starting on or after January 1, 2019 in line with the Financial Reporting Council’s plans for bringing a revised UK Corporate Governance Code into effect.

UK Supreme Court holds that plumber engaged by Pimlico Plumbers was a “worker” and not a self-employed contractor

The Supreme Court has dismissed the latest appeal by Pimlico Plumbers Ltd (the Company) against the employment tribunal’s decision that one of its plumbers, Mr Smith, was a “worker” under the provisions of the Employment Rights Act 1996 (ERA) and the Working Time Regulations 1998 (WTR).   The Supreme Court held that, on the facts of the case, Mr Smith satisfied the key elements of worker status in that he undertook to carry out work personally for the Company and that the Company was not in the position of a client or customer of a business carried on by him.


There are three levels of employment status in the UK: self-employed, worker and employee. Self-employed individuals are not entitled to the same employment protections as workers and employees, and so, for example, are not entitled to protection from unlawful deductions from wages under the ERA or to paid annual leave under the WTR. Mr Smith brought a claim before the employment tribunal claiming that, although his contract described him as an “independent contractor” and he was registered for VAT, submitted invoices to the company and filed tax returns on the basis that he was self-employed, he was in fact a worker and therefore entitled to those rights.

The employment tribunal held that Mr Smith was a worker.  The Company appealed to the Employment Appeal Tribunal, and then the Court of Appeal, both of which dismissed their appeals. The Company then appealed to the Supreme Court which delivered its judgment on 13 June 2018.

Supreme Court judgment

On the facts of the case, the key elements which determined Mr Smith’s status as worker rather than self-employed were:

– personal service (proven by the lack of an unfettered right of substitution); and

– the fact that Mr Smith did not provide his services to the Company as a client or customer of a business carried on by him.

On these points, the Supreme Court agreed with the tribunal that Mr Smith had no unfettered right to substitution (Mr Smith in effect only being able to substitute himself with another Pimlico plumber). This limited right of substitution was not therefore inconsistent with the requirement of personal service for worker status.

On the second point, the Supreme Court held that, in spite of the fact that Mr Smith was entitled to reject work and was free to take on outside work and provided his own tools, the employment tribunal had been entitled to consider a number of factors as strongly indicating that the Company was not a client or customer of Mr Smith. These included the requirement that he wear a branded uniform, drive a branded van, carry an identity card and closely follow the administrative instructions of its control room; the severe terms as to when and how much the Company was obliged to pay him; the contractual references to ‘wages’, ‘gross misconduct’ and ‘dismissal’ in the documentation; and the suite of restrictive covenants regarding his working activities following termination.

So, on balance, the Supreme Court could see no reason to overturn the tribunal’s original decision that Mr Smith was a worker. He could therefore pursue his claims for unlawful deductions from wages and for holiday pay.

Whilst this decision may provide a useful indication of what particular factors may decide an individual’s employment status (and consequent rights), each case, as always, will turn on its particular facts.

BVerfG verwirft Drei-Jahres-Frist für sachgrundlose Befristungen nach Vorbeschäftigung

Einmal ist keineswegs kein Mal! 

Mit Beschluss vom 6. Juni 2018  (Az.: 1 BvL 7/14 und 1 BvR 1375/14), veröffentlicht am 13. Juni 2018, verwarf das BVerfG die bisherige Rechtsprechung des Bundesarbeitsgerichts (BAG) zu sachgrundlosen Befristungen und bestätigt die Verfassungsmässigkeit deren Beschränkung durch das Teilzeit- und Befristungsgesetz (TzBfG). Da rund 9% aller Arbeitsverhältnisse in Deutschland sachgrundlos befristet sind und diese Quote bei jüngeren Arbeitnehmern zwischen 20 und 30 Jahren sogar bei 30% liegt, hat die Entscheidung große praktische Bedeutung.

§ 14 Abs. 2 S. 2 TzBfG erlaubt die sachgrundlose Befristung eines Arbeitsverhältnisses nur, wenn zwischen den Arbeitsvertragsparteien vorher noch kein Arbeitsverhältnis bestanden hatte. Diese Regelung legte das Bundesarbeitsgericht seit 2011 einschränkend dahingehend aus, dass eine frühere Tätigkeit für dasselbe Unternehmen dann keine Relevanz mehr habe, wenn zwischen der Vorbeschäftigung und der neuen Befristung mehr als drei Jahre vergangen sind.

Das BVerfG erklärte diese Auslegung nun für verfassungswidrig. Es warf dem BAG eine unzulässige richterliche Rechtsfortbildung vor, weil dieses sich über den Willen des Gesetzgebers hinweg gesetzt habe. Im Gesetzgebungsverfahren war bewusst auf eine Karenzfrist, wie sie das BAG mit seiner Auslegung einführte, verzichtet worden.

Künftig sind sachgrundlose Befristungen damit unwirksam, wenn der Arbeitnehmer bei demselben Arbeitgeber früher bereits beschäftigt war. ‎Unwirksam sind auch bereits vereinbarte Befristungen, die im Vertrauen auf die Rechtsprechung des BAG abgeschlossen wurden. Im Ergebnis werden deshalb etliche in den letzten zwei Jahren sachgrundlos befristet abgeschlossene Arbeitsverträge unbefristet fortbestehen, wenn die betroffenen Arbeitnehmer sich auf ihre länger zurückliegende Vorbeschäftigung berufen.

Anders sieht das BVerfG dies nur dann, wenn ein unbeschränktes Vorbeschäftigungsverbot nicht erforderlich ist, um Kettenbefristungen zu verhindern und das Modell des unbefristeten Arbeitsverhältnisses als Regelbeschäftigungsform zu sichern. Davon könne beispielsweise auszugehen sein, wenn die Vorbeschäftigung sehr lang zurück liege, ganz anders geartet als die neue Tätigkeit oder von sehr kurzer Dauer war, wie bei geringfügigen Nebenbeschäftigungen während der Schul- und Studien- oder Familienzeit sowie bei Werkstudenten und auch bei einer Unterbrechung der Erwerbsbiographie, die mit einer beruflichen Neuorientierung verbunden ist. Hier sieht das BVerfG eine einschränkende Auslegung von § 14 Abs. 2 S. 2 TzBfG als geboten an.

Der betrieblichen Praxis ist mit diesen unscharfen Abgrenzungskriterien nicht geholfen, so dass sachgrundlose Befristungen nach einer Vorbeschäftigung künftig vermieden werden müssen. Dazu haben Arbeitgeber bei der Besetzung von sachgrundlos befristeten Stellen künftig vorab etwaige Vorbeschäftigungen der vor ihnen sitzenden Bewerber aufzuspüren. Ihre eigene interne Dokumentation wird – nicht zuletzt aufgrund der datenschutzrechtlichen Vorgabe, Daten früherer Arbeitnehmer nach angemessener Frist zu löschen – dafür kein zuverlässiges abschließendes Ergebnis liefern können. Sie dürfen die Bewerber jedoch nach einer Vorbeschäftigung fragen und diese sind zur wahrheitsgemäßen Auskunft verpflichtet. Diese Auskunft solllte zu Beweiszwecken in der Personalakte dokumentiert werden.

Will employers soon be under an obligation to require their employees to take holiday?

Although pursuant to Sec. 7 para. 1 of the German Federal Leave Act (Bundesurlaubsgesetz) it is the employer‘s obligation to grant holidays, in practice this usually occurs only after the individual employee’s formal request for holiday leave.

In the near future, the European Court of Justice (ECJ) must decide whether or not employers can – as currently – wait for an employee’s holiday request before granting holiday or if they are legally obliged to require employees to take at least the statutory minimum holiday, in order to prevent the employee being able to carry forward unused holiday entitlement to the following year or being entitled to payment in lieu of unused holiday.

Pursuant to current case law of the German Federal Labour Court, the employer is entitled but not obliged to request employees to take holiday leave, i.e. without receiving a formal holiday request. If the employee does not request holiday leave, the holiday entitlement is forfeited at the end of the reference period. Recently, however, several state labour courts have viewed this critically and declared themselves in favour of employers being under an obligation to require their employees to take holiday leave even without a formal request. Prompted by this, the German Federal Labour Court submitted a reference for a preliminary ruling to the ECJ.

The opinion of the ECJ’s Advocate General was published on 29 May 2018 and indicates that in the future employers will not be obliged to require their employees to take holiday leave in cases where it has not been formally requested. However, according to the Opinion, employers may nevertheless be required to prove that suitable measures were taken to allow the employees to take holiday leave. This could – according to the Advocate General – also include an obligation on the employer to inform the employee that if not taken their holiday entitlement will be forfeited.

Employers should therefore now request at an early stage in the holiday year that their employees book their holiday leave and should inform them that, if not taken, their holiday entitlement will be forfeited. The employer‘s request should be documented for evidentiary reasons. If the employee should nevertheless not request any holiday leave, it may be advisable for the employer to require the employee to take the holiday leave.

RGPD : nouveau facteur de risque en droit social?

Le règlement général sur la protection des données (« RGPD ») est entré en vigueur le 25 mai 2018. Il modifie la législation antérieure sur le traitement des données personnelles en supprimant notamment le principe de déclaration préalable à la CNIL. Cette déclaration est remplacée par une obligation pour l’entreprise de démontrer la conformité de ses systèmes de traitement des données, notamment par la nomination d’un délégué à la protection des données et l’obligation de notifier les violations de données. Les sanctions liées au non-respect de cette réglementation ont de quoi faire frémir les directions juridiques puisque les amendes que peut prononcer la CNIL peuvent aller jusqu’à 20 millions d’euros et 4% du chiffre d’affaires de l’entreprise concernée.

En matière de gestion du personnel, les flux de données sont nombreux, et le RGPD va concerner toutes les informations nominatives liées aux recrutements (donc aux candidats), à l’exécution du contrat de travail, mais également toute information nominative en lien avec la formation, la sécurité au travail, la médecine du travail, le Trésor Public etc.

L’employeur doit donc être en mesure de démontrer qu’il a informé les salariés, objet de ces données, des diverses caractéristiques du traitement des données telles que la base juridique du traitement, la source des données, leur durée de conservation, le droit d’accès. L’employeur doit également former les salariés qui traitent ces données, et, potentiellement, prévoir que le non-respect de la règlementation du traitement des données peut donner lieu à sanction.

Il conviendra donc d’informer et consulter le comité d’entreprise, le cas échéant, sur toutes nouvelles polices ou règles de gouvernance mises en œuvre afin de s’assurer que les salariés ont des instructions précises sur la façon dont ils doivent gérer les données. Ces polices et règles internes, dont le non-respect peut donner lieu à sanction, devront également être intégrées dans le règlement intérieur de l’entreprise (ou en annexe). En effet, en cas de contentieux portant par exemple sur une sanction ou un licenciement d’un salarié qui n’aurait pas respecté ces polices et contreviendrait au RGPD, les juridictions sociales vont s’assurer que ces formalités ont bien été respectées par l’employeur. A défaut, les juges pourraient considérer que la sanction prononcée (y compris le licenciement) n’est pas justifié.

Enfin, on peut s’interroger sur l’ouverture d’un nouveau champ de contestation pour les salariés ou leur représentants devant les juridictions sociales sur le thème par exemple du niveau d’information donné ou de la finalité du traitement qui pourrait créer un préjudice particulier aux salariés.

Il est donc important tant au regard de la CNIL que des salariés et de leurs représentants de s’assurer que tout a été effectué dans les règles.

Can a claim for compensation for unused holidays be inherited following an employee’s death during employment?

Pursuant to Sec. 7 para. 4 of the German Federal Leave Act (Bundesurlaubsgesetz) payment in lieu of accrued but untaken holiday is only possible if it cannot be taken due to the termination of the employment. On termination of the employment, the holiday entitlement automatically transforms into an entitlement to compensation.

In the event of an employee‘s death, regarding the question whether or not the employee’s heirs are entitled to claim compensation for any accrued holiday not taken by the employee, the German Federal Labour Court has held that it depends on the time of death:

  • If the time of death occurred after the termination of the employment, the entitlement to compensation was deemed to have already arisen and therefore passed into the estate;
  • If the time of death occurred during the employment, then the employee’s heirs were not entitled to compensation for unused holidays.

However, in 2014, the European Court of Justice (ECJ) by contrast also granted compensation in cases where the employment ended due to the employee’s death. As a result in October 2016 the German Federal Labour Court referred to the ECJ the question whether or not compensation in the case of an employee’s death during employment also passed to the employee’s heirs, if this was excluded by national inheritance law.

In his opinion of 29 May 2018 the ECJ’s Advocate General was of the view that employers are in any case obliged to grant heirs compensation for unused holidays. According to the Advocate General, employees of a public employer could directly invoke the EU directive; employees of a private employer could argue an entitlement based on Sec. 31 para. 2 of the European Charter of Fundamental Rights. Although the ECJ’s judgment is currently still pending, it is likely that in the future heirs will also be able to claim compensation for unused holidays in cases where an employment ends due to the employee’s death.

First-ever ‘Riders’ Statute’ signed in Bologna, giving food delivery company riders a set of minimum standards of protection

On 31 May 2018, at the City Hall of Bologna (the fourth most populous city in northern Italy), the city’s mayor, representatives of Italy’s three main workers unions (CGIL, CISL and UIL), and two food delivery companies active in Bologna (Sgnam and Mymenu) met and signed the “Paper of fundamental rights of the digital worker in the urban environment.” (the Riders’ Statute). The Riders’ Statute aims to grant riders who work for food delivery companies (Riders) a set of minimum standards of protection. Absent from this important meeting (and list of signatories) were the largest food delivery companies in Italy, Deliveroo, Foodora and Glovo. The Riders’ Statute will not therefore apply to these companies, or indeed to any food delivery companies operating outside Bologna but, nevertheless, given the rise of the food delivery business in Italy and the increase in the numbers of Riders in cities across Italy, it is worthwhile taking a closer look at what the Riders’ Statute provides.

First, the Riders’ Statute does not take a clear position on the central question of whether food company delivery riders are “subordinate workers” or “autonomous workers” in the Italian regime, a question also raised by the Labor Court of Turin in a recent decision [See link]. It does however introduce certain clear, specific and fundamental rights for Riders (some of which are already provided by  statutory laws). These include:

  • Riders have the right to be informed about the way their reputational rating is determined.
  • Riders have the right to receive certificates of professional experience if they decide to change company.
  • Riders must be insured against risks and civil liabilities.
  • Riders have the right to personal data protection.

The Riders’ Statute also introduces other rights which may be viewed as more controversial than the basic ones listed above, for instance:

  • Riders have the right to a minimum hourly wage, calculated in accordance with the relevant National Collective Agreement for employees carrying out similar tasks. Considering that the National Collective Agreement for employees in the logistic and transportation sector provides a minimum hourly wage of € 8,50/ hour (a much higher rate than Riders typically receive currently), this could have a major impact on the profitability of food delivery businesses in Italy.
  • Riders have the right to wage increases if they are required to work on public holidays or during the night. This clause in particular is incompatible with the ‘at will’ nature of the work of Riders and Riders’ right to refuse calls.
  • Riders have the right to refuse to work in bad weather. Like the bullet point above, this clause is incompatible with the nature of the Riders’ work.
  • Riders have the right to strike. This is a right granted by the Italian Constitution, but only if a subordinate employment is in place, which is not the case with Riders (at least until now).
  • Riders can be rightfully dismissed from employment only in the event of gross misconduct or serious breach of contract. As with the bullet above, this is another typical feature of treatment offered to subordinate workers only.

Our view is that the signing of the Riders’ Statute is in fact an important development in the general discussion and debate regarding the reasonable and proper treatment of Riders, an increasingly important type of worker in the Gig economy. It contains some clear and basic protections for Riders, but it seems to go too far in its attempt to bring Riders into the category of subordinate workers, introducing some rights that are rigid and incompatible with the flexible nature of the work of Riders.

We consider that national statutory legislation on the treatment of Riders and other similar workers in the Gig economy would be beneficial to all interested parties. Local agreements like the Bologna Riders’ Statute are helpful in that they force discussion and debate but can be harmful, especially if other cities pass similar Riders Statutes. There is in fact a great need for clarity and uniformity of rights and regulations relating to Riders across the entire Italian territory, in cities large and small. The uncertainty that currently prevails is not good for Riders, for  employers or, more generally, for the customers of food delivery companies.

Contempt of court and protected strikes

Where employees take part in a strike, albeit protected, they run the risk of being held in contempt of court and being held personally liable for a fine or even imprisonment. This is if they step outside the realm of acceptable conduct that has been sanctioned by a court order. This applies even if employees cannot be individually identified and linked to particular acts or omissions. Similarly, unions may be held in contempt of court and liable for a fine where they do not take reasonable steps to monitor and control their members’ behaviour during strikes.

In KPMM Road & Earthworks (Pty) Ltd v Association of Mineworkers & Construction Union & others (2018) 39 ILJ 609 (LC), employee-members of the Association of Mineworkers & Construction Union (AMCU) embarked on a protected strike against their employer. The strike soon turned violent as striking employees intimidated and forcibly removed non-striking employees and subcontractors from site and prevented further access to the site by blockading a section of the N11.

The employer approached the Labour Court for an order interdicting the employees’ unlawful conduct. The order was granted on 18 July 2016 and required the striking employees to stop threatening, intimidating, harming or assaulting non-striking employees and subcontractors. They were also interdicted from assembling or congregating within 2 000 meters of the site.

AMCU was also called upon to “… take all reasonable steps within its power to persuade the striking employees not to engage in the unlawful behaviour associated with the strike.” In spite of this order and correspondences to the union’s attorneys, the unlawful conduct and violence continued. The employer therefore approached the Court for a contempt of court order against the union and the striking employees.

In deciding whether or not the employees and the union were in contempt of court, the Court considered the test as set out in Fakie NO v CCII Systems (Pty) Ltd 2006 (4) SA 326 (SCA), which sets out that the Court (1) must be satisfied beyond a reasonable doubt that there was a refusal to comply with the order, (2) this refusal was wilful and (3) this deliberate refusal to comply was in the complete absence of bona fides.

It was found that the conduct of the employees breached the court order. The fact that individual perpetrators were not identified was of no consequence, as it was found that the employees had “… associate[ed] themselves with one another to act as a group, with a common purpose, to commit unlawful conduct in support of their strike, and persist[ed] with this conduct despite the existence of the order.” However, the Court noted the safeguard for innocent employees in that even if the doctrine of common purpose is applied, employees can exonerate themselves, as several did, by providing an explanation to the court by way of affidavit.

With regards to the union’s liability, it was held that it had not acted reasonably or taken reasonable steps to guard against the unlawful conduct of employees. The Court found that the union needed to act reasonably by pro-actively intervening where transgressions by its members occur, and ensuring it had responsible personnel on the ground to address errant employees. Only in these circumstances can the union legitimately say it took reasonable measures within its power.

The union was subjected to a fine of R1 mil suspended for three years and the employees subjected to a fine of R1 000, which the employer could immediately deduct from their salaries.

This article was written by Robin Vers, Associate,  Norton Rose Fulbright South Africa Inc

Restructuring due to AI technology

Technological advancements in artificial intelligence will impact heavily on the transportation industry and jobs.  Artificial intelligence in the transport industry is a double-edged sword.  While it will create new job opportunities, the technology will render others obsolete.  The question around the use of autonomous self-driving cars is no longer hypothetical.  All Tesla vehicles have the hardware needed for full self-driving capability. Volvo, which appears to be leading the pack, aims to have fully autonomous vehicles on the road by 2021. (Volvo is reportedly scaling back its ambitious self-driving car experiment)

Autonomous cars, could provide significant opportunities for freight and goods transport businesses.  On a safety and reliability level, with the human factor removed, the likelihood of road accidents could reduce by an estimated 80%-90%. (How Do Self-Driving Cars Actually Work? (Tesla, Volvo, Google); Self-driving cars could dramatically reduce the road toll)

While the possibilities for innovation are exciting, employers face a moral and legal dilemma, namely how best to transition the workforce, and how to manage such a transition.

Uber makes for an interesting case study in future readiness in circumstances where the status of Uber drivers are placed into question, because if Uber begins using AI technology to drive its vehicles, then  drivers who are recognised as employees may face retrenchment.

The company has faced litigation around the world on the simple question of whether Uber drivers are actually Uber employees.

The response varies in different countries. In the United Kingdom, the courts have held that Uber drivers are its employees.  (Uber loses appeal in UK employment rights case)  Conversely, in the United States, the courts have held that Uber drivers are independent contractors.  (Uber settles lawsuits to keep drivers as independent contractors in California and Massachusetts   In South Africa the Labour Court found that the contractual relationship is between the drivers (Uber SA) and Uber BV (based in the Netherlands).  It accepted the concession by the drivers that there was no contractual arrangement between them and Uber SA.  The Labour Court held that there was no employment relationship between the drivers and Uber SA but left open the question of whether the drivers were employees of Uber BV.  (Uber South Africa Technology Services (Pty) Ltd v National Union of Public Service and Allied Workers (NUPSAW) and Others (C449/17) [2018] ZALCCT 1 (12 January 2018))

At first glance, it appears that Uber’s stance that there is no employment relationship between them and the driver partners removes the drivers’ entitlement to certain employee rights and benefits, in turn reducing costs to Uber users.  The current relationship allows more flexibility on their part.  It is conceivably beneficial to their autonomous future that Uber is able to end their relationships with their current driver partners with minimal litigation and costs, without the need to pay severance to drivers pursuant to a retrenchment process should they venture toward driverless vehicle technology.

How can South African transport companies which are not in the same position as Uber transition into a driverless future?

Sections 189 and 189A of the Labour Relations Act govern the requirements if an employer is considering retrenchment.  Employers wishing to retrench due to structural and economic reasons must follow the provisions in that Act or be exposed to litigation due to unfair dismissals.  According to the Labour Relations Act, retrenchment should be the last option.

When transitioning into the future, employees across all sectors should diversify their skills to allow job flexibility and employers must understand the laws governing employment relations.  Moving into a more ‘tech driven’ workplace is inevitable.  The companies that transition the smoothest and adapt the quickest will be the ones which are able to thrive in the new environment.

This article was written by Lovanya Moodley, Associate and Nkululeko Tselane, Candidate Attorney, Norton Rose Fulbright South Africa Inc

Issues of employment status: pseudo self-employment and hidden personnel leasing in Germany

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.