How UK contractors will fare under Germany’s labour reform

The German recruitment market is responsible for over €22bn (£17.1billion) of economic activity, making it the fifth most active employment market in the world. And with the number of freelancers and self-employed in the country approaching 500,000, it is little wonder that the proposed limit to the AüG (Arbeitnehmerüberlassungsgesetz) licence has caused a stir, not only in Germany but throughout Europe, writes Matt Walters of overseas contracting advisory Capital Consulting.

Contracting in Germany: The Changes & Concerns

Presently, there is a legal requirement for any company that leases contractors to an organisation in Germany to have an AüG licence, with no restriction on the length of the engagement. However under the proposed German labour law reform, from 2017, all contractors will be classified as employees after 18 months.

One reason such changes have hit the headlines is due to the involvement of the Association of Professional Staffing Companies (APSCo), which opened an office in Germany last year. Since then, the association has declared war on what it regards as a “damaging” law that it says will have a largely negative impact on the flexible workforce, as well as the German economy.

APSCo expressed concerns that the proposals have been pushed through following pressure from trade unions to stem the increase of non-unionised labour, without fair consideration of the wider ramifications. In a further blow to the proposed change, 88 prominent German business leaders have published an open letter in the German national press, urging the government to reconsider under the tagline, “Don’t destroy good work through unnecessary laws”.

It’s Not Just Germany

It has also been said by those opposed to the changes that the German professional recruitment sector is in danger of falling victim to the restrictions of ‘one-size-fits-all’ legislation. Indeed, there is still a big gap between blue collar and white collar workers that is not reflected in current contractor legislation. The problem arises due to both being treated the same despite them having a completely different set of needs and priorities.

It is this broad strokes application of contractor legislation that is creating big problems. Similar stories echo across Europe with talks around IR35 in the UK and, more recently, the change to the status of the Declaration of Independent Contractor Status (Verklaring Arbeidsrelatie, VAR) in the Netherlands.

The aim of these changes, and something we continue to see introduced under different guises throughout Europe, is to ensure that the freelancer or contractor is not simply a ‘disguised’ employee and that clients (‘Klienten’) are fulfilling their social obligations, as deemed by the state, to their external workforce. The state’s stake in this, of course, is to ensure that workers are not left without social cover, which would ultimately prove costly for the state.

The Practical Upshots

In terms of the situation in Germany, while there is no accurate way to predict the impact of the AüG regulation changes, it is likely that, as the 18-month point approaches, agencies will seek to turn over workers, either by flipping them to the same client in another country or to a different client before bringing them back again. There has been concern expressed over whether contractors will be penalised if they exceed 18 months with a client, however, this will not be the case: if a contractor is extended beyond 18 months they will simply be deemed a full-time employee. While this is disadvantageous in many cases for the client, the contractor will not be negatively affected.

But there will be penalties for the client should the authorities notice a wrongful termination through the worker claiming unemployment benefits or via any audits or security checks that are carried out that show the conclusion of a contract beyond the 18-month point. In this instance, the client will face the consequences of Germany’s no ‘at-will’ employment laws, designed to prevent unlawful terminations. This makes the implications of letting a contract roll over extremely onerous for the client.

Realistically, recruiters (‘Werber’) are likely to put a system in place where contractors cannot and do not exceed 18 months with the same client. Reputable and shrewd agencies will try to ensure their revenue stream continues by providing another candidate to the client and trying to place the original worker with another company. It means that there will be a higher turnover and more administration involved, but this could turn out to be favourable for agencies as there will be a greater and more consistent need for their services. 

It is also worth pointing out to contractors (and employment agencies supplying the services of these workers) that not every use of contingent staff constitutes ‘labour leasing.’ If an individual is genuinely self-employed and will not work under the hirer’s supervision and direction, there is not necessarily a requirement for an AüG licence, nor will there necessarily need to be an employment contract between the agency and the individual. In such circumstances however, it is rare for the work to exceed 18 months in duration in any case.

Business-As-Usual

The long and short of it is that although this further tightening of legislation affecting contractors and temporary staff will change how workers are engaged, it will not change the need for a flexible workforce in Germany. The country still remains the industrial heartland of Europe and this is not going to come to an end as a result of changes to the AüG licence. Moreover, the contractor staffing industry across the world is renowned for its capability to ‘bounce back’ from legislative changes, so we think it is only a matter of time before the industry finds a way to work within this new set of rules and continues to thrive.