Germany – a changing contractor landscape … or is it?

As with all proposed legislation changes any impact on the way in which our contractor workforce is engaged will naturally create some uncertainty in the market. The proposed German legislation changes that were initially due to be rolled out on the 1st Jan 2017 and which were subsequently postponed to 1st April 2017 are no exception.

To be clear the new legislation is a revision of the existing AÜG labour leasing legislation and whilst certain aspects of the legislation have knock on effects on the definitions of employees/self-employed workers the majority of the changes relate to “AÜG model” Temporary Agency workers.

It is generally recognized that there are 2 principal routes to market in most EU countries Germany included, these being Self-employed “Contract model” and AÜG Leased workers “AÜG model”. The new legislation will require suppliers (Employment Businesses and Consultancies) of Contractors to clients to define the model being used “Engagement Model” for their specific resources formally prior to commencement of any assignment. This is resulting in some administrative contractual amendments being required between Suppliers and their clients and additional levels of due diligence being performed at both candidate and client level.

The models explained:

“Contract model”– Individuals are setup in Germany as self-employed with German Tax and VAT registrations and either Social security registration or a recognized German Medical healthcare policy permitting them to opt out of social security (expats and locals alike). These are typically “Sole traders” rather than Ltd companies (GmbH/AG etc).

The rules around operating under the “Contract model” change little under the proposed legislation changes other than perhaps bringing back into the spotlight the requisite criteria to be recognized as Self Employed and not be open to reclassification under deemed employment.

Some general guidelines to respect under the “Contract model” and best ensure Candidate suitability based on German self-employment criteria:

• Ensure the job specification supplied is all encompassing and details all the aspects of the role to a point that it can be demonstrated the individual would know their role based solely on this information to avoid having to see further clarification on site with other client employees.
• State that the consultant is choosing to work as an independent contractor/freelance and not as an employee.

State that if the consultant feels their work situation changes and that this might impact on their status/classification that they must at the 1st available moment make all parties aware of their concerns both verbally and in writing (email is acceptable).

• State that consultants should provide their own tools and equipment (logic should prevail here).
• State that consultant should be able to demonstrate absolute autonomy for their own work / self-governed.
• Show that consultants must provide own German recognised professional insurances (PI & PL).
• Show that consultants must be free to define their own place of work.
• Show that consultants must be free to define their own hours of work.
• Consultants should ideally be paid on the basis that a milestone has been achieved rather than per day/hour units
• Demonstrate multiple clients and that less than 5/6 (83%) of their revenue is generated from any one client in a defined period.
• Demonstrate they have their own professional (Website. This demonstrates a financial investment in their own business and also an active search for prospective clients.

Client suitability in terms of the manner in which the Candidate will be used “How the contract is lived” is most important to ensure this also meets the requisite requirements of the “Contract Model” criteria.

From a client agreement perspective you need to consider things to avoid and you should be seeking written confirmation in some form of your Clients commitment to…

• Avoid Fixed hours (such as min 8 hours per day)
• Avoid Fixed/predetermined work location
• Any mention of holiday/bonuses/salary
• Avoid SDC (Supervision/Direction/Control)
• Avoid the use of the workers in existing teams of employees
• Avoid shared workspace/offices with employees if possible (some German clients have now taken this a step further and now have separate floors/buildings/entrances for contract workers)
• Avoid shared facilities such as canteens/carparks/staff parties/staff meetings
• Avoid provision of tools / equipment by the client (logic to prevail)
• Avoid client e-mail addresses/telephone numbers/ business cards
• Avoid client uniforms
• Avoid restrictive clauses limiting the workers ability to work for multiple clients
• Review access policies for sites such as security swipe card access v’s sign in as visitor for each visit and exit

In summary none of the above requirements represent a change…these rules applied previously and this is just a reminder of the criteria to respect under the “Contract model”.

Potentially the most dramatic change based on the new AÜG legislation is the retraction of the “Parachute mechanism” which currently permits a supplier who holds a valid AÜG license to move “contract model” contractor to their AÜG model in the case of a reclassification status by the client or the German authorities.

Recruitment firms active in the German market note increased activity from end-user clients asking more questions of suppliers and asking for specific details related to the assigned Contractors. This has included questionnaires from Clients to suppliers based around the standard questions usually asked by the German Social Security services.

There are also reports of more extreme situations whereby certain German clients have taken this a step further by physically segregating their own “Staff/employees” from external resources such as Sole traders and Leased workers by basing them in separate buildings/floors within buildings away from their internal employee workforce.

One of the most common questions faced currently is “do we need to/how do we move our “Contract model” workers to “AÜG model ahead of the legislation being implemented in April?” The answer is relatively simple, if you feel your workers fall short of the “Contract worker” criteria then you need to act to remedy the situation now irrespective of the legislation changes.

“AÜG Model”– The AÜG model is essentially a Payroll model via an authorized AÜG License. The key consideration for Suppliers being that the AÜG holder is legally required to contract directly with the Client and as such suppliers/employment businesses must relinquish direct contracts and instead operate bespoke margin only agreements with the AÜG holder.

The above contractual chain is mandatory given that the new legislation makes “Chain leasing” illegal as of the 1st of April with serious legal and financial consequences for all parties in the contractual chain.

There are other critical considerations with operating via the “AÜG model” such as funding, payment terms, and additional costs for Statutory Holiday/Sickness and employer’s social security costs which should be discussed in detail to avoid unexpected complications later in the process.

SO to recap the key changes for the AÜG legislation include:

• Removal of Parachute mechanism as a fallback position.
• Chain leasing classified as ILLEGAL
• AÜG employment has been limited to 18 months in the new legislation however additionally there are now several other clarifications:18 months for the worker not the role therefore replacement of the worker for the same role @ 18 months for a further 18 months is permitted.
• If the worker leaves for a period of 3 months at the end of the contract they can then return for a further 18 months.
• At the 18 month limit the worker will become a true employee of the END CLIENT but the worker can now REJECT/REFUSE this transition but the process to do so is heavily administrative and involves a physical visit to the employment office locally within 1 month of the offered transition and then within 3 days of this to confirm refusal to the END CLIENT.

To conclude, Yes there are changes to be considered and Yes everyone should expect variation in their Modis Operandi with clients, suppliers and candidates alike however it’s equally possible to argue that if you have always followed the “Contract Model” rules and your Contractors are true Contractors and live the contract as such then nothing changes…

This article has been prepared by the Contractor Management Firm 6CATS.