Risks and consequences of hidden employee leasing

In practice, this is known as concealed labor supply when a contract for work or services has been signed, but the actual conditions meet the characteristics of employee leasing.

In many cases, companies take a very relaxed approach to the whole thing, but the procedure actually harbours risks for all those affected. Employees often have to wait in a legally uncertain situation and companies risk high fines and damage to their reputation.

Estimated reading time: 8 minutes

What is temporary employment and when does it become problematic?

In the case of employee leasing the Temporary Employment Act (AÜG) applies. This law defines the conditions under which a company is authorized to supply workers to a client company. To do so, the relevant companies must obtain a license from the Federal Employment Agency, known as a licensing requirement.

If this legal requirement is circumvented, it becomes problematic. Concealed labor supply occurs when a contract for work or services effectively meets the criteria of a temporary employment contract in practice. temp employment are not met in such cases. Various factors may indicate concealed employee leasing, such as employees being integrated into the company’s structure or subject to the hirer’s direct instructions.

If there is such a deception, this can have serious legal and financial consequences.

Legal consequences of concealed employee leasing

The German Temporary Employment Act (AÜG) sets out clear rules on the level of fines for companies that make use of covert employee leasing. The amount of the fine depends on how serious the offence is and how many employees are affected by this offence. For small and medium-sized companies, such a fine can even threaten their very existence.

A further consequence is that the employee concerned can assert a claim to a permanent employment relationship with the company. This entitlement arises in retrospect. This means that in such cases, salaries and social security contributions must be paid retrospectively. This naturally affects a company's planning and financial security and can represent an enormous financial burden.

In the case of concealed labor supply, the contractual agreement between the hirer and the temporary employment agency is legally void.

Financial burdens and economic risks for companies

Anyone who thinks that fines are the only thing a company has to worry about is mistaken. Social insurance institutions, for example, have the authority to demand contribution payments. If these are not paid, these back payments can be demanded over several years, which can result in immense sums.

There are also potential claims for damages and demands from employees or third parties. Consider, for example, a workplace accident—if the insurance company refuses to cover benefits due to an unclear contractual relationship, the employee may file claims against the company. This, in turn, creates significant financial risks.

Affected companies face not only financial but also economic consequences. If covert employee leasing occurs, it can erode trust among business partners and customers. This can weaken the company's competitiveness in the long run and cause serious damage to its reputation.

What effects does the hidden AÜG have on affected employees?

Employees are often the victims in this scenario. They are often completely unaware of the legal situation and only realise at a later stage that they have been deprived of essential rights as a result of the covert hiring out of employees.

This can also result in serious damage for employees. If the employer has not paid the social security contributions properly, the employee may suffer gaps in their benefits. This means, for example, that pension insurance, unemployment benefits or health insurance are affected. If an employee falls ill or loses their job, this can threaten their very existence.

Furthermore, it is often difficult for employees to assert their rights against the employer. If the hirer and the lender shift responsibility from one to the other, it can be difficult for an employee to enforce their entitlement to holiday, continued payment of wages in the event of illness or even protection against dismissal.

What are the challenges and internal impacts of covert employee leasing on an organisation?

Once hidden employee leasing is detected, companies must thoroughly review and revise their internal processes. For example, contracts must be drafted again correctly. It must be clearly stated that these are contracts for work and services. They must also fulfil the criteria to distinguish them from temporary employment contract. This means additional work for companies. The HR and legal departments will have to work well together to ensure that everything runs smoothly.

It is also essential for managers and employees to receive training on legal requirements. These sessions should clearly explain the differences between contracts for work and services and temporary employment. While this may incur costs for companies, it helps strengthen compliance and prevent future violations.

It is also important for companies to take preventative measures. They must introduce a compliance management system to ensure that all relevant legal requirements are adhered to. This includes a regular review of existing contracts. It is important for companies to ensure that contracts for work and services do not contain any elements that could indicate the hiring out of employees.

Effective in-house compliance should also involve collaboration with external consultants or specialized lawyers. These experts can identify weaknesses in existing processes and provide tailored recommendations for improvement. Additionally, companies must regularly update their internal guidelines to ensure they remain compliant with the latest legal requirements.

What role do the Federal Employment Agency and the trade union play in this?

The role of the Federal Employment Agency and the trade unions should not be underestimated in these cases. The Federal Employment Agency is responsible for issuing permits. It is also responsible for monitoring compliance and legal requirements. This means that they investigate companies and check for violations.

Trade unions can help affected employees assert their rights. They offer advice and support in clarifying legal issues and can help to eliminate misunderstandings.

The social dimension of hidden temporary work

Hidden employee leasing is a widespread issue, but it is not just an individual problem—it also has broader social implications. When trust between employers and employees erodes, it creates a growing divide between both parties.

By fulfilling their responsibilities and complying with legal requirements, companies can help create a fairer and more transparent labor market. At the same time, it is up to policymakers to establish clear and comprehensible regulations that prevent circumvention of the AÜG.

What is the importance of transparency and trust?

One of the key lessons learnt from the problem of covert employee leasing is the importance of transparency and trust. Companies that base their business models on questionable practices not only risk legal consequences, but also the loss of their credibility.

Transparency means that contracts are clearly drafted and employment relationships are properly regulated. Trust, on the other hand, is created when employees feel that they are treated fairly and can rely on their employer.

Long-term prospects

A fundamental shift in thinking is needed at all levels. Companies must recognize that while covert employee leasing may provide short-term cost savings, it can lead to significant long-term expenses and damage their reputation. Therefore, it is essential to provide proper training for employees to ensure compliance and ethical business practices.

It is essential for employees to know their rights and actively assert them. They can seek support from advisory centers, trade unions, or other organizations that provide guidance and assistance.

The problem of hidden labour leasing can be solved in the long term through good cooperation on all sides.

Do you still have questions about covert employee leasing or are you looking for a legally compliant partner for temporary work? Please contact us. We will be happy to help you!