Risks and consequences of hidden employee leasing

In practice, this is referred to as a concealed supply of labour if a contract for work or services has been concluded but the characteristics of a supply of labour are actually present.

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, there is a legal submission of the Temporary Employment Act (AÜG) before. This law defines what the conditions are for a hirer to be authorised to supply workers to a borrower. To do this, the relevant companies must have a licence from the Federal Employment Agency. This is called a licence requirement.

If this legal requirement is circumvented, it becomes problematic. A concealed supply of labour is deemed to exist if a contract for work or service meets the criteria of a temporary employment contract in practice. Temporary employment agency is not fulfilled. There are various factors that can be present here, for example, if it is a case of a concealed employee leasing. This can mean, for example, that the employees are integrated into the company organisation or that they are bound by the hirer's 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 concerned. This entitlement arises retroactively. This means that in such cases, salaries and social security contributions must be paid retrospectively. This naturally affects a company's planning security and can represent an enormous financial burden.

In the event of a concealed supply of labour, the contractual relationship between the hirer and the temporary employment agency is legally invalid.

Financial burdens and economic risks for companies

However, anyone who thinks that fines are the only thing a company has to fear is mistaken. Social insurance institutions, for example, are authorised to demand payment of their contributions. If these are not paid, these back payments can be demanded over several years, which can result in immense sums.

In addition, there are also potential claims for compensation from employees or third parties. Just think of the case of an accident at work. The employee can now assert claims against the company if the insurance company does not want to pay benefits because the contractual relationship is unclear. These are of course further financial risks.

However, affected companies also suffer economic consequences in addition to the financial consequences. If there is a covert hiring-out of labour, the trust of business partners and customers in the company may be lost. This impairs the company's competitiveness in the long term. The company's reputation can be seriously damaged.

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 that they have been deprived of essential rights as a result of the concealed temporary employment.

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 organisational challenges and internal consequences of covert employee leasing?

Once a hidden employee leasing has been identified, companies must comprehensively revise their internal processes. For example, contracts must be drafted 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. This means additional work for companies. The HR and legal departments must work well together to ensure that everything runs smoothly.

It is also important that managers and employees are informed about legal requirements in training sessions. The difference between contracts for work and services and temporary employment is clearly explained. Of course, this is costly for companies, but it can strengthen compliance and prevent future offences.

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 contractual relationships. 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.

It is important for in-house compliance to also work with external consultants or specialised lawyers. These are specialised in identifying weaknesses in existing processes and making appropriate recommendations for further action. Companies must also ensure that they regularly update their internal guidelines so that they can react to the current legal situation.

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

The role of the Federal Employment Agency and trade unions should not be underestimated in this scenario. The Federal Labour Agency is responsible for issuing permits. It is also responsible for monitoring compliance with legal requirements. In practice, this means that they investigate companies and check for violations.

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

The social dimension of hidden temporary work

Hidden employee leasing is something that is very common. However, this is not just an individual problem. It also has social implications. Employers and employees no longer trust each other and a rift develops between the two parties.

By taking their responsibility seriously and adhering to the legal requirements, companies can contribute to a fairer and more transparent labour market. At the same time, it is the task of politicians to ensure clear and comprehensible regulations that make it more difficult to circumvent 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 formulated and employment relationships are clearly 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

It is important that a rethink takes place at all levels. It must be clear to companies that although they may save money in the short term when using covert employee leasing, they may incur considerable costs in the long term and their reputation may also be damaged. It is therefore important that employees in companies are trained accordingly.

It is important that employees know their rights and actively assert them. You can turn to advice centres, trade unions or other institutions that can help you with your questions.

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

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