Differentiation between contracts for work and labour, service contracts and temporary employment

In German contract and labour law, a distinction is made between contracts for work and services, service contracts and temporary employment. It is important for companies to choose the right type of contract. This enables them to avoid legal risks and work efficiently with external service providers and employees. If a company chooses the wrong type of contract, this will have legal consequences. It is therefore important for companies to know exactly which form of contract to choose.

Definition of contract for work and services

These are two different forms of contract under German civil law. Their purpose and legal structure have significant differences. In both cases, one party provides a service. The obligations of the parties involved are very different. The contract for work is more concerned with achieving a specific result. In the case of a service contract, the activity itself is at the centre and no specific success has to be guaranteed.

What is a contract for work?

A work contract is regulated in §§ 631 ff. of the German Civil Code (BGB). The contractor undertakes to produce a specific work. The focus here is on achieving a specifically defined result that goes beyond the service. The contractor is only entitled to remuneration once the contractor has fulfilled the result in accordance with the contractual agreements and the client has accepted it.

In practice, this means, for example, the construction of a building, the repair of an appliance, the development of software or the creation of a work of art. The contractor is responsible for ensuring that the work is handed over free of defects. He is also liable for any defects and deviations from the subject matter of the contract. The client has the right to rectification or can also enforce a reduction in the price if the result does not meet the agreed requirements. In some cases, he can even withdraw from the contract.

What is a service contract?

In contrast, the Service contractwhich is anchored in Section 611 of the German Civil Code (BGB), is a continuous or one-off activity for which no specific success is owed. In this case, it is more important that the contractor provides a specific service and not that it achieves a specific end result. 

An example of a service contract is an employment contract. In this, the employee makes his labour available. However, the employee is not liable for the economic result. Contracts with doctors, lawyers or consultants are also service contracts. Here you pay for their work without knowing for sure whether the desired result will materialise. A doctor, for example, is paid for the treatment they provide. It is independent of whether the healing process occurs as desired. A lawyer is also paid regardless of whether the court case is won or lost.

Distinguishing features

The two types of contract also differ in the way they are paid. In the case of a contract for work, payment is only made after the contractor has completed the work and the client has accepted it. In the case of a service contract, the client tends to pay an hourly or monthly wage, regardless of the result achieved. This is particularly important for employment contracts, as the employee is paid for the time worked. It does not matter whether his work is economically successful for the respective employer.

Another important differentiating factor between the two types of contract is the fact that the contractor is bound by instructions. In a contract for work and services, the contractor works independently. He decides for himself how he provides his services. It is important that the end result fulfils the contractual requirements. This means that a contract for work and labour is less subject to instructions. In contrast, a service contract is much more subject to instructions. This is particularly true for employment relationships. For example, an employee is integrated into a company organisation by the employer. He is also subject to instructions from the employer with regard to his working hours, the type of work to be carried out and the location where he carries out his work.

How is the distinction made between a contract for work and a contract for services?

It is often difficult to draw a clear distinction between contracts for work and service contracts. Particularly in cases where the activities have the character of both a contract for work and a contract for services, the distinction can be difficult to make. 

Take software development, for example. Here, the employer commissions the development of a special software solution with clearly defined requirements for his company. This is clearly a contract for work and services. However, if the IT consultant is subsequently to provide continuous support and consultancy services, this is a contract for services. It is often the case in IT that software is developed first and then support is provided. In this case, the demarcation is difficult.

Normally, the distinction between a contract for work and a contract for services can be made on the basis of various criteria. In the case of a contract for work, a specific result is required. This is not the case with a service contract. In the case of a contract for work, the client accepts the result. This is not the case with a service contract. The client pays for the contract for work as soon as the desired result is achieved. This is also not the case with a service contract. With a contract for work, the employee has greater freedom. In the case of a service contract, the employee is often closely bound by instructions from the employer.

Temporary employment: definition and characteristics

The supply of temporary workers, also known as temporary employment, is regulated in §§ 1 ff. Temporary Employment Acteset (AÜG). In this case, a company, also known as the hirer, hires out its employees to another company, which is known as the borrower. The lender receives its remuneration from the hirer. The leased employees remain formally employed by the lender. They may be bound by the hirer's instructions with regard to day-to-day work. However, as far as working hours, holiday entitlement and the like are concerned, the hirer continues to be bound by instructions.

Temporary employment differs primarily in that the employee is integrated into the hirer's operational organisation. The employee performs his work for the hirer, who can also give him certain instructions. This is a decisive difference, as the contractor is not integrated into the client's organisation in the case of a contract for work and services.

The temporary employment are typically found in industries that have high, fluctuating staffing requirements. These are particularly peak periods such as Christmas or other public holidays. Logistics and production companies traditionally rely on temporary staffing. Companies in the healthcare sector also frequently rely on temporary staffing when staffing requirements fluctuate. German companies are therefore able to bridge short-term bottlenecks by using temporary workers. The advantage for them is that they do not have to enter into long-term employment relationships.

How is the distinction made between a contract for work, a contract for services and the supply of temporary workers?

Companies must make a clear distinction between these three types of contract. A faulty contract can have legal consequences for the client and the contractor. Illegal employee leasing and bogus self-employment in particular can result in high penalties.

The difference between a contract for work and labour leasing is, for example, that the contractor owes a specific piece of work. The contractor works independently. However, he is not integrated into the client's business. If the situation is different in practice, there is an accusation of concealed employee leasing.

In the case of a service contract, it is often somewhat difficult to distinguish it from a temporary employment contract. A genuine service contract is normally an independent service. If the client integrates the service provider into his company and subjects him to instructions, this is a temporary employment contract.

What are the legal consequences of an incorrect choice of contract?

If the wrong type of contract is chosen, this can have considerable legal and financial consequences for all parties. Hidden employee leasing in particular can result in severe sanctions under the AÜG. 

If companies work with temporary employees who are, however, declared as a work or service contract, social security contributions may be demanded, there may be criminal consequences or the employee concerned may even have to be permanently employed by the company.

Companies must therefore clearly differentiate between the contents of the contract. If companies actually operate a temporary employment agency but mistakenly conclude contracts for work or services, the authorities can demand additional social security contributions, impose criminal penalties or even order the employee concerned to be permanently employed by the company. In cases of uncertainty, legal advice should be sought.