On 15 October 2024, the Federal Employment Agency updated its Technical Instructions on the Employee Leasing Act (Arbeitnehmerueberlassungsgesetz – AUG). The most serious change concerns the scope of the authorization requirement under the Employee Leasing Act. The inclusion of employees who work virtually for a company in Germany from abroad will affect employer of record models in particular.
Scope of the authorization requirement under the Employee Leasing Act
In principle, the scope of the authorization requirement under the Employee Leasing Act is limited to the Federal Republic of Germany in accordance with the territoriality principle. The Employee Leasing Act applies if the assignment has sufficient domestic relevance.
Therefore, the Employee Leasing Act covers the following areas:
- the assignment in Germany,
- the assignment extends across borders into Germany,
- the assignment across borders from Germany,
- the hiring out of an agency worker (Zeitarbeitnehmer) by a provider based abroad to a hirer/client based abroad if the agency worker is working in Germany.
Hiring out by a foreign provider to a domestic client is not covered if the agency worker is deployed exclusively abroad. This constellation relates to cases in which the performance of the work generally requires the employee to be present at a specific location.
Extension of the scope of the authorization requirement under the Employee Leasing Act in accordance with the updated Technical Instructions
The Federal Employment Agency extends the geographical scope under section 1.1.1. of the Technical Instructions as follows:
“Work that does not require presence at the company or at a specific location, that can be performed independently by the employee and that can generally be completed entirely using modern communication and information technology, such as a PC and internet connection, is generally suitable for exclusive teleworking or exclusive home office. A distinction must be made if agency employees work exclusively in a home office abroad or perform telework exclusively in their home abroad.
Whether a German employee leasing license is required and whether the AUG applies is a question of trade law that falls under public law. The assessment under social security law, tax law or employment law is not decisive. In order to protect the sub-labor market for employee leasing, the location of the agency worker’s physical location cannot be the sole criterion for work that is performed exclusively in the home office or as exclusive telework, regardless of location. Under authorization law, the decisive factor is whether the assignment has a domestic connection. This is generally the case for location-independent services if the assignment takes place from within Germany or the agency worker works virtually for a domestic hirer.”
The last sentence in particular harbors enormous explosive power:
- Firstly, it is more than questionable whether a domestic connection can be affirmed in the case of location-independent services if the person from abroad works virtually for a company in Germany. In this respect, there is likely to be a violation of the territoriality principle.
- Secondly, the Technical Instructions lead to increased legal uncertainty. In particular, there is a great deal of debate about what is meant by “virtual activity” – does it depend on virtual integration or should any virtual activity, e.g., brief email communication, be sufficient?
- Since the Federal Employment Agency regularly checks the reliability of staffing companies under trade law, the question arises as to how this can be done with respect to work that is done from abroad in a purely virtual manner.
Consequences and outlook
Even if the Technical Instructions are internal regulations, they shall be met in practice. Ultimately, the Federal Employment Agency decides on the basis of its Technical Instructions whether a situation is subject to authorization under the Employee Leasing Act.
Regulatory offense
The hirer/client in Germany commits an administrative offense under section 1 no. 1 lit. a AUG if the hirer allows an agency worker assigned to him by a staffing company without a permit, i.e., if the staffing company abroad does not have a permit to provide agency workers. The offense can be punished with a fine of up to €30,000. The staffing company abroad will also be interested in this sanction, as it wants to offer its customers in Germany a legally compliant solution and not jeopardize customer relationships.
Employer of Record (EOR)
The inclusion of virtual activities from abroad will pose challenges for providers of Employer of Record services. This is because if the EOR provider hires skilled workers abroad and they work virtually for a client in Germany, this is sufficient under the updated Technical Instructions for the affirmation of a domestic connection and thus for a license requirement. However, many EOR providers from abroad are unlikely to have a license for employee leasing, but at most their legal entity in Germany. Even if an EOR provider wanted to apply for a license, this could be precluded by § 3 art. 2 AUG. According to this provision, a license must be denied if the employee leasing activity is to be carried out in operational units that are not located in a member state of the European Economic Community or another signatory state to the Agreement on the European Economic Area. In this respect, EOR providers who offer alternative solutions in addition to the traditional employee leasing model are likely to benefit.
General trend towards the regulation of virtual space
With increasing digitalization and the relocation of work to the virtual space, regulation of the virtual space is becoming apparent, e.g., with regard to the scope of application of the Works Constitution Act to employees who work remotely from home or abroad. Increasing regulation is worthy of concern when it overshoots the mark, which is the case with the updated Technical Instructions on the Employee Leasing Act. Closely related to this is the current practice of status determinations. In the past, it was an indication of self-employment if the person did not work at the client’s premises but from home or remotely, but this has changed, especially since the start of the pandemic: As more and more employees are working from home or remotely, German authorities argue that working from home or remotely is typical of an employment relationship. The increasing flexibilization of working conditions and the resulting harmonization of employment relationships and self-employment relationships means that authorities and courts are increasingly viewing self-employment relationships as employment relationships.
In view of the recently passed Bureaucracy Relief Act IV, which aims to reduce bureaucracy, the updated instructions from the Federal Employment Agency represent a considerable step backwards.
Author
Dr. Thomas Leister
Osborne Clarke, Munich
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