Hidden employee leasing is the case when a company officially acts as a service provider but is actually leasing employees. In this case, the statutory provisions are not complied with. In such a case, a work or service contract is concluded, but in fact all the factors for a concealed employee leasing are present.

This is very risky for both companies and employees. As the legal provisions are not complied with, it leads to considerable problems for both sides. If you look at the issue internationally, it can be further exacerbated by different labour law templates and cultural circumstances.

Definition and basics: What is a hidden temporary employment agency?

This case always occurs when a company formally recognises a Work or service contract is concluded. In practice, however, all legal requirements for these two contracts are circumvented and a concealed hiring-out of employees occurs. In this specific case, this means that an employee is assigned to a company to perform work without the corresponding authorisation or the corresponding assignment contract.

In Germany, the Temporary Employment Act (AÜG) this area. Internationally, however, the various regulations vary. Some countries have similarly strict regulations as Germany. Others are less strict or define this area less clearly.

It is important to know that a contract for work and labour contains a concrete result of the work. The service contract regulates the provision of a specific activity, whereby the result is not the main focus. A classic example of service contracts are doctors or lawyers. They receive their fee for their work without the aim of the contract being a cure or winning a court case.

In the case of employee leasing, an employee is made available to a company. The employee is subject to the instructions of the company. This is problematic as it contravenes the law.

Legal framework conditions in the international environment

If you look at the situation from an international perspective, it becomes very confusing. In Germany, there is a clear regulation in the Temporary Employment Act. There are different regulations in other countries.

The EU has drawn up directives, such as the Posting of Workers Directive for cross-border Temporary employment has to look like. However, the implementation of these directives varies from country to country. The problem for international companies is that they have to comply with national laws as well as European and international regulations.

Country-specific requirements

It is important to note, for example, that many countries have different requirements for the authorisation and registration of temporary workers. 

Take France, for example. There are strict regulations on temporary labour here. They require detailed registration and reporting to the authorities. The Netherlands has a different approach. Here, there are special collective labour agreements in which the regulations for temporary employment are laid down. If you take an international view and look at the USA, the legal situation can vary from state to state. This makes the situation very complex for companies that operate internationally.

The definition of temporary employment is also handled differently in many countries. In Germany, the focus is clearly on whether the employee is bound by instructions. It is also important whether the employee is integrated into the company. In other countries, it is more important how long an employee is loaned to another company and what the contractual arrangements look like. For companies that deploy their employees across borders, it is therefore particularly important that they know the respective national particularities and units. This applies both to the regulations in their own country and in the country to which the employee is posted.

Consequences of hidden temporary work

If a concealed hiring out of labour exists and is discovered, there is a risk of high fines. This also has tax consequences for a company. The employee also has the right to claim back social security contributions. In addition, they can insist on being taken on by the company and subsequently placed on an equal footing with permanent employees. Especially with regard to salary, sickness and pension payments, this can quickly lead to very high sums.

A major problem of covert employee leasing in an international context is also the competent jurisdiction and applicable law. Sometimes it can be difficult to define which national laws apply when the employee is hired in one country but works in another. This often creates legal grey areas, which can increase the risk of covert employee leasing.

Social security and tax issues in an international context

Tax issues and social security regulations in particular are a major problem in an international context when a hidden employee leasing is involved. If a company deploys its employees across borders, the regulations of their home country and country of deployment apply and must be observed. The A1 certificate, which is required for postings within the EU, plays a key role here. Without correct declarations, there are sanctions and legal problems in both countries.

From a legal perspective, problems can arise if the employee is effectively assigned to a foreign company. If this is not reported correctly, either tax evasion or double taxation may occur. It is therefore important that companies fulfil all tax obligations in their home country - and in the employee's country of assignment - correctly.

What are the problems and risks associated with hidden employee leasing?

Hidden employee leasing has various risks for both companies and employees. For example, there is the risk of bogus self-employment. This is always the case when a de facto contract for work or services has been concluded, but the employee is de facto bound by the instructions of the leased company and is also integrated into its organisation. These are both criteria of a temporary employment contract. Since it is declared differently here, it is a concealed employee leasing.

Employees who work in a hidden temporary employment agency have no social security cover. There may be gaps in the social security system. Employees miss out on pension entitlements, unemployment insurance and health insurance. They therefore lose important protective rights for themselves. There are legal consequences for the company.

Prevention and measures that compliance can take over

Clear measures through compliance are important for companies so that they can avoid covert employee leasing. The task of compliance here is to ensure that the year of employment, models and contracts are carefully scrutinised. This is particularly important in an international context. This ensures that work and service contracts are correctly delineated.

It is also important for companies to work with specialised legal advisors. These experts are very familiar with national and international labour law requirements. They then help the company to adapt the employment year models in line with legal requirements. Managers and HR managers must also receive regular training so that risks can be minimised.

Often in companies, the compliance employees themselves can also be such specialised legal advisors. This is of course the best case, as they are familiar with this area. However, there are also cases in which the compliance department in a company works together with specialised legal advisors.

Digital working models and new challenges

Remote working has increased significantly in recent years. In addition, the world of work is becoming increasingly digitalised. For companies, however, this means that the problem of hidden labour leasing is becoming much more acute. Virtual working models make it more difficult to distinguish between services and temporary employment. Particularly in an international context, the boundaries become blurred when employees from their home country work for a foreign company.

It is important for companies to have clear legal regulations in this case. They must also correspond to the actual working conditions. Particularly in the case of remote work, it is important that the employee is not integrated into the organisation of the company providing the assignment and does not receive any instructions from there. The remote employee is still bound by the lending company's instructions and is also integrated into its organisation.

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