Germany: Time to check international contracts for sub-contracting of services

Even companies with their registered seat outside of Germany and without any employees in Germany may face claims based on the newly introduced German Minimum Wage Act.

German Minimum Wage Act since 1 January 2015

The new German Minimum Wage Act (the “Act”) entered into force on 1 January 2015. It sets the minimum wage to EUR 8.50 per hour. Companies registered in Germany and abroad are responsible for the payment of minimum wage to their own employees working in Germany. They are also liable for the payment of the statutory minimum wage by their sub-contractor (and its sub-contractors) to its employees, as if they were a guarantor (the “sub-contractor-liability”) (section 13 of the Act). It is therefore vital to select any sub-contractor carefully and obtain at least contractual assurances that they do pay the minimum wage. Further contractual obligations are recommended depending on the specific risks linked to the individual contract. Failure to do so could carry a fine of up to EUR 500,000.00.

Sub-contractor-liability in case of companies registered outside of Germany

While the Act explicitly mentions that both, employers registered in Germany as well as those registered abroad are responsible for the payment of minimum wage to their employees, the Act is not as explicit in this respect with regard to the sub-contractor-liability. There has not yet been a court decision on this question nor has any legal commentary dealt with it.

Since this is a situation involving a conflict of laws, the rules and regulations of private international law will decide upon the sub-contractor-liability for foreign companies.

In the European Union the Rome I Regulation (EC No 593/2008 of 17 June 2008 on the law applicable to contractual obligations) applies. The parties' freedom to choose the applicable law is one of the cornerstones of the system of conflict-of-laws – not without limitations, though. Regardless of the choice of law, effect must be given to the so-called overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed. Rome I Regulation (Article 9) defines such overriding mandatory provisions as provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organization.

Generally speaking, there are not many "overriding mandatory provisions" in German employment law (e.g. protection against dismissals under the Maternity Protection Act is regarded as mandatory). There are some arguments against the characterisation of section 13 of the Act as an overriding mandatory provision, e.g., the Act mentions companies registered outside of Germany explicitly only in the context of the employer's responsibility for the payment of minimum wage, but not in the context of the sub-contractor-liability, and the sub-contractor-liability, therefore, only covers net-wages.

However, in our opinion there are more arguments in favor of the characterisation of section 13 of the Act as an overriding mandatory provision, such as:

• section 21 of the Act provides for an administrative offence for working together with a contractor being aware or negligently failing to be aware that such contractor fails to pay the minimum wage;
• the minimum wage will be guaranteed even if the employer becomes insolvent;
• all companies profiting from the employees' work will be held responsible for the payment of minimum wage;
• companies with a registered seat in Germany would be disadvantaged in comparison to companies registered abroad;
• companies could easily circumvent sub-contractor-liability by contracting via companies with a registered seat outside of Germany.

There is much to suggest that such claims fall under the jurisdiction of German employment courts (Articles 20 et seqq. of Regulation (EU) No 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters).

Besides the legal arguments, there are factual considerations which give reason to believe that employees who do not receive the minimum wage from their employer, e.g. due to its insolvency, will claim the minimum wage from their employer's contractors, regardless of the contractor’s registered seat. This is even more true due to the high visibility and political impact of the Act in Germany.

Outlook

In this light, it is recommended to examine any respective international service contracts to see whether they contain general clauses that already cover the risks linked to the broad sub-contractor-liability for German minimum wages. If not, such contracts should be amended accordingly on the basis of a risk-assessment exercise taking into account the industry sector, the number of employees and sub-contractors, and the reputation of the sub-contractors involved.