Contracting Out is Common Among Firms in Germany and Comes in Various Forms

Contracting out, that is, firms hiring external staff from other firms to perform services for them, is widespread in Germany. Almost 90 per cent of all German firms outsource at least one of their core business functions, i.e. processes that directly serve the firm’s main purpose. On top of this, 60 per cent of firms outsource at least one process which has a supportive function within the firm. There are a variety of different reasons for the prevalence of service contracts. For example, one of the most common motives for using service contracts is the possibility to acquire specialised personnel or services on a temporary basis. Furthermore, not only can the working conditions of workers hired under service contracts vary greatly, but the implementation of contractual agreements can differ too.

These are the findings of a study conducted by the Centre for European Economic Research (ZEW), Mannheim, in collaboration with the infas Institute for Applied Social Sciences in Bonn and the Leibniz University of Hanover. The study, which was commissioned by the German Federal Ministry of Labour and Social Affairs, is the first of its kind to provide comprehensive, representative evidence on the prevalence, working conditions and realisation of contractual agreementsof contracting out in Germany. The basis of the study is a scientific survey of managers and works council members from a total of more than 9,500 firms.

Compared to hiring, the provision of workers fulfilling service contracts is concentrated in a much smaller group of firms in particular sectors of the economy. “For around half of the contractors, service contracts are more of a side business providing no more than 30 per cent of their revenue. That being said, around 12 per cent of contractors seem to specialise in service contracts, making over 90 per cent of their revenues through service contracts,” explains Dr. Michael Maier, a researcher in the ZEW Research Department “Labour Markets, Human Resources and Social Policy” and co-author of the study. Due to the great flexibility provided by the use of contracting out in the production process, the application spectrum of service contracts is very broad, ranging from firms who do not contract out at all to firmswho outsource some of their business functions while also carrying out service contracts for other firms.

Wage differences for workers involved in core business functions

According to the assessment of managers at firmsthat contract out, external workers hired under service contracts generally work under similar conditions as their permanent staff. There is, however, a clear difference in how workers deployed in firms’ core business functions are paid, with a considerable number of service contract workers being even better but rarely worse paid, at least according to managers. Works council members, however, assess the situation a little differently, claiming more often that service contract workers are worse rather than better off than permanent staff. Around 20 per cent of the surveyed managers believe that wage dumping through the use of service contracts is a common practice in their respective industry.

Service contracts and personnel leasing (temporary work) seem to be used to complement one another, with the majority of firmsnot viewing personnel leasing as an alternative to outsourcing. The legal distinction between the two ways of hiring external staff is not straightforward, however, meaning that there may be cases of firms implementing service contracts that, from a legal standpoint, more closely resemble personnel leasing contracts.

Grey area between service contracts and personnel leasing

In service contracts, the responsibility for carrying out the service agreed upon in the contract – and thus for the associated economic risk – lies solely with the contractor. This means that the contracting firm does not have any formal right of instruction as would be typical of a normal employment contract or a personnel leasing agreement. In practice, however, many firms implement service contracts which, in terms of risk assignment and rights of instruction, legally greatly resemble service contracts. “In particular in terms of who carries the burden of economic risk, the contractor in more than 80 per cent of cases bears the responsibility for any warranties. Between 20 and 40 per cent of firms implement service contracts containing quality control measures, which is not typical of a service contract, as the responsibility for providing the services does not lie solely with the contractor,” explains Michael Maier.

This suggests the existence of a significant legal grey area between service contracts and personnel leasing. Many of the firms in the survey describe business practices which, at least in certain aspects of the assignment of risk and instruction rights, differ from how service contracts typically should be drawn up and implemented. That being said, the actual percentage of firms knowingly or unknowingly using fake service contracts is difficult to narrow down empirically.

For further information please contact

Dr. Michael F. Maier, Phone: +49 (0)621/1235-307, E-mail: michaelf.maier@zew.de