Social standards for contractors proposed

In October 2013, German car manufacturer Daimler adopted minimum social standards for its contractors. The company’s new rules form part of an ongoing public debate on pay and working conditions for contract workers. The debate has been fuelled by proposals to extend the co-determination rights of works councils and a draft law to regulate service contracts put forward in February 2013. Unions back calls for more regulation, but employers’ organisations oppose it.

Background

On 7 October 2013, German car manufacturer Daimler released a statement, Daimler sets out social principles for contractors (in German). In it, Daimler establishes minimum standards for working conditions, health protection and accommodation for employees. The company requires all its contractors to pay their contract workers at least as much as the starting salary stated in the regional collective agreement. Contractors employing temporary agency workers must pay them the supplementary payments negotiated in the 2012 collective bargaining round in the metal and electrical industry (DE1206019I).

These new standards apply to all firms tendering for service contracts on Daimler’s premises, including contractors who are not bound by a sectoral or company-level agreement. Companies not working to these standards are excluded from the tendering process. An audit team is currently being set up to conduct random compliance checks.

Finally, the company’s new rules say that employee representatives must be told the results of the random checks. Daimler’s management will also keep employee representatives informed about operative planning and substantial changes to the use of temporary agency or contract workers on the company’s premises throughout the year. Any queries arising out of such information will be discussed between the representatives and management.

Daimler’s setting of social standards for its contractors has its origin in an ongoing debate on pay and working conditions for contractors.

Use of contractors

In Germany, service contracts (Werkverträge) are used in many forms, either by individuals or by companies. For example, many people hire self-employed craftsmen to paint apartments, install or repair plumbing and so on. Companies use suppliers or external service providers when there are specialised tasks to be done, such as journalists or graphic designers to create a brochure, IT firms to provide specialised services or suppliers to deliver components.

All service contracts share certain common features. The contractor agrees to produce a product or perform a service and, if this is satisfactory, the contractor receives an agreed fee for these products or services. The rights and obligations of the contractor and the client are stipulated in detail in the German Civil Code (BGB, paragraphs 631–651). Contract workers conclude an employment contract that sets out pay and other features of their jobs with the contractor who is their direct employer, not the ultimate client.

At the beginning of 2013, the Social Democratic Party (SPD) and the Left Party presented proposals for stricter legislation to regulate pay and working conditions for contract workers.

The SPD, for example, holds that increasing numbers of companies are contracting out core functions in order to reduce their labour costs. Their concern is that contract workers are being employed to circumvent collectively agreed wages or sectoral minimum wages. Since temporary workers were granted a minimum wage and sectoral pay supplements, they are being used less frequently.

The Left Party has said legislation is needed to prevent the misuse of service contracts to avoid paying the minimum wage for temporary agency work or other collectively agreed standards.

Regulating service contracts

Both the SPD and the Left Party acknowledge that there are no statistics for the prevalence and usage of service contracts. However, both parties have been calling for new regulations for contract workers for some time, but their proposals have reemerged this year during the widespread political debate on the issue and were, for example, discussed in the Bundestag (the lower house of the German parliamentary system) on 21 February 2013.

A key demand is the introduction of a presumption provision (Vermutungsreglung). The SPD argues that a catalogue of criteria should be created, on the basis of which a service contract can be presumed to be bogus. If a service contract were to meet a certain number of criteria from the catalogue, the onus would then be on the client company to refute the charge. Then, if the existing employment contracts were judged fraudulent, the contract workers would be entitled to be employed directly by the client company and to be granted the same pay and conditions as comparable regular workers. The Left Party, in fact, has already presented a draft law defining seven such criteria.

Both parties also favour extension of the co-determination rights of works councils. The SPD insists that works councils need greater rights to information about the pay and employment contracts of contract workers.

The SPD also wants works councils to have the right to veto the use of contract workers if it will have a negative effect on permanent staff. The Left Party supports similar information rights and, most of all, wants the Works Constitution Act to be amended to include a works council veto.

Both parties’ proposals have stimulated a heated debate between the social partners about the pros and cons of service contracts, which have long been in use in all industries.

Social partners’ views

The German Confederation of Trade Unions (DGB) believes there should be no further regulation of lawful employment contracts. However, the DGB agrees that there are signs that service contracts are being misused to depress wage rates and pass on business risks.

The DGB has stressed the need for a better legal demarcation between bogus and lawful service contracts and a clear-cut distinction for temporary agency work. If contract workers are doing the work of regular staff at the client firm, their employment contract with the contractor should be nullified and replaced with a standard contract with the client.

The Tax Enforcement Unit for Undeclared Work (FKS) should have more staff resources to help its officers detect the use of bogus contracts, says the DGB, and the unit should have exclusive responsibility for conducting such checks. The FKS should also have a complaints office to which works council members and employees could report suspected cases anonymously.

The DGB echoes the calls of the SPD and the Left Party for greater co-determination rights for works councils over the use of contract workers. This includes more information about their pay and working conditions, being involved in the planning of personnel capacity and deployment, and a right to veto the use of contractors in particular cases. A statutory national minimum wage and the possibility of extending collective agreements to cover all employees in a specific sector would, says the DGB, improve the situation.

Employers such as Gesamtmetall, the employers’ association for the metalworking and electrical industry, have warned against any further regulation of service contracts. In a position paper published in March 2013, the employer organisation called for an objective debate about such contracts.

It argues that service contracts are a core element of a market economy and widely used in the metal and electrical industries. As part of their daily business, companies have to continually review what work they should do themselves and what will be best done by specialised contractors. Contracting-out is not an illegal practice and service contracts are needed, not as a means to lower wages, but as a means of buying specialised services and expertise.

Gesamtmetall has acknowledged that individual cases of service contract misuse certainly need to be penalised. However, the employers’ organisation insists that current legislation provides sufficient sanctions if effective systems of inspection are in place. It therefore rejects any proposals to extend works councils’ co-determination rights or their right to influence management decisions about what to buy, make or outsource. It adds that any interference with entrepreneurial freedom would damage German industry.

The employers’ organisation correctly points out that contract workers have the same rights as any other group of workers to set up works councils in their firms and fight for collective pay.

Sandra Vogel, Cologne Institute for Economic Research (IW Köln)