Germany: New evidence on the scope of service contracts feeds into social partner debate
In the wake of the very heated public debate on service contracts, with unions claiming that workers on such contracts are not treated as fairly as core staff, a new study by the Institute for Employment Research (IAB) outlines to what extent German companies use these contracts and presents their motives for doing so.
In autumn 2016, the German Federal Parliament passed new legislation on temporary agency work. The original bill included stricter rules on contracted work but this was changed significantly under the influence of the social partners, which have long had divergent opinions on this topic. Indeed, the Confederation of German Trade Unions (DGB) has been fighting this practice for years. In legal terms, it is not the client but the contractor who is accountable for its workers and who is also responsible for the contracted workers’ pay and working conditions. Unions point out that contracted workers are not treated on equal terms with core staff and face worse working conditions and pay. However, companies and employer organisations, such as the German Confederation of Employers’ Associations (BDA), hold that service contracts are a common feature of the German economy, improve productivity, safeguard jobs (in service companies) and should not be further regulated.
So far, there has been little representative evidence on how many companies use service contracts and why. Now a report offering a thorough analysis of the use of on-site service contracts (PDF) has been produced by the Institute for Employment Research (IAB).
Use of service contracts
As the name suggests, such contracts are used for services that are performed on the contractor’s premises. The report, published on 2 December 2016, maintains that on-site contracted workers are most likely to compete with either core staff or temporary agency workers hired by the client.
In the fourth quarter of 2015, as part of its Job Vacancy Survey, IAB surveyed around 12,900 establishments and public administrations on their use of service contracts. Data from this representative survey indicate that around 26,000 establishments and administrations used on-site service contracts involving 212,000 on-site contracted workers in the fourth quarter of 2015. This compares with the over 43.4 million employed people in Germany reported by the Federal Statistical Office (Destatis) for the same quarter, of whom, according to the Federal Employment Agency (BA), 31.1 million were in jobs liable to social security contributions at the end of 2015.
According to IAB, on-site contracted workers were present in every sector. In the last quarter of 2015, the highest proportions were found in the food/textile/furniture industry (15%), in construction (12%), in information and communication (10%) and in other business services (10%). They were also employed in chemicals, glass and the building material industry (8%), logistics and transportation (7%) and in (electrical) engineering and vehicle construction (6%). Altogether, around two-thirds of all service contracts were concentrated in these industries. However, only around one-third of all employees in jobs liable to social security contributions work in these sectors.
Although bigger companies used service contracts and contracted workers more often (some 78,000 contracted workers in the fourth quarter of 2015), smaller and medium-sized companies also had a notable number of contracted workers on their premises. Medium-sized companies worked with around 62,000 such workers while smaller companies used around 72,000 in the fourth quarter of 2015.
Motives for using service contracts
IAB also carried out 30 in-depth telephone interviews to learn more about why companies use such contracts and how they go about it. The interviewees were either company or personnel managers. Although the data cannot be regarded as representative because of the small number of interviews, the research nonetheless provides a starting point for probing deeper into companies’ needs and motives.
The interview results show that on-site service contracts were used for many activities, such as cleaning buildings, taking care of deliveries, carrying out studies and operating special machines. On-site services do not necessarily involve low-skilled work and can include highly specialised labour. By their very nature, service contracts tend to cover a fixed term. While some managers suggested that this was important to ensure freedom of choice and to be able to switch contractors (especially when services were not performed satisfactorily), others pointed out that the contracts were limited to the period of the project they covered. However, 7 out of the 30 companies interviewed had concluded open-ended on-site service contracts.
When asked about the reason for using on-site service contracts, most companies stated that the task in question was no longer part of their core competencies and they therefore did not want to retain core staff to perform it. As the IAB report indicates, saving on recruitment and retention costs for (skilled) personnel was the main reason for outsourcing activities. It should be noted that 35% of the companies who had used on-site service contracts in the fourth quarter of 2015 had, in the previous 12 months, also experienced labour shortages that had prevented them achieving their full economic potential. Moreover, 27% of companies with on-site services contracts had failed at least once to find suitable labour themselves. Establishments without on-site service contracts were far less affected by labour shortages, with only 10% reporting a lack of skilled labour. These findings suggest that outsourcing certain tasks serves as a strategy for solving the recruitment troubles of companies and administrations .
Other motives for using on-site working contracts included increasing internal flexibility and being able to deal with orders received at very short notice. A small proportion of those interviewed also said they needed specialised services, such as maintaining and repairing machinery.
Around two-thirds of the managers interviewed stated that contracted workers did not do the same work as their core staff. Only when internal flexibility was the major motive for outsourcing might contracted workers and core workers perform the same task. Such was the case, for example, when contracted workers were hired to cope with unusually full order books or seasonal business. Finally, companies outsourcing work reported being satisfied with the quality of the work performed, the qualifications and availability of contracted workers and the cost savings achieved.
One-third of the interviewees indicated that they had no idea about the contracted workers’ pay and working conditions. Another four interviewees said they had only a vague idea about this. Only a few managers could name differences in working times or applicable collective agreements. Given the legal setting for service contracts in Germany, such answers were to be expected.
As IAB notes, there is likely to be an increase in skilled labour shortages in the future, and on-site service contracts can be expected to play a greater role in such a scenario. What is interesting about the research institute’s results is that companies use on-site service contracts to avoid labour shortages, suggesting that on-site contracted workers complement, rather than replace, core workers. However, it remains an open question why contractors find it easier than client companies to find suitable personnel.