Co-operation with external IT resources

Co-operation with external IT resources

Drafting contracts for IT projects alongside the requirements of the AÜG serves as a starting point for achieving compliance, but it needs to be accomplished by accurate and effective project organization, project governance and thoughtful collaboration of the parties throughout the course of the IT project

Cooperation with external vendors and their personnel is very common in the IT sector. External support can be provided by temporary agency workers, contractors or service providers and their employees as well as self-employed freelancers. The distinction between these models, however, does not depend on the contract designation, but on the factual daily contract implementation.

The various models of cooperation can be defined as follows:

TEMPORARY AGENCY WORK

In case of temporary agency work, the temporary agency workers are leased by their employers to employer's clients. The latter (lessee) is entitled to issue instructions to the temporary agency workers, whereas the temporary work agency (lessor) remains their employer according to the German Act on Temporary Agency Work (Arbeitnehmerüberlassungsgesetz – AÜG).

The AÜG is applicable to all assignment operations on German territory, thus including both assignments from foreign countries to Germany and vice versa. Solely the temporary agency worker's activities on foreign territories are excluded, even if the client's registered office is located in Germany.

Temporary agency work will be an appropriate assignment model for IT-projects, where resources will have to be integrated into the client's establishment and receive instructions from the client. Leasing will be possible up to 18 months, which is the maximum leasing duration. Longer assignments will only be possible after the conclusion of collective bargaining agreements by lessees and the competent trade unions of the assignment sector.

CONTRACT TO PRODUCE A WORK

Due to advancing digitalization, IT-projects are increasingly "outsourced" and assigned to specialized IT enterprises, which act as contractors for the client. Regulated by Sec. 631 et seq. German Civil Code (BGB), the contractor is obliged to produce a promised work as defined between the parties. A contract to produce a work therefore requires the parties to define a distinguishable, intended result as "work". The contractor is responsible for achievement of the defined result and the client benefits from warranty claims should defects occur.

In case of a contract to produce a work, the parties should insist on a preferably extensive definition of the work (e.g. development of particular software). The contractor should maintain his own work organization, deployment planning and quality management to the greatest extent possible, usually also holding the profit responsibility. His authority to replace his agents should be incorporated in the contract to produce a work. The client might insist on incorporating a definition of the minimum skill set of the used agents and provisions on the exchange of the used personnel in predefined cases.

When the contractor is assigning his vicarious agents to the client's site, the latter ought to stipulate and follow up with a set of measures to prevent the agents from being integrated into the client's work organization and from receiving instructions from the client. Thus, the client's right to give instructions to the external personnel of the contractor should be explicitly excluded in the work contract. As this can lead to considerable delays and not all clients are willing to accept such a complete exclusion, the parties may choose to appoint a contact person in order to liaise on the progress of the project.

SERVICE CONTRACTS

Upon the conclusion of a service contract, the service provider is obliged to perform the promised services without owing a defined work result. The responsibility for the result remains with the client and the client therefore does not enjoy any specific warranty rights. Service contracts usually apply to the delivery of services like consulting and support services (e.g. "user help desk"). Different from an employee of the client, the service provider carries out the services under his own responsibility to organize the services. The service provider and his employees, who qualify as the provider's vicarious agents, are not bound by the client's instructions. Therefore, such cooperation can be entered into if the service provider carries out services without the need to be instructed due to his superior expertise. Against this background, clients should also assign other tasks to the service provider than to their permanent employees.

Service contracts can be used in all cases where the agreed services can be carried out by the service provider, who has his own business organization clearly separate from the client's organization, and without the need of permanent interaction with the client and instructions from his side. Alternatively, high-end experts, who act on a regular basis for various clients and who are consulting the client in their special field of expertise, might be commissioned as service providers for a limited period of time. The remuneration should express accordingly the services'´ higher ranking, which can be calculated on the basis of the effectively spent working hours or days as well as the consumed material on "time & material" basis.

However, in all cases working in mixed teams of the service providers together with permanent staff of the client instead of performing other tasks has to be avoided.

SELF-EMPLOYED FREELANCERS

The shortage of skilled IT experts also leads to the assignment of (fictitious) self-employed IT "contractors", i.e. freelancers. Even if the parties intend to conclude a service contract or a contract to produce a work, reality demonstrates that such freelancers are often integrated into the business organization of their client and receive their instructions for work on a nearly daily basis. Therefore, their distinction to the assignment of temporary agency workers is often particularly difficult, thus leading to a high risk.

Frequently, the assignment of such freelancers will not comply with the requirement of being free from instructions and not being integrated into the work organization of the client. If the key criteria of being subject to directions and integrated within the client´s organization are fulfilled, the "freelancer" as a natural person is considered a regular employee instead of a (fictitiously) self-employed person, so that both, he and the client, are subject to mandatory social security contributions. If these are not paid, freelancer's client and/or the end client are committing a crime due to social security fraud. The foundation of a single-person company by the freelancer usually does not prevent fictitious self-employment, if the legal entity is only a veil to evade social security.

IMPACT ON THE ASSIGNMENT OF EXTERNAL IT-PERSONNEL AND RECOMMENDED ACTIONS

The criteria for differentiation between the assignment models have to be followed with utmost scrutiny.

Due to the decisive character of the overall assessment of the contractual terms and factual circumstances of the co-operation, it is advisable for the parties to implement as many "characteristic" features of the intended assignment model into the contract as possible. Already during the process of making the sourcing decision on the intended form of cooperation and the compliant assignment option, the principles mentioned above in particular ought to be complied with.

Once the parties have reached the strategic decision to conclude a contract to produce a work or a service contract instead of a contract on temporary agency work, this decision should be clearly reflected within the IT-contract. A court that has to decide on the (non-)occurrence of hidden temporary agency work will consider all facts of the particular case, including the wording of all contractual provisions and the manner in which the IT-contract is factually executed by the parties. The parties should bear in mind that merely including clear language pointing to a specific type of contract will not protect them from the legal consequences of hidden temporary agency work if: (a) project organization and (b) the behavior of the parties are indicative of temporary agency work. In a nutshell, drafting contracts for IT projects alongside the requirements of the AÜG serves as a starting point for achieving compliance, but it needs to be accomplished by accurate and effective project organization, project governance and thoughtful collaboration of the parties throughout the course of the IT project. In this regard, the AÜG certainly creates challenges for the IT industry as the statutory requirements conflict with the established methods to successfully realize IT projects.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.