Definition and legal basis of employment companies
The term employment company refers in Germany to a labor market and insolvency law institution that specializes in the temporary continued employment, qualification, and placement of employees, particularly following corporate restructurings, closures, or insolvencies. Employment companies regularly operate based on corporate law structures, usually as a GmbH or non-profit GmbH (gGmbH), and carry out their functions within the framework of specific legal regulations.
The aim is to prevent unemployment through temporary continued employment and to promote transition into the regular labor market.
Legal classification of employment companies
Employment law framework
Employment companies must be treated in accordance with the requirements of German labor law. The employment relationship between the employee and the employment company is generally regulated by a so-called triangular contract, which includes the following constellations:
- Termination of the previous employment relationship with the previous employer, often based on a social plan and voluntary participation.
- Entering into a new fixed-term employment contract with the employment company under facilitated conditions pursuant to § 110 SGB III (Third Book of the Social Code).
- Supporting measures, especially qualifications, retraining, and job application support, which promote reintegration into the regular labor market.
Social law aspects
Employment companies are particularly subject to the provisions of the Social Code. According to § 216a SGB III, contributions from unemployment insurance (transfer short-time allowance, transfer benefits) may be claimed when employees transfer to the employment company as part of a social plan. These include:
- Entitlement to transfer short-time allowance, which is paid for up to 12 months.
- Entitlement to qualification measures, promoted, for example, by the Employment Agency.
- A prerequisite is the conclusion of a transfer or social plan between the employer and works council pursuant to § 111 et seq. BetrVG (Works Constitution Act).
Corporate law foundations
Employment companies are established in practice in various legal forms (typically GmbH or gGmbH) to reflect potential liability risks and organizational requirements. They are often supported by the transferring companies, works councils, and/or state actors. The founding modalities as well as the duties and rights of the management are governed by the GmbH Act and the respective articles of association.
Areas of application and function in German labor law
Relevance in restructuring and insolvency proceedings
Employment companies are essential instruments for cushioning mass redundancies, for example in the event of plant closures, outsourcing, or insolvency proceedings. They offer affected employees the opportunity to remain employed for a defined period, during which they receive individual support in job search, further training, and retraining.
Integration into a social plan and support through transfer measures are legally relevant. In insolvency proceedings, the employment company is often a part of so-called transfer companies pursuant to § 216b SGB III.
Distinction from other company forms
Employment companies in particular should be distinguished from temporary employment agencies and traditional personnel recruiters. While the latter pursue market-driven commercial interests, employment companies focus on temporary bridging of unemployment including qualification. Legally, there are differences with regard to social insurance obligations, employment contract design, and available financial support.
Financing and funding opportunities
Sources of financing
Employment companies are regularly financed from various sources:
- Contribution obligations of the transferring company, particularly in the context of social plan negotiations (§ 112 BetrVG).
- Public funds, particularly from unemployment insurance (transfer short-time allowance).
- Funds from the European Social Fund (ESF) or state programs.
Funding conditions and duties to cooperate
Funding requirements and entitlement conditions are governed by §§ 110 et seq. and 216a et seq. SGB III. A prerequisite is usually:
- A valid social plan including a transfer agreement,
- Approval of the works council,
- labor market-oriented use of the funds (especially qualification, coaching, and placement).
The employee undertakes to actively participate in the employment company’s reintegration measures; otherwise, funding may be forfeited.
Impacts, duties, and rights for employees and employers
Rights and duties of employees
By moving to an employment company, employees enter into a new employment relationship with its own duties and rights. Key points are:
- Entitlement to regular remuneration, usually based on transfer short-time allowance,
- Obligation to actively participate in qualification and placement measures,
- employment contractual obligation according to the new contract, but always for a limited period.
Rights and duties of employers
Original employers are regularly obliged to provide information and cooperate in the establishment and financing of the employment company if it is part of a social plan. There is also a duty to inform and notify employee representatives.
Conclusion and summary
Employment companies constitute a specialized instrument in German labor and social law to make dismissals socially acceptable and to promote qualifications and placement opportunities. Their establishment, financing, and operation are subject to strict legal framework conditions relating to labor, social, corporate, and insolvency law. They thus make a significant contribution to the social security and stabilization of the labor market in restructuring and crisis situations.
Frequently asked questions
What legal requirements must employment companies meet?
Employment companies in Germany are subject to specific legal framework conditions since they serve as labor market instruments to avoid or mitigate unemployment. The form of the company is crucial: Most commonly, they are non-profit GmbHs, associations, or foundations. The legal requirements are primarily determined by the social law regulations of the Third Book of the Social Code (SGB III). Employment companies must be approved as labor market providers, requiring certification pursuant to § 178 SGB III. Furthermore, close cooperation with the Federal Employment Agency and job centers is necessary to access funding. The General Equal Treatment Act (AGG) also applies without restriction to employment companies. Employees and assigned persons enjoy full labor law protection rights, such as those under the Protection Against Dismissal Act (KSchG), the Works Constitution Act (BetrVG), and the Working Hours Act (ArbZG). In addition, employment companies are subject to tax law provisions, especially regarding possible non-profit status.
How are employment relationships legally structured in an employment company?
Employment relationships in an employment company are generally structured as regular employment relationships according to German labor law. Employees usually receive fixed-term employment contracts in accordance with § 14 Part-Time and Fixed-Term Contracts Act (TzBfG), with the fixed term typically being project-based and grounded in public funding programs. Employees are protected by all relevant labor laws, such as the Minimum Wage Act (MiLoG), Maternity Protection Act (MuSchG), Federal Leave Act (BUrlG), or Collective Bargaining Act (TVG). The protection against dismissal regulations must also be observed; this often includes social selection (§ 1 para. 3 KSchG) and specific requirements for fixed-term contracts within the company. Employment contracts must be concluded in writing (§ 2 Nachweisgesetz/NachwG), expressly recording the job description, working hours, remuneration, and duration of the employment relationship.
What funding opportunities exist from a legal perspective for employment companies?
Employment companies can benefit from various funding opportunities under the Social Code (in particular §§ 16 ff. SGB II and §§ 216 ff. SGB III). These include especially wage cost subsidies from the Federal Employment Agency (integration subsidies), funds from the European Social Fund (ESF), and specific programs at the municipal or state level. Legally binding, however, is that funding must be purpose-specific and demonstrably used for the integration and qualification of unemployed persons. The requirements for funding and its scope are stipulated in funding notices and grant decisions. Funding is subject to extensive documentation obligations, and violation of these can carry liability consequences, such as reimbursement claims or criminal penalties for subsidy fraud (§ 264 StGB).
What co-determination rights does the works council have in employment companies?
The statutory co-determination rights of the works council under the Works Constitution Act (BetrVG) also apply in employment companies. This includes, in particular, the right to information and consultation (§§ 80, 82 BetrVG), the right of co-determination in individual personnel measures such as hiring, transfers, and dismissals (§§ 99, 102 BetrVG), as well as in social matters, such as the determination of working hours and breaks (§ 87 BetrVG). Works councils can monitor compliance with occupational safety laws, the implementation of qualification measures, and health protection. This applies regardless of whether the employment relationships are fixed-term or financed through public funding.
What liability risks do the management of an employment company face?
The management of an employment company is subject to numerous liability risks. In addition to general civil law management liability (§ 43 GmbHG, § 31 BGB), particular attention must be paid to the proper use of funding from a social law perspective. Improper use of funds can result in repayment claims by funding providers as well as criminal consequences, especially in the case of subsidy fraud under § 264 StGB. Violations of labor law provisions (e.g. minimum wage, working time recording, occupational safety regulations) can also have civil and administrative penalty consequences. In the event of insolvency, there is an obligation for timely filing for insolvency pursuant to § 15a InsO; failure to comply can lead to personal liability. In addition, compliance with non-profit law (for non-profit employment companies) is strictly required to retain tax privileges and recognition.
What regulations apply when terminating employment in an employment company?
Upon termination of the employment relationship, all applicable labor law regulations apply without restriction. This includes termination with notice periods in accordance with statutory, collective bargaining, or contractual rules (§ 622 BGB), extraordinary termination (§ 626 BGB), as well as expiry of fixed-term employment contracts (§ 15 TzBfG). In the case of dismissals for operational reasons, special dismissal protection, consultation procedures with the works council, and, where applicable, the mass dismissal notification according to § 17 KSchG must be observed. Furthermore, all parties must be informed of the termination in a timely and written manner (§ 623 BGB). When project funding expires, special transitional arrangements may apply, such as entitlement to transfer measures or outplacement counseling if agreed in individual or collective agreements.
What special features apply in data protection law for employment companies?
Employment companies are required to comply with all data protection regulations, especially the General Data Protection Regulation (GDPR/DSGVO) and the Federal Data Protection Act (BDSG). Due to the close cooperation with public bodies and the processing of particularly sensitive personal data (e.g. data on previous employment history or health data), higher requirements for data security and documentation of processing apply. The transfer of data to the Federal Employment Agency, job centers, or funding agencies always requires a legal basis, such as consent or statutory permission. Employment companies are required to appoint a data protection officer (§ 37 GDPR), if more than 20 people are regularly involved in automated processing of personal data. They must also guarantee comprehensive information rights to data subjects and implement technical and organizational measures to protect the data.
Are employment companies subject to control by external audit bodies?
Yes, employment companies are subject to control by external audit bodies in several respects. On the one hand, the Federal Employment Agency and the respective funding providers are entitled to inspect all documents related to the use of public funds and to conduct on-site audits. In addition, there is regularly a duty of audit by auditors or audit associations (for associations and foundations), who also check compliance with laws and bylaws. In the area of social insurance law, audits are conducted by the German pension insurance institutions regarding the proper remittance of social security contributions. Breaches of audit requirements can have extensive legal consequences, such as recovery of funding, fines, and, in the case of tax-privileged companies, withdrawal of non-profit status.
