German Minimum Wage Act: is the principal also liable for the insolvency of subcontractors?

As we reported previously (Risk of “principal’s liability” pursuant to Section 13 of the German Minimum Wage Act), Section 13 of the German Minimum Wage Act (Mindestlohngesetz – MiLoG) provides for liability of the principal based on the model of general contractor’s liability pursuant to Section 14 of the German Employee Posting Act (Arbeitnehmerentsendegesetz – AEntG). This states that a company that commissions a (sub)contractor to render work or services is liable for the payment by said (sub)contractor of the minimum wage to its employees.

As we reported (Risk of “principal’s liability” pursuant to Section 13 of the German Minimum Wage Act), however, it is unclear whether the criteria developed by the Federal Labour Court (Bundesarbeitsgericht – BAG) for the exclusion of internal-company principals from liability pursuant to Section 14 AEntG also apply to Section 13 MiLoG. The legislator has not took a clear stand on this. We will report on this again when the matter has been clarified by the competent authorities or the courts.

Aside from this, however, there is a great deal to suggest that liability pursuant to Section 13 MiLoG in conjunction with Section 14 AEntG does not apply where the subcontractor fails to pay the minimum wage because it is unable pay it, i.e. because it is insolvent and not because it is merely unwilling to pay it. A court decision on this has yet to be passed. It is unlikely, however, that liability for subcontractors’ insolvency would be required for achieving the aims pursued by the legislator with MiLoG.

The liability set out in Section 13 MiLoG is intended to ensure that care is taken when choosing a subcontractor. It is intended to promote the choosing of diligent subcontractors and not free employees from the risk of their employer’s insolvency. In this respect, choosing as solvent a cooperation partner as possible is not sufficiently related to ensuring adherence to the minimum wage in the employment contract. On the contrary: a blanket obligation under Section 13 MiLoG to reduce the risk for subcontractors’ employees of the insolvency of their employer would have nothing to do with the objectives of MiLoG, so that this risk would have to be limited in conformity with the constitution. Indeed, another interpretation is that cooperation and division of labour in industry would be at risk in the long term. To use the words of Gregor Thüsing, MiLoG would “due to its very focus become a law preventing contracts for work” (Thüsing, Written commentary on the public hearing of 30 June 2014 in Berlin, Committee Bulletin (Ausschussdrucksache) 18(11)148, p. 56).

Conversely, an exclusion of insolvency cases would – where the authorities and courts support this assessment – request in the principal being liable under Section 13 MiLoG only in the event of its subcontractor’s “unwillingness to perform”, but not in the event of “inability to perform”, i.e. in the event of the subcontractor’s insolvency. Liability under Section 13 MiLoG would then no longer apply upon the filing with the competent court of a proper request to open insolvency proceedings (Section 13 of the German Insolvency Code (Insolvenzordnung – InsO)).

From the perspective of insolvency practice, it would in many cases be very difficult, if not indeed impossible, to continue the debtor in insolvency’s business operations in the event of a different understanding of Section 13 MiLoG (i.e. understood in terms of liability for solvency). This is because hardly any principal would be prepared to accept the risk of paying its illiquid contractor’s wages up to the minimum wage. Pre-financing of insolvency benefits affords, at best, only limited protection from this.

See also:

• Does the German Minimum Wage Act mean new rules for remuneration for on-call times?
• Risk of “principal’s liability” pursuant to Section 13 of the German Minimum Wage Act 
• Organisation of working time accounts after The German Minimum Wage Act comes into force 

Information on all practice-relevant matters relating to MiLoG and practical approaches to solutions are provided by the forthcoming book “Das Mindestlohngesetz in der betrieblichen Praxis – Grundstrukturen, Praxisprobleme und Lösungsansätze” (The German Minimum Wage Act in Commercial Practice – Basic Structures, Practical Problems and Possible Solutions) by Mückl/Pötters/Krause, which will be published in March 2015. More details (in German) can be found at www.rws-verlag.de/03820.