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Foreign companies doing business with Germany should be aware of pitfalls created by the new minimum wage law (MiLoG)

On January 1st 2015 Germany’s first minimum wage law enters into force. Many (foreign) companies don’t see any reason for concern, since they are paying their employees working in Germany well above 8.50 Euro net per hour, the (in most industries) new minimum wage.

The real danger – however – is hidden in the new law and forces employers to carefully monitor their German contract management.

According to Article 13 MiLoG employers are fully liable towards employees for their subcontractors (including further subcontractors down the line) and service providers (such as cleaning companies, accounting, IT or other services) as far as the obligation to pay a minimum wage is concerned. An exculpation is not permitted, thus an active contract management is required to avoid substantial risks. These range from the obligation to pay the minimum wage to employees of their subcontractors and service providers (which may only be relevant in case of a later insolvency of these companies) to administrate fines and penalties of up to EUR 500,000.00 and the exclusion from the award of public sector contracts. In case of intent or gross negligence even a criminal liability exists, since any case of not paying the minimum wage automatically means that social security contributions are illegally withheld.

A careful choice of service providers is therefore essential. All existing contracts should be carefully checked. Further a constant contract monitoring is required.

Special care needs to be taken where services are offered at exceptionally low costs or through foreign contractors using foreign employees (which are usually paid on home country basis). To choose the cheapest service provider might seriously backfire in the near future.

Foreign contractors themselves must be prepared to allow their German partners a close look at their remuneration system. Further they have to adjust their business model, taking into account the German minimum wage payable to its own employees for the time they work in Germany. Finally they must be registered with the
German customs authorities before starting work in Germany.

Contract drafting thus becomes more important, as it must safeguard the interests of the parties involved, taking into account the final risks in case of non-compliance and the enforcement of claims against subcontractors and service providers.

The new German minimum wage law therefore creates the urgent need to immediately take a close look at all existing contractual relationships with subcontractors and service providers especially in low-cost industries.