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3 July 2019

Act to Com­bat Un­law­ful Em­ploy­ment and Ben­e­fit Fraud

  • Germany adopted the Act to Combat Unlawful Employment and Benefit Fraud in June 2019. The new legislation gives major reinforcement to the customs administration’s special monitoring unit for undeclared work, which now gains a number of new powers and is set to receive a significant boost in staffing. This will enable the unit to fight unlawful employment and the misuse of government benefits more consistently and effectively.
  • The new legislation provides employees with better protection against pay that does not meet the minimum wage, against employers who fail to remit social security contributions, and against exploitation in general.
  • At the same time, it safeguards the government revenue needed for investing in the future, strengthens law-abiding companies by ensuring fair competition, and helps the unemployed by improving their chances of finding legal work.

Introduction

Unlawful employment, benefit fraud and undeclared work cause major shortfalls in tax revenue and social security contributions. In addition, they harm law-abiding employers and all of the workers who have to pay higher social security contributions in order to compensate for these losses. The workers who participate in such arrangements also suffer: they have to work under poor conditions, their employers do not comply with occupational safety rules and minimum wage rules, and they receive less protection and fewer social benefits. Finally, these harmful activities undercut competition: fraudulent practices allow companies to offer significantly cheaper products and services, which can crowd out law-abiding companies, precipitate the loss of legal jobs and hamper job creation.

To counter these problems more effectively, the German Bundestag adopted the Act to Combat Unlawful Employment and Benefit Fraud (Gesetz gegen illegale Beschäftigung und Sozialleistungsmissbrauch) on 6 June 2019 (the Act was approved by the Bundesrat in late June). The new legislation – which consists of amendments to a number of existing acts – gives major reinforcement to the government’s special monitoring unit for undeclared work (called Finanzkontrolle Schwarzarbeit and abbreviated in this article as FKS), which is based at the customs administration. The FKS has now been endowed with a number of new powers that will make it a central authority for conducting inspections and investigations in key areas of labour law and social law.

The German government’s special unit for monitoring undeclared work (Finanzkontrolle Schwarzarbeit or FKS) is based at the German customs administration and has a staff of roughly 7,000 employees who work for 41 main customs offices at 113 different locations around the country. The Act to Combat Undeclared Work (Schwarzarbeitsbekämpfungsgesetz) forms the legal basis for efforts to fight undeclared work and unlawful employment. The legislation defines the terms “undeclared work” and “unlawful employment” and assigns the FKS various tasks and powers that form the basis for the inspections and investigations that the unit conducts. The FKS engages in close cooperation with other authorities and social partners at the national and international level.

The FKS monitors compliance with the legal provisions that govern labour markets. In the past two years alone, FKS inspections and investigations into undeclared work and unlawful employment found legal violations that accounted for losses totalling approximately €1.8 billion. The actual figure is probably many times higher. The new legislation’s objectives are to protect workers even more effectively against illegal wage practices and exploitative working arrangements; to take more effective action against unlawful employment, benefit fraud, and the non-payment of social security contributions and the attendant tax evasion; and to further enhance authorities’ ability to monitor compliance with minimum wage requirements. At the same time, it safeguards the government revenue needed for investing in the future, strengthens law-abiding companies by ensuring fair competition, and helps the unemployed by improving their chances of finding legal work. It also enacts various measures to prevent and combat unauthorised child benefit claims.

To ensure that these new tasks can be performed effectively, the German government is planning a significant increase in customs administration staff. The current financial plan already includes earmarks to increase FKS staffing to over 10,000 by 2026. On top of this, additional staffing will be needed to perform the new functions introduced by the new legislation: this includes roughly 3,500 additional new positions in the FKS and 900 positions in supporting customs administration units (such as education and training, pre-deployment training, IT, and deployment support). There are also plans to boost staffing at family benefit agencies and at the Federal Information Technology Centre (ITZ Bund).

The newly adopted legislation introduces amendments to various laws, particularly the Act to Combat Undeclared Work, the Posted Workers Act, the Code of Criminal Procedure, the Residence Act, various parts of the Social Code (Books II, III, IV and X), the Income Tax Act and the Fiscal Code. The legislation entered into force on the day following its promulgation (except for one amendment to the Posted Workers Act that relates to employers domiciled abroad, which will not take effect until 30 July 2020 due to the implementation of EU legislation). The new provisions focus on the following priorities:

Fighting economic crime and organised crime

In recent years, it has been found that the areas of unlawful employment and undeclared work include a significant amount of organised economic crime which has even begun to penetrate Germany’s borders. One frequent form of organised undeclared work is called “missing trader fraud”, which involves the use of fictitious invoices that are issued by bogus companies and brought into circulation for purposes of concealing undeclared work and tax evasion.

Missing trader fraud

occurs when fictitious invoices are brought into circulation by bogus companies and traded as services on the market. Customers of these bogus companies enter these fictitious third-party services into their books as expenses in order to generate illicit earnings for criminal purposes – mainly for paying undeclared wages to workers, for concealing profits, for paying kickbacks to clients, etc.

In order to combat these practices and effectively curb economic crime and organised crime in the areas of unlawful employment and undeclared work, the new legislation gives the FKS expanded investigative powers. These include, in particular, the ability to monitor telecommunications in cases involving the non-payment and misappropriation of wages by criminal gangs in accordance with section 266a of the Criminal Code (Strafgesetzbuch).1 Specifically, this means that public prosecutors can request a court order for the surveillance of suspects’ telecommunications in such cases and can task the FKS with the implementation of corresponding measures. The FKS now also has the power to conduct measures to identify suspects for purposes of criminal proceedings.2 Furthermore, the issuance and circulation of fictitious invoices – for example, for the purpose of withholding or misappropriating wages – are now for the first time punishable by fine. Any person who issues or circulates such invoices and thereby facilitates undeclared work or unlawful employment will now be subject to a fine of up to €100,000. In cases where such acts are committed by gangs or result in large financial gains, fines can be as high as €500,000.3

The new legislation also strengthens the customs administration’s procedural rights. The Code of Criminal Procedure (Strafprozessordnung) had already provided FKS staff with police powers for the prosecution of crimes. Under the Code’s provisions, FKS officials act as investigators for the public prosecution service, which is in charge of investigation proceedings. Under the new legislation, the FKS now has the power to conduct and conclude criminal proceedings independently in cases involving the withholding and misappropriation of wages in accordance with section 266a of the Criminal Code. In such cases, the public prosecutor’s offices cede their investigative powers to the FKS where certain preconditions have been met.4

As a result, the FKS will strengthen enforcement processes and reduce the workload of public prosecutors, thereby facilitating and augmenting the work of public public prosecutor’s offices in these key areas of law enforcement. In addition, the FKS now has the right to participate in certain court trials: courts must now include the FKS in administrative fine proceedings in all cases where the public prosecution does not participate in the court hearings. During such hearings, the FKS will have the opportunity to question the involved parties.5

Ensuring fair working conditions

Fighting labour exploitation and human trafficking

Forced labour, human trafficking and labour exploitation still happen in Germany. This can include jobs that involve the targeted recruitment of people who, at least at first, take on the work voluntarily. In some cases, workers are not told the truth about working conditions or the real nature of the job. To make them keep quiet, employers may withhold part of the workers’ wages, confiscate their identity documents, or subject them to threats. Given the nature of their tasks, FKS staff are often the first people who find indications of human trafficking in connection with illegal work. For this reason, the new legislation provides the FKS with the necessary authority (a) to conduct the necessary inspections and investigations to take action against exploitative working conditions and (b) to investigate human trafficking in connection with employment, forced labour and labour exploitation.6 FKS efforts in this realm of criminal activity will complement the criminal prosecutions conducted by police forces.

Fighting undeclared work initiated on markets for day labourers

In many towns and cities, workers looking for casual labour sometimes gather on public streets or squares to offer their services. This is a phenomenon that is often referred to as “day labourer markets”. Whoever is willing to work for the lowest wage gets the job, which frequently entails physically strenuous work on construction sites or in the transport sector, and at wages far below the legally prescribed minimum. Until now, the FKS could intervene only when such workers were caught in the act of performing the illegal work – for example on construction sites. The new legislation expands the unit’s options for taking action by permitting the FKS to conduct inspections and investigations at earlier stages – i.e. during the time when such undeclared work or unlawful employment is being initiated.7 This makes it possible to combat illegal and undeclared work at the point of initiation and to break up day labourer markets that frequently go hand-in-hand with exploitative working conditions. These new measures aim to help affected individuals secure legal employment, thereby safeguarding social insurance systems.

Disclosure requirements in connection with undeclared work offers

The new legislation requires publishers of advertisements or anonymous job offers to provide the FKS, upon request, with the names and addresses of clients in cases where indications of undeclared work or unlawful employment exist. These rules apply regardless of the publishing media used.8 To monitor employers who advertise jobs and to request information from the publishers of such advertisements, the FKS can consult job and recruitment offers published in print and other analogue media as well as on online service platforms, forums or other electronic communication platforms offering work or services. This will enhance the ability of the FKS to inspect anyone who makes online offers to perform work or services, thereby enabling the unit to track online offers of unlawful employment and undeclared work more effectively.

Combating the provision of improper housing

The FKS is already able under its current powers to check compliance with various minimum working conditions laid down in the Posted Workers Act (Arbeitnehmer-Entsendegesetz), such as compliance with contractual minimum wage and paid leave rules. The new legislation expands these powers to include inspections of contractually agreed housing conditions.9 The main aim here is to address the growing problem of insufficient housing for foreign workers. This trend often has undesired social consequences, such as when foreign workers move into homeless shelters or into overcrowded, overpriced, low-quality housing – a problem currently seen in some of Germany’s major cities. The FKS now has the power (a) to inspect employer compliance with contractually agreed obligations to provide suitable housing – in the construction industry, for example – and (b) to punish violations.10

These measures include the right to enter housing in order to inspect whether employers are providing workers with suitable housing.11 In accordance with constitutional provisions (Article 13(7) of the Basic Law), this applies exclusively for the purpose of preventing imminent risks to public safety and order. Numerous public authorities in Germany already have such rights of entry, including business authorities, revenue authorities, and occupational safety and health authorities. The FKS also retains the power to conduct house searches, but requires a court order to do so.12

Expanded requirements to carry ID and to register new employees immediately with social insurance providers

The Act to Combat Undeclared Work and Book IV of the Social Code (Sozialgesetzbuch) already stipulate that certain economic sectors – namely construction, catering and transport – are subject to rules that require (a) employees to carry ID cards while working and (b) employers to register new employees immediately with the social insurance system. The FKS and the public authorities they work with have found that the private security industry is another sector where undeclared work and unlawful employment are especially prevalent. People who work in the private security industry frequently change their place of work. This presents the FKS with particular challenges when it comes to conducting inspections in this area of business. The on-site identification and questioning of workers in this sector provides crucial information for checking compliance with employer and employee obligations such as rules on minimum working conditions, employer contributions to social security systems, and foreign nationals. Under the newly adopted legislation, individuals working in the private security business are required to carry identification documents, and stricter rules apply to the documentation of working hours.13 This will make it easier for the FKS to conduct effective inspections and to combat violations of the law.

Combating false self-employment

Employers often try to avoid paying social security contributions by hiring people who work under conditions of false self-employment. Recent trends show that professionally organised placement services are increasingly recruiting workers from other EU countries for this purpose. The consequences of these activities include: inadequate social security on the part of people who work under terms of false self-employment, and higher costs for social security systems. Even before the new legislation was introduced, business registration agencies reported suspicious cases to the FKS. But the FKS was limited to conducting investigations of false self-employment on site only, at the premises of known employers. Under the new legislation, the FKS has the power to inspect and investigate false self-employment even without having to go to a specific employment site.14 In addition, the FKS can now demand that individuals suspected of being falsely self-employed submit documents or provide information either in writing or in person. Furthermore, any employer who recklessly withholds employer or employee contributions to social security systems will now be committing an administrative offence that the FKS can punish with a fine of up to €50,000.15 This closes a gap in the types of intentional acts that are punishable under section 266a of the Criminal Code.

Combating benefit fraud

Benefit fraud that is committed on the basis of fictitious employment contracts or faked self-employment is a growing problem. There are frequent cases where employment relationships are faked. That is, they exist merely on paper for purposes of applying for supplementary benefits (such as basic income support for jobseekers) under Book II of the Social Code. This type of benefit fraud is often conducted in an organised manner through the targeted recruitment of workers from other EU member states, who then have to hand over the bulk of the social benefits they receive to professional intermediaries based in Germany (as a type of “fee”). The new legislation provides the FKS with comprehensive powers of inspection and investigation in order to enable the monitoring unit to take action in these cases.16

The FKS can now conduct inspections and investigations not only in cases where work or services have actually been performed but also in cases where employment relationships or self-employment have been faked for the purpose of fraudulently attaining social benefits under Books II and III of the Social Code. This will enable benefit fraud to be combated more effectively and will help to ensure that when people receive social benefits, these benefits are in line with the law.

As part of the controls that it performs in accordance with the Act to Combat Undeclared Work, the FKS now also has the power to review evidence in connection with the fraudulent receipt of child benefit payments and to forward such evidence via immediate notification to the responsible family benefits agency for inspection and, if necessary, further investigation.17 In addition, the FKS now has the power to participate in audits carried out by family benefits agencies; the aim here is to provide assistance in on-site measures.

Improving cooperation and data exchange

Stronger links between competent authorities are needed in order to fight effectively against unlawful employment and benefit fraud. To this end, Germany’s new legislation significantly expands cooperation and data-sharing between the authorities that are involved in detecting and combating unlawful employment, undeclared work and benefit fraud. To facilitate mutual assistance and data-sharing between the relevant authorities, the new provisions specify additional authorities that the FKS will collaborate with. This will result in a joined-up approach that strengthens and improves efforts to fight illegal wage practices. These additional authorities are the family benefits agencies; the registration and licensing authorities under the Prostitute Protection Act; the social security funds under the Collective Agreements Act; the authorities in charge of issuing permits for the private security industry under section 34a of the Trade Regulation Code; the Land authorities in charge of licensing and supervising commercial road haulage; and the agencies in charge of monitoring and controlling compliance with Land procurement and collective agreement law.18 The new provisions also provide for intensified cooperation and data-sharing between the FKS and police authorities.19 Cooperation with advisory services, helplines and information centres that deal with matters involving human trafficking and labour exploitation will also be significantly expanded.

The new legislation also creates a number of new data transmission powers – especially for the FKS, family benefits agencies and other involved authorities – that will enable this group of authorities to conduct automated data exchanges and data retrievals. The relevant IT systems will be adapted to enable this automated access. The electronic exchange and retrieval of data will facilitate the rapid and efficient flow of information between authorities and will largely replace paper-based notifications that can often be more time-consuming.

Specifically, in matters involving undeclared work and benefit fraud, the FKS now has the power to conduct automated retrievals of data from the databases of benefit providers under Books II and III of the Social Code (Federal Employment Agency, local job centres, joint federal/local entities) and from the databases of pension insurance providers. In matters involving VAT fraud, the FKS now has the power to retrieve data from the databases held by the Federal Central Tax Office.20 Conversely, data from the IT system of the FKS will be transmitted for certain purposes to benefit providers under Books II and III of the Social Code, to family benefit agencies, and to social assistance providers under Book XII of the Social Code. In addition, the FKS must forward to police and law enforcement authorities information that serves to prevent and prosecute crimes and administrative offences. The FKS will also beef up its cooperation with relevant authorities in other EU countries within the framework of the Internal Market Information System (IMI).21

In matters involving child benefit payments, family benefits agencies will be able to use automated data retrieval procedures to provide (a) social benefits providers, (b) social assistance providers and (c) agencies in charge of advance maintenance payments with information pertaining to individual child benefit payments.22 Conversely, pension insurance providers and benefit providers (as defined in Books II and III of the Social Code) will be able to furnish family benefits agencies with the data they need to review child benefit applications. In cross-border cases, the FKS will have the ability to conduct automated transmissions of relevant child benefit payment data to competent authorities in other EU member states.23 This will help to prevent duplicate payments, for example.

Finally, the new legislation includes provisions to strengthen the links between authorities working to combat unlawful employment and benefit fraud. For example, it amends section 93 of the Fiscal Code (Abgabenordnung) to include benefit providers under the Asylum Seekers Benefits Act among the authorities that are permitted to conduct automated account data retrievals. This measure will make it easier for these providers to review benefit recipients’ eligibility for benefits under the Asylum Seekers Benefits Act, thereby helping to prevent unwarranted benefit payments. The Land authorities responsible for prosecuting and punishing administrative offences under the Act to Combat Undeclared Work will now have the possibility to participate – like customs administration authorities do – in the Federal Network Agency’s automated procedures. This will provide such Land authorities with quicker access to the customer file data they need to perform their functions effectively.24

Measures pertaining to child benefit payments

In addition to expanding the inspection powers of the FKS and intensifying data-sharing practices, the new legislation also amends the rules on child benefit payments set out in the Income Tax Act (Einkommensteuergesetz). Specifically, during the first three months after moving to Germany, citizens of other EU member states are now able to claim child benefit payments only if they are employed in Germany.25 The aim here is to prevent newly arrived EU citizens who are not part of the workforce from placing undue financial burdens on the federal budget.

After this three-month period has elapsed, such individuals can claim child benefit in Germany as long as they fulfil the preconditions giving them the right to freedom of movement. Those who are in Germany solely for the purpose of finding work cannot claim child benefit. The family benefits agencies are responsible for ascertaining whether claimants satisfy the eligibility criteria attached to freedom of movement and, where appropriate, to report their findings to the authorities responsible for foreign nationals. Persons who are not eligible for freedom of movement cannot claim child benefit. Family benefits agencies do not decide whether a person has the right to freedom of movement. However, if a family benefits agency gains knowledge of facts that suspend or terminate a person’s eligibility to receive child benefit, it can temporarily discontinue payments without notifying the recipient.26 This means that family benefits agencies can now react more quickly to changes in circumstances and thereby prevent unwarranted payments. If it turns out that there were no grounds for discontinuing payments, agencies must remit the outstanding child benefit payments without delay. Furthermore, the new legislation contains provisions to clarify the rules on retroactive child benefit payments27 and to update the applicable regulations on tax-privileged volunteer services.

Summary

The new Act to Combat Unlawful Employment and Benefit Fraud provides the German customs administration with additional powers that enable authorities to fight unlawful employment and the misuse of government benefits more consistently and effectively. It also enacts measures to strengthen the links between various authorities and introduces new rules regarding child benefit payments. The new legislation provides employees with better protection against pay that does not meet the minimum wage, against employers who fail to remit social security contributions, and against exploitation in general. It also fosters fair competition for employers and safeguards government revenue. Ultimately, it ensures better order and more fairness on the labour market.28

Footnotes

1
Section 100a(2) no 1q of the Code of Criminal Procedure (new).
2
Section 14(3) of the Act to Combat Undeclared Work (new).
3
Section 8(4) and (5) of the Act to Combat Undeclared Work (new).
4
Sections 14a to 14c of the Act to Combat Undeclared Work (new).
5
Section 12(5) of the Act to Combat Undeclared Work (new).
6
Section1(3) no 5, section 2(1), first sentence, no 7 of the Act to Combat Undeclared Work (new).
7
Section 2(1), first sentence, no 8, section 5a, and section 8(6) of the Act to Combat Undeclared Work (new).
8
Section 7 of the Act to Combat Undeclared Work (new), section 14 of the Telemedia Act (new).
9
Section 5, first sentence, no 4, section 6(1), and section 16 of the Posted Workers Act (new).
10
Section 23(1) no 1 of the Posted Workers Act.
11
Section 17, first sentence, no 3 of the Posted Workers Act (new).
12
See section 102 of the Code of Criminal Procedure.
13
Section 2a(1) no 11 of the Act to Combat Undeclared Work (new), section 28a(4), first sentence, no 11 of Book IV of the Social Code (new).
14
Section 3 et seqq. of the Act to Combat Undeclared Work (new).
15
Section 8(3) and (6) of the Act to Combat Undeclared Work (new).
16
Section1(2), second sentence, section 2(1), first sentence, no 2, and section 3 et seqq. of the Act to Combat Undeclared Work (new).
17
Section 2(1), third sentence, of the Act to Combat Undeclared Work (new).
18
Section 2(4), first sentence, of the Act to Combat Undeclared Work (new).
19
Section 6(1), second and third sentences, of the Act to Combat Undeclared Work (new).
20
Section 6(2) and (3) of the Act to Combat Undeclared Work (new).
21
Section 6(6) of the Act to Combat Undeclared Work (new).
22
Section 68(5) of the Income Tax Act (new).
23
Section 68(6) of the Income Tax Act (new).
24
Section 112(2) no 8 of the Telecommunications Act (new).
25
Section 62(1a) of the Income Tax Act (new).
26
Section 71 of the Income Tax Act (new).
27
Section 70(1) of the Income Tax Act (new).
28
For more information, please visit www.mehrordnungundfairness.de

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