German authorities intensify crackdown on undeclared work: Nationwide raids in the construction sector highlight compliance risks

Why this matters: Escalating enforcement and broader exposure

The large-scale raids are not isolated incidents, but rather part of a broader trend of intensified regulatory scrutiny in high-risk industries. Authorities are systematically expanding enforcement measures to sectors with structural exposure to compliance risks – often involving cross-border labor, subcontracting, and documentation challenges.

According to the Federal Ministry of Finance, the FKS initiated around 100,000 criminal proceedings and nearly 50,000 administrative investigations in 2024 alone – with a strong focus on sectors prone to undeclared work and complex supply chains.

A recent legislative initiative by the German Federal Ministry of Finance reinforces this shift: In July 2025, the Ministry published a draft bill on the “Modernisation and Digitalisation of Undeclared Work Enforcement”. The law aims to further develop the FKS and optimize its risk-based audit strategy. Key elements include an automated data analysis and comparison system that will allow the FKS to evaluate large datasets systematically and derive more accurate risk assessments for the presence of undeclared work or illegal employment.

Companies that comply with the law may benefit from fewer audits, while high-risk areas will be subject to more frequent and thorough inspections.

In addition, the draft law provides:

• Digital enhancements to FKS investigations: Including improved access to identity verification tools without depending on other agencies;
• A stronger risk-based approach: Focusing resources on organized forms of illegal employment and areas with high damage potential;
• Expanded investigative and enforcement powers: Including participation in the police information network to improve inter-agency coordination;
• More severe sanctions: Such as up to five years’ imprisonment or fines for falsified documentation; and
• Independent investigative powers for the FKS: Reducing the need for delegation by public prosecutors.

The FKS as well as the Ministry has identified the following industries as priority targets for inspections and audits:

• Construction;
• Transport, logistics, and freight forwarding;
• Hospitality and accommodation; and
• Hairdressing and beauty.

These sectors are characterized by:

• Business models that involve the use of subcontractors;
• Mobile and seasonal workforces;
• Cross-border labor and foreign staffing; and
• Challenges in time tracking and documentation.

The combination of legal complexity, operational fluidity, and high personnel turnover increases exposure to risks such as undocumented employment, underpayment, and unlawful temporary agency work. However, certain business models involving third parties are increasingly under scrutiny per se.

Recent court rulings have confirmed this trend: German labor and social courts have increasingly clarified liability issues in complex contractor constellations and emphasized the need for “transparent and auditable employment relationships”, particularly where subcontractors or temporary workers are used.

Companies operating in these environments should proactively assess and strengthen their HR compliance system.

Key legal risks in scope

The typical risk areas include:

• Illegal temporary agency work (“Arbeitnehmerüberlassung”): Use of third parties in alleged non-compliance with AÜG rules;
• Illegal employment / undeclared work of such third parties: Employment relationships that are (allegedly) not reported to social security authorities or tax offices;
• Misuse of subcontracting: Utilization of subcontractors that effectively serve as disguised employment relationships; and
• Violations of the Minimum Wage Act: Underpayment of workers, particularly via complex subcontractor chains.

These issues can lead to serious consequences, including:

• Retroactive liability for social security contributions and taxes: This can affect both the company and individuals;
• Criminal investigations: These may also target individuals, including responsible managers and executives;
• Fines and administrative sanctions: These can apply to both legal entities and individuals involved; and
• Exclusion from public tenders or subsidy programs.

How to prepare: Compliance and dawn raid readiness

To mitigate risks and ensure readiness for inspections or raids, companies should consider the following:

1. Contractor due diligence

• Vet subcontractors and staffing firms for compliance: Check registration, licensing and track record;
• Ensure equal pay and proper social security contributions: Regularly verify documentation to confirm compliance; and
• Include audit and indemnification clauses in contracts: Secure cooperation and risk allocation.

2. Proper and accurate documentation

• Maintain clear, accessible records of employment relationships: This includes time sheets, wage payments, and work permits; and
• Ensure proper documentation for foreign workers: Follow onboarding procedures and maintain records of permit.

3. Internal training

• Train HR, operations, and site managers on red flags and risk areas – in particular if the business models builds on use of third parties; and
• Ensure awareness of the rules governing subcontractors and temporary agency work.

4. Dawn raid protocols

• Establish a response team (including external counsel) and internal procedures for handling dawn raids: Define responsibilities and escalation chains; and
• Train all relevant employees, especially front-line staff, on how to interact with investigators: Do not obstruction and reserve rights.

Takeaway

The recent nationwide raids signal a clear message: German authorities are accelerating enforcement efforts to uncover labor law violations in high-risk industries. Companies should act now and take proactive steps to strengthen internal controls.

If you have questions about risk exposure in your industry, contractor compliance, or dawn raid preparation, our team is available to support you.

Authored by Désirée Maier, Angeline Leder, and Silvia Tomassone.