Germany: Ongoing efforts by authorities to prevent 'false self-employment'

For decades German companies have been engaging freelancers instead of or in addition to regular employees to achieve more flexibility, save social contributions and avoid bureaucratic burdens. While in many cases this practice is neither illegal nor illegitimate, social security offices and tax authorities have become increasingly anxious to counteract so called “false self-employment”.

Very often it is not easy to determine whether a person is self- or dependently employed. The consequences where authorities find a company to be in violation of the respective regulations can be quite severe.

The freelance status has several advantages, often for both parties, compared to regular employment relationships. Based on the idea that a freelancer bears his own financial risk and will take care of social security himself, for freelancers there is no statutory dismissal protection, no social security contributions have to be paid, no minimum wage or working time regulations have to be observed and a freelancer will have no sickness or holiday entitlements.

However, this comes at a “price” due to the nature of the contractual relationship itself. In most cases the company’s rights of direction will be limited; working time and place of work will be determined by the freelancer himself. A freelancer is not only free to work for other companies but also does not owe the services in person. Usually he will also not be integrated into the working operations of the company he performs services for.

Circumventing or “bending” the rules, especially by limiting the rights of the freelancer, comes with an increasing risk of authorities qualifying the freelance contract as an employment relationship. The evaluation not only includes review of the contractual basis of the relationship but also the way the contract is being “lived” by all parties.

If a freelance relationship qualifies as an employment relationship, possible consequences can include retroactive repayment of social security contributions, granting full statutory rights to the employee (in respect to holiday entitlements, sick pay, working time etc.), joint liability (with the employee) for unpaid tax, administrative fines and/or criminal prosecution in case of intent.

Actions for employers

Companies should carefully evaluate the factual nature of the working/ service relationship in each given case. In case of doubt, insurance status can be established by pension authorities on written request.