Bogus self-employment

Bogus self-employment / Scheinselbständigkeit

March 04, 2021

For entrepreneurs, flexibility in personnel decisions is often essential for a variety of reasons. Not every development or need of a company allows for long-term investment decisions. The creation of a permanent job represents a far-reaching commitment for both parties. Especially in industries that work predominantly on a project basis, it is impossible to imagine working without freelancers. On the contractor side, too, there is seldom any interest in a conventional employment relationship in these sectors, as freelance project-related work for different clients, often remotely and from anywhere on earth, is highly valued. The reluctance on the part of German entrepreneurs, however, is great due to the fear of being exposed to accusations of bogus self-employment.

Criteria for bogus self-employment

Employee, freelancer, contractor. For the question of whether an activity is subject to social security contributions, it is primarily the actual course of action that is relevant and not the description. If this shows that it is a dependent activity, the designation in the contract is no longer relevant. In the meantime, the law itself specifies criteria in section 611 a of the German Civil Code (BGB) according to which the distinction is to be made as to whether someone is an employee or not: " The employment contract obligates the employee to perform work in the service of another person under instructions and in personal dependence. The right to issue instructions may concern the content, performance, time and place of the work. A person is bound by instructions if he or she is not essentially free to organize his or her work and choose his or her working hours. The degree of personal dependence also depends on the nature of the respective activity. In order to determine whether a contract of employment exists, an overall assessment of all circumstances must be made. If the actual performance of the contractual relationship shows that it is an employment relationship, the description in the contract is irrelevant.”

The question of whether someone is a bogus self-employed person must be answered on the basis of these criteria in each individual case. The starting point is whether there is an instruction-bound, externally determined work in personal dependence.

The first question to be asked is whether there is personal dependence on an employer.

Characteristics of personal dependence are, in particular, integration into the work organisation of an employer as well as being bound by the employer's instructions.

Further criteria for bogus self-employment can then be: Fixed place of work and fixed working hours on the premises of the client, strict holiday regulations specified by the client, authorisation obligations for side jobs or for other clients, the obligation to wear company clothing.

It always depends on the overall situation. There are no fixed limits that can be used to determine how much freedom is necessary and how much instruction is permitted.

The following criteria can be used:

• Does the client have no regular employees (regular employed workers?)?

• Does the contractor essentially work for only one client? (approx. 5/6 of the turnover with one client - in the case of project-related activities, the potential client should always have an eye on whether the contractor also has other clients).

• The client has employees who carry out the same activities as the self-employed person.

• The self-employed person is bound by instructions and is integrated into the client's work organisation - no entrepreneurial activity.

• The self-employed person has previously worked for the client as an employee.

When does freelance work come into question?

Freelance work can usually only be considered if the contractor works for different clients and performs his work freely and without being bound by instructions. It is always difficult when the contractor is to be integrated into the client's work organisation like an employee and the client performs identical activities as an employee of the client.

When should the choice of a classic dependent employment be prioritized?

From the employer's point of view, the advantage of dependent employment is the better possibility of control. If the Dismissal Protection Act does not apply, the employer can usually more easily make the decision to create a position in his company that is subject to social security contributions. Therefore, if there is a risk that a cooperation is to be considered as bogus self-employment, the advantages and disadvantages of a permanent position should also be examined and weighed up immediately. If several of the criteria discussed here are met, which could indicate bogus-self-employment, one should proceed with great caution. In case of doubt one should give preference to dependent employment or seek a status determination procedure. More often, entrepreneurs shy away from the seemingly unbreakable commitment of a permanent position and want to get to know the contractor first and "only" try out freelance work for this purpose. In this case, we can only refer to the possibility of agreeing on a probationary period, which makes it possible to get to know each other, but allows both sides to part from each other in an uncomplicated way.

What are the consequences of an established bogus self-employment?

According to the latest case law of the Federal Labour Court, the employer can now claim back overpaid remuneration if the employee status has been established retroactively (BAG v. 26.6.2019 - 5 AZR 178/18). Previously, it had long been the case that the former contractor/freelancer was well protected. After it had been established that it was an employment relationship subject to social security contributions, the employee had to continue to be employed at the previously agreed fee rates. The freelance fee previously paid was thus converted unchanged into the gross remuneration owed. It is now clear that employers can reclaim the difference between the fee paid and the actual customary remuneration owed within the meaning of section 612 (2) of the BGB. Employees are not protected here on the basis of their possibly existing trust if they themselves subsequently pursue the determination of their status.

Status determination procedure

In the so-called status determination procedure (Statusfeststellungsverfahren), the social security status is determined. Both the employer and the employee can voluntarily apply for such a procedure under section 7a (1) sentence 1 Social Code IV (SGB IV) at the Clearing House of the German Pension Insurance Federation. Alternatively, an enquiry procedure can be made at the respective collection agency (section 28 h (2) sentence 1 half sentence 1 SGB IV).

However, there is also the possibility of a mandatory status determination procedure. This is always the case if the employee is the spouse, partner or descendant (e.g. child, grandchild) of the employer or the managing partner of a GmbH or UG. The competent collection agency is then obliged under section 7a (1) sentence 2 SGB IV to send the relevant notification to the German Pension Insurance Association. After the form has been sent in the clearing office initiates the investigation into the status determination. Employers and employees are informed of this by notification.

Are you unsure whether you are allowed to employ a freelancer and need advice on drafting employee contracts? Contact us and we will discuss how we can provide you with legal support and guidance for your plans.