Avoid bogus self-employment: What startups need to consider when working with freelancers

Many start-ups rely on collaboration with freelancers in the start-up and growth phase. They offer flexibility, specific expertise and are often a cost-effective solution for implementing projects quickly. However, the legal classification of freelancers harbors risks: If the collaboration is not clearly regulated, there is a risk of bogus self-employment. This can have considerable legal and financial consequences for start-ups – from back payments for social security contributions to fines.

In this article, I will show you what bogus self-employment is, what criteria courts and authorities apply and how start-ups can work with freelancers in a legally compliant manner. The aim is to give young companies clear guidance on how they can minimize these risks and at the same time benefit from working with freelancers.

What is bogus self-employment?

Pseudo-self-employment occurs when a freelancer is formally considered self-employed but is actually integrated into the company like an employee. In such cases, self-employment is only assumed “in appearance” in order to avoid obligations under labor and social security law. In such cases, the German Pension Insurance (DRV) and labor courts examine closely whether the person is genuinely self-employed or whether it is a dependent employment relationship. The decisive factor here is not the text of the contract alone, but how the collaboration is structured in practice. Even if a contract expressly describes a self-employed activity, the actual implementation can lead to a different legal assessment.

The consequences of bogus self-employment can be serious for start-ups: In addition to high back payments for non-payment of social security contributions, there is the threat of fines and possible claims under employment law by the freelancer – for example for protection against dismissal or paid vacation. It can also be problematic under tax law if the tax office makes retroactive wage tax claims. It becomes particularly critical if the DRV discovers several cases of bogus self-employment during a tax audit – back payments can quickly reach amounts that threaten the existence of the company. Startups should therefore ensure at an early stage that their collaboration with freelancers is legally sound.

Criteria for differentiation: self-employed or bogus self-employed?

Whether a freelancer is actually self-employed or a bogus self-employed person depends on an overall assessment of various criteria. These criteria are used by the German Pension Insurance and the courts and relate to both the contract and the actual structure of the collaboration. A key criterion is integration into the company: if the freelancer works in the company’s team like an employee and uses its infrastructure, this is more likely to be a sign of bogus self-employment. It is equally critical if the freelancer is subject to fixed working hours or regularly attends internal meetings.

Another important criterion is the fact that they are bound by instructions. Freelancers typically work independently and decide on their own working hours, place of work and how the job is carried out. However, if a freelancer receives detailed instructions and is closely supervised, this indicates a dependent employment relationship. The entrepreneurial risk also plays a role: freelancers bear their own economic risk and act as entrepreneurs on the market – for example through advertising or multiple clients. However, if they work exclusively for one company and receive a fixed salary regardless of the success of the project, this can be problematic. The number of clients is also relevant: Freelancers should ideally have several clients to document their independence.

How can startups avoid bogus self-employment?

Clear contractual regulations

A well-drafted contract forms the basis of any collaboration with freelancers and can help to minimize the risk of bogus self-employment. The contract should clearly stipulate that the freelancer works independently and is not integrated into company processes. This also includes a description of the project or service as well as regulations on free time management and choice of location. It is also important to include a clause on the freelancer’s own tax and social security obligations – this indicates that both parties are clear about their roles.

However, a contract alone is not enough: The actual implementation of the collaboration is always decisive. If, for example, a startup concludes a contract in which free time management is agreed, but still orders the freelancer to the office at fixed times, there is a contradiction between the text of the contract and reality – which can quickly become apparent during audits. Startups should therefore ensure that all contractual provisions are also adhered to in practice.

Avoidance of operational structures

Freelancers should not be treated like permanent employees – neither organizationally nor socially. In concrete terms, this means that they should not have fixed working hours or be required to attend internal meetings (except on a project-related basis). The use of company e-mail addresses or business cards should also be avoided, as this gives the impression to the outside world that the freelancer is part of the company.

Another aspect concerns access to internal systems or resources: while it may be necessary for freelancers to have access to certain tools or data for certain projects, this should always be kept to a minimum. The more a freelancer is integrated into company structures, the greater the risk of bogus self-employment. Startups should therefore draw clear boundaries and ensure that freelancers are perceived as external service providers – both internally and externally.

Proof of multiple clients

A key criterion for distinguishing between self-employment and bogus self-employment is the number of clients of the freelancer. If a freelancer works exclusively or predominantly for a single company, there is an increased risk of bogus self-employment – especially if they are involved on a long-term basis. Startups can minimize this risk by not agreeing any exclusivity clauses and ensuring that their freelancers also work for other clients.

Another advantage of multiple clients is that this underlines the freelancer’s status as an independent contractor. In cases of doubt, this can serve as an important argument to refute the accusation of bogus self-employment. Startups should therefore regularly check whether their freelancers are also working on other projects – for example through discussions or corresponding proof.

Performance-related remuneration

The type of remuneration also plays an important role in distinguishing between self-employment and bogus self-employment. A fixed monthly salary is more likely to indicate a dependent employment relationship – especially if no specific results have been agreed. Self-employed persons, on the other hand, typically work on a performance-related basis: They only receive their remuneration once a project has been completed or certain milestones have been reached.

Startups can use this model to emphasize the independence of their freelancers and at the same time define clear performance targets. However, care should be taken to ensure that the remuneration is fair and in line with the scope of the project – otherwise this could be seen as an indication of circumvention of social security obligations.

Audit by external consultants

A legal review by a specialist lawyer or tax consultant can help to identify and minimize potential risks at an early stage. This involves not only reviewing the text of the contract, but also analyzing the actual implementation of the collaboration – for example, with regard to being bound by instructions or operational integration.

This investment is particularly worthwhile for long-term projects or important key positions: early advice can help to avoid expensive additional payments or fines and at the same time create legal certainty. External consultants can also help to develop alternative models such as contracts for work or project-based employment.

Conclusion: Legally compliant collaboration with freelancers

Working with freelancers offers start-ups many advantages – but without clear regulations, there is a risk of bogus self-employment. These risks can be minimized by carefully drafting contracts, avoiding operational structures and documenting the freelancer’s independence.

As a lawyer with experience in employment law, I support start-ups in developing legally compliant solutions for working with freelancers – be it by drafting individual contracts or by advising on the actual implementation of projects. Because only those who act in a legally secure manner can concentrate fully on the success of their company!

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.