A new BGH ruling confirms the risks of bogus self-employment – be prepared
In recent years, I have repeatedly pointed out the risks that pseudo-self-employment can entail, both for employers and for “pseudo-self-employed” persons themselves. Industries such as game development, Esports, agencies and startups are particularly vulnerable to these risks. The nature of these industries – often characterized by flexible work structures, project-based assignments, and frequent use of freelancers – increases the likelihood that the lines between self-employed and employed will blur.
For example, in my 2020 article Freelancer: danger of client’s claim to enrichment in case of bogus self-employment, I warned about the legal complications that can arise when bogus self-employment is present.
In another article, Liability Risks for Esports Teams When Working with Bogus Self-Employed Players, I specifically addressed the Esports industry and the potential risks they could face when dealing with bogus self-employed players.
Now, a recently published ruling by the German Federal Court of Justice (BGH) underscores the concerns I shared. It highlights the need for a precise demarcation between the self-employed and the employed, and underscores the potential legal and financial consequences of not drawing this line clearly.
What is bogus self-employment and who can it affect?
Bogus self-employment is a condition in which a person formally acts as an independent contractor, but in practice fulfills the role and duties of an employee. This employment relationship can result in significant legal and financial consequences for both the client and the bogus self-employed person, including but not limited to labor law, social law, social security law and tax law.
New forms of work, such as the gig economy, have brought new challenges in distinguishing between pseudo self-employment and regular employment. Platform-based work, where small jobs are given to freelancers on a short-term basis – such as delivery services like Takeaway.com and its subsidiary Lieferando in Germany, or driving services like Uber and MyTaxi – can also contribute to pseudo self-employment.
In Germany, pseudo-self-employment is regarded by the legislator as a form of undeclared work, as additional duties, in particular employer contributions, may be incurred as a result of the determination of dependent employment. However, the distinction between permissible self-employment and employment subject to social insurance contributions is not always clear-cut due to fuzzy legal terms and different interpretations by social insurance agencies and courts. Only in cases of gross misuse is it possible to make a reliable distinction in advance at the start of the contract.
While the concept of bogus self-employment is gradually fading into the background in the political debate away from those affected, another term has gained acceptance: the abuse of contracts for work and services. Since around 2012, this term has been increasingly used in the political debate in Germany and was also part of the 2013 coalition agreement between the CDU/CSU and the SPD. The focus here is primarily on the relocation of former core activities of a company to other companies, often accompanied by the mass relocation of former employees to these work contract companies.
These developments show that in the modern working world it is becoming increasingly important to be clear about the distinction between the self-employed and employees. This is particularly relevant for industries such as game development, esports, agencies and many startups that often work with freelancers and therefore run the risk of blurring the line to bogus self-employment. As I discussed in my previous posts, the consequences can be significant.
The current BGH ruling and its effects
The recent ruling by the Federal Court of Justice sets new standards in the demarcation between pseudo self-employment and regular employment. Although the ruling was published in a criminal context, it relates to the “withholding and embezzlement of remuneration” (Section 266a of the Criminal Code), a law that is relevant to all employers.
The ruling focuses on the “overall picture of the work performance”, which is decisive for distinguishing between so-called pseudo-self-employed attorneys and freelancers of a law firm. This approach can also be applied to other professions. If the criteria of being bound by instructions and integration lose their discriminatory power and significance due to the specific nature of the activity, the focus should be on the entrepreneur’s own entrepreneurial risk and the type of remuneration agreed.
The ruling also makes it clear that contribution payments by undeclared workers and illegal employees on the basis of an agreement reached with the employer do not automatically establish the factuality of Section 266a para. 1 and 2 StGB can be omitted. Rather, these payments should be considered at the penalty assessment level.
It is important to emphasize that this interpretation of the ruling focuses on the general delineation and not on specific situations or industries. Each case of bogus self-employment is unique and must be assessed individually.
However, the ruling underscores the need for employers and principals to carefully consider whether their employment relationships comply with the requirements of the law. Otherwise, they can expect significant legal and financial consequences.
The demarcation between the self-employed and employees is becoming increasingly difficult, especially in industries such as game development, Esports, agencies and startups. However, the ruling of the Federal Court of Justice (BGH) provides important guidelines that companies can use to minimize legal risks.
The most important findings of the BGH ruling
The recent ruling of the German Federal Supreme Court (BGH) provides a thorough analysis on the distinction between pseudo self-employed and regular employees. It emphasizes the importance of carefully examining actual labor relations and highlights the role of several key factors.
Firstly, the BGH attaches great importance to inclusion in the company organization. A person who is to be classified as self-employed should generally have a high degree of autonomy and flexibility with respect to the performance of his or her work. However, if it is determined that the person is firmly integrated into the organizational structure of the client and works in a manner similar to an employee, this could be an indication of pseudo self-employment.
Second, the ruling emphasizes the importance of the principal’s authorizing powers. An independent contractor usually makes independent decisions about how to perform his or her work. If, on the other hand, the client gives detailed instructions on how to perform the work while retaining control over the work process, this could be another indication of pseudo-self-employment.
Another main focus of the BGH ruling is the correct calculation and payment of social security contributions. If a principal is found to be withholding or misappropriating these contributions, it will be considered a serious violation by the court. This could result in both civil and criminal penalties for the principal, including possible fines and imprisonment.
Overall, the ruling highlights the complexity of the distinction between pseudo self-employment and regular employment and underscores the need to examine this issue carefully, taking into account all relevant factors. It sends a clear signal to all employers that they must closely scrutinize their employment relationships and ensure that they comply with legal requirements.
How to avoid bogus self-employment
The risk of bogus self-employment can be significantly reduced if clear and unambiguous contracts are drawn up that carefully define the nature and conditions of the collaboration. However, it is not only the drafting of the contract that is crucial, but also ensuring that the actual working conditions match those specified in the contract.
A contract negotiated for freelance work should explicitly state that the freelancer has a high degree of autonomy and flexibility with respect to the performance of his or her work. It should also list the specific services or projects that the freelancer will perform, making it clear that the freelancer has control over the process and outcome of that work.
In addition, it is important that the contract clearly distinguishes between the client and the freelancer. This means that the client should not be referred to as the “employer” and the freelancer should not be referred to as the “employee”. There should also be no clauses that entitle the client to give detailed instructions on how to perform the work or to retain control over the work process.
After the contract has been concluded, both parties should pay careful attention to ensure that the actual working conditions correspond to the contractual terms. This means that the freelancer is actually working autonomously and independently, and that the client is not trying to take control of the work process or give detailed instructions on how to perform the work.
It is also important to regularly check that the actual working conditions continue to comply with the contractual terms. This can be done through regular reviews and discussions between the parties. If working conditions change over time, it may be necessary to revise the contract to ensure that it continues to meet legal requirements.
By following these steps, you can significantly reduce the risk of bogus self-employment and ensure that your employment relationships comply with legal requirements.
The current case law of the Federal Court of Justice (BGH) underlines and deepens my long-standing warnings about the risks of bogus self-employment. I would particularly like to point out startups, esports teams, website owners, and other similarly structured organizations that may underestimate or overlook tax and social security law requirements. The urgency of carefully reviewing and, if necessary, adjusting contracts and practices cannot be overstated to avoid potential legal and financial consequences.
It is critical that directors and officers in particular recognize the potential magnitude of a criminal conviction in the context of bogus self-employment. Such a conviction can have serious consequences, including the inability to ever be self-sufficient again. Therefore, this issue should be treated with the highest priority and caution.
It should not be forgotten that running a website or portal, even if it was originally started as a hobby, can lead to legal obligations once it reaches a certain size and profitability. It is therefore advisable to seek professional advice in good time in order to minimize the risk of bogus self-employment and the associated consequences.
In this case, forewarned is definitely forearmed – especially when it comes to the complex and nuanced topic of bogus self-employment. Don’t hesitate to contact legal counsel if you need help with the delineation process or have additional questions about this topic. Careful planning and preparation can save you from serious consequences.