Most important points

• Pseudo self-employment exists if a person working as a freelancer is integrated into the company under the actual working conditions as an employee, but is employed without an employment contract and without paying social security contributions.

• The criteria for bogus self-employment include Being bound by instructions, integration into the client’s work organization, no own employees or entrepreneurial risk, essentially only one client.

• If bogus self-employment is established, the client is threatened with retroactive payment of social security contributions (employer and employee share) and taxes; fines and criminal proceedings for withholding social security contributions may follow.

• Pseudo-self-employed persons themselves can assert claims like an employee (vacation entitlement, protection against dismissal, etc.) if an employment relationship is affirmed.

• Startups must be careful when hiring freelancers: Precise contract design and factual handling (no full-time assignment as with employees, freedom in working hours/location, several clients) help to avoid bogus self-employment.

Differentiation between freelancers and employees

In young companies, it is common to initially hire freelancers or independent contractors instead of immediately concluding permanent employment contracts. However, in order for a contractor to actually be self-employed, they must develop their own entrepreneurial activity. This means

• Ideally, he brings in his own resources,

• can freely determine their working hours and place of work,

• is not integrated into the client’s internal organization (no fixed place in the office, no inclusion in duty rosters or hierarchies),

• and bears an entrepreneurial risk (e.g. remuneration according to results, possibility of making a loss, own advertising on the market).

An employee, on the other hand, is personally dependent: he owes the employer his labor, must follow instructions, has fixed working hours/locations and receives his salary regardless of the success of the work. The designation in the contract or billing on a fee basis alone are not decisive. The overall picture of the work performance is decisive.

Criteria for bogus self-employment

The German Pension Insurance and courts examine various characteristics in cases of suspected bogus self-employment:

• Instruction-bound: Does the freelancer receive detailed instructions on the content, execution, time and location of the work like an employee?

• Integration: Does the freelancer take part in team meetings, use internal systems (like employees), appear externally like an employee of the company (business card, company e-mail)?

• Working hours: Does the person concerned have to keep fixed hours or is he free to organize his time as he wishes?

• Work equipment: Does the client provide the essential work equipment (laptop, software, office)?

• Duration and scope of activity: Does the person work exclusively or predominantly for one client over a longer period of time (indicative: >5/6 of turnover with one client)?

• No employees of his own: Does the allegedly self-employed person have no employees and act alone?

• No own presence on the market: lack of own advertising, web presence, several customers?

No single criterion is absolute; an overall assessment is made. However, in social security law, for example, there is a presumption of bogus self-employment if someone works permanently and essentially only for one client and has no employees.

Legal consequences of determination

If a freelancer is classified as a bogus self-employed person, this has considerable consequences:

• Back payment of social security contributions: The client must pay the social security contributions for the entire period of employment (health, pension, long-term care, unemployment insurance), both the employer’s and the employee’s share, plus interest. A reversal with the employee (e.g. deducting their share from the fee) is usually not possible for the past.

• Criminal liability: Withholding social security contributions can be punished as a criminal offense under Section 266a of the German Criminal Code (StGB) if it was done intentionally.

• Fines: Misdemeanor proceedings with severe fines are also possible.

• Employment law claims: The former “freelancer” could suddenly assert employee rights, e.g. continued payment of remuneration in the event of illness, paid vacation, participation in company social security systems and possibly protection against dismissal. An unplanned increase in staff with retroactive effect can be problematic for a startup.

Practical tips for avoidance

In order to avoid bogus self-employment, start-ups should observe a few principles:

• Contract design: The contract with freelancers should be clearly formulated as a service contract, without typical employment contract clauses. No formulations that indicate subjection to instructions; instead, agreement of service packages or project results.

• Use in practice: Do not treat the freelancer like an internal employee. Do not prescribe fixed working hours, no vacation request system, no company e-mail address if possible. Control communication in a results-oriented manner rather than to the minute.

• Multiple clients: It is in the self-employed person’s interest to have several clients. As a client, you can encourage this by not planning a full workload for a freelancer, but instead assigning part-time projects.

• Status check: In case of doubt, you can apply to the German Pension Insurance (Deutsche Rentenversicherung) for a status determination procedure to obtain clarity.

By taking these points into account, startups can make use of flexible collaboration in the form of freelancers without taking unnecessary risks of subsequent reclassification as an employee.