Most Important Points: Bogus Self-Employment
- Pseudo self-employment exists when a person working as a freelancer is integrated into a company like an employee under actual working conditions. However, this individual is engaged without an employment contract and without paying social security contributions.
- Key criteria for bogus self-employment include being bound by instructions, integration into the client's work organization, lacking own employees or entrepreneurial risk, and primarily working for only one client.
- If bogus self-employment is established, the client faces serious consequences. These include the retroactive payment of social security contributions (both employer and employee shares) and taxes. Fines and criminal proceedings for withholding social security contributions may also follow.
- Pseudo-self-employed individuals themselves can assert claims similar to employees. This includes vacation entitlement or protection against dismissal if an employment relationship is ultimately affirmed.
- Startups must exercise caution when hiring freelancers. Precise contract design and careful practical handling are essential to avoid bogus self-employment. This means avoiding full-time assignments typical for employees, ensuring freedom in working hours/location, and allowing the freelancer to have several clients.
Differentiating 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, for a contractor to truly be self-employed, they must conduct their own entrepreneurial activity.
This means:
- Ideally, they bring their own resources.
- They can freely determine their working hours and place of work.
- They are not integrated into the client’s internal organization, such as having a fixed office spot or being included in duty rosters or hierarchies.
- They bear an entrepreneurial risk. This could involve remuneration based on results, the possibility of making a loss, or undertaking their own advertising in the market.
An employee, on the other hand, is personally dependent. They owe their labor to the employer, must follow instructions, have fixed working hours/locations, and receive a salary regardless of work success. The designation in the contract or billing on a fee basis alone is not decisive. Instead, the overall picture of the work performance is crucial.
Criteria for Bogus Self-Employment
The German Pension Insurance and various courts examine several characteristics when investigating suspected bogus self-employment:
- Instruction-bound: Does the freelancer receive detailed instructions regarding the content, execution, time, and location of the work, similar to an employee?
- Integration: Does the freelancer participate in team meetings, use internal systems, or appear externally as an employee of the company (e.g., with a business card or company e-mail)?
- Working hours: Does the individual have to adhere to fixed hours, or are they free to organize their time as they wish?
- Work equipment: Does the client provide the essential work equipment, such as a laptop, software, or office space?
- Duration and scope of activity: Does the person work exclusively or predominantly for one client over a longer period? An indication might be if more than 5/6 of their turnover comes from a single client.
- No employees of their own: Does the allegedly self-employed person have no employees and act alone?
- No own market presence: Is there a lack of own advertising, web presence, or multiple customers?
No single criterion is absolute; instead, an overall assessment is made. However, in social security law, 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 entails considerable consequences for the client:
- Back payment of social security contributions: The client must retroactively pay social security contributions for the entire period of employment. This includes health, pension, long-term care, and unemployment insurance, covering both the employer's and the employee's share, plus interest. It is usually not possible to recoup the employee's share from past payments.
- Criminal liability: Withholding social security contributions can be punished as a criminal offense under Section 266a of the German Criminal Code (StGB) if done intentionally.
- Fines: Misdemeanor proceedings, potentially resulting in severe fines, are also possible.
- Employment law claims: The former "freelancer" could suddenly assert employee rights. These rights include continued payment of remuneration during illness, paid vacation, participation in company social security systems, and potentially protection against dismissal. Such an unplanned increase in staff with retroactive effect can be problematic for a startup.
Practical Tips for Avoidance
To avoid bogus self-employment, startups should observe a few principles:
- Contract design: The contract with freelancers should be clearly formulated as a service contract, avoiding typical employment contract clauses. Do not include formulations indicating subjection to instructions; instead, agree on service packages or project results.
- Use in practice: Do not treat the freelancer like an internal employee. Avoid prescribing fixed working hours, vacation request systems, or providing a company e-mail address if possible. Control communication in a results-oriented manner rather than focusing on minute-by-minute oversight.
- 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 rather assigning part-time projects.
- Status check: In cases of doubt, you can apply to the German Pension Insurance (Deutsche Rentenversicherung) for a status determination procedure to gain clarity.
Conclusion
Effectively managing the classification of workers is crucial for startups. By carefully structuring contracts and daily working relationships, companies can harness the flexibility of freelancers while mitigating the significant legal and financial risks associated with bogus self-employment. Proactive adherence to these guidelines protects against potential liabilities and fosters a compliant working environment.