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False Self-Employment in Germany: A Guide for Management

The issue of false self-employment poses significant legal, financial, and criminal challenges for companies. Particularly in the context of project-based activities, the use of external service providers, or agile working methods such as Scrum, misclassifications can have fatal consequences. This article is aimed at management and provides a practical explanation of the legal framework, risks, and strategies to avoid false self-employment.

What is False Self-Employment?

False self-employment arises when a supposedly self-employed activity actually exhibits the characteristics of an employment relationship. According to Section 611a of the German Civil Code (BGB), an employment relationship is characterized by work performed under instructions and in personal dependence. Key criteria include:

  • Right to Issue Instructions: The extent of directives regarding the content, location, time, and manner of work execution.
  • Integration: Inclusion in the organizational structure of the client company.
  • Entrepreneurial Risk: Self-employment implies the independent organization of resources and the ability to make a profit or incur losses.

A formal designation as a “freelancer” or “external service provider” is not decisive for the legal assessment; the actual conduct of the working relationship is what counts.

Risks of False Self-Employment

False self-employment entails significant financial, legal, and criminal risks that affect both the company and its responsible parties:

1. Financial Risks

  • Social Security Contribution Back Payments: Employers are liable under Section 28e of the German Social Code (SGB IV) for the repayment of all unpaid contributions, including the employee’s share.
  • Late Payment Penalties: Penalties of 1% of the contribution amount can accrue for each month of non-payment.
  • Tax Liabilities: The tax office can demand back payment of income tax, with the freelancer’s fee being recalculated as net wages.

2. Labor Law Risks

  • Retroactive Employee Status: External workers can claim rights to vacation, continued payment of wages in case of illness, or company pension plans.
  • Protection Against Dismissal: False self-employed individuals can file lawsuits for wrongful termination, potentially leading to the continuation of the employment relationship.

3. Criminal Risks

  • Withholding Social Security Contributions (Section 266a StGB): Intentional withholding is punishable by fines or imprisonment for up to five years.
  • Entry in Competition Registers: Companies can be excluded from public contracts.

Common Problem Areas

1. Project-Based Work

IT specialists or other highly qualified professionals are often hired for project-based work. These situations carry a high risk as such individuals are often closely integrated into the company’s organization and subject to its directives. A holistic evaluation of all circumstances is crucial: high remuneration or exceptional expertise alone does not justify self-employment if dependence prevails in other aspects.

2. Agile Working Methods (e.g., Scrum)

Scrum teams often consist of internal and external employees. Close collaboration and participation in meetings can indicate integration. Moreover, cross-functional directives can quickly lead to false self-employment.

3. Use of External Service Providers

Distinguishing between service contracts, work contracts, and temporary employment is challenging. A work contract requires a clearly defined deliverable. Lack of clarity or the de facto integration of the service provider into operational workflows can result in covert temporary employment.

Legal Precedents and Practical Insights

Courts emphasize case-by-case assessments. Typical indicators of dependent employment include:

  • Use of the client company’s resources.
  • Obligation for personal performance.
  • Regular participation in internal meetings.

To avoid false self-employment, a status determination procedure under Section 7a SGB IV is recommended. However, this procedure only provides limited legal certainty and does not replace a review of the practical implementation of the contractual relationship.


Is the Status Determination Procedure a Solution?

The status determination procedure under Section 7a SGB IV provides companies with a means to clarify the legal classification of a working relationship early on. While a positive decision by the German Pension Insurance may offer temporary legal certainty, it is not binding for labor courts. These courts can still rule that a dependent employment relationship exists despite contrary findings. Additionally, the procedure focuses solely on social security aspects and does not directly address tax or labor law issues. Therefore, it is only a building block in a comprehensive risk minimization strategy, not a standalone solution.

In my practice, I have repeatedly represented companies that relied too casually on supposedly secure contract structures. An ostensibly airtight service contract offers no guarantee if the practical implementation contradicts it.

Courts meticulously examine the actual circumstances of collaboration. My advice to management: Take the issue seriously, invest in prevention, and regularly review both the contract design and its implementation. The cost of such checks is minimal compared to the consequences of false self-employment – financially and criminally.

Recommendations for Management

  1. Careful Contract Drafting
    • Clearly distinguish between work and service contracts.
    • Avoid clauses that suggest an employment relationship.
  2. Review of Implementation
    • Ensure that external workers are not integrated into company operations.
    • Avoid directives that go beyond the agreed-upon scope of the contract.
  3. Regular Compliance Audits
    • Train responsible parties.
    • Regularly analyze existing contractual relationships.
  4. Proactive Risk Minimization
    • Use status determination procedures.
    • Consult with labor and social security law experts.

Conclusion

False self-employment is a multifaceted risk that can lead to financial, legal, and criminal consequences. Careful contract drafting, reviewing practical implementation, and comprehensive compliance management are essential to minimize risks and ensure legal certainty.

German Lawyer Jens Ferner (Criminal Defense & IT-Law)
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