Would you rather hand over difficult assignments and special projects to freelancers? This is often a good option to take advantage of the special knowledge and skills of flexible contractors. In fact, however, this approach poses a mostly underestimated risk for many companies: bogus self-employment. This is because the proportion of cases in which the DRV identified bogus self-employment has doubled since 2007, despite an increase of 35% in cases examined (As of 2019). This is usually followed by high back payments, which can significantly threaten both the existence of the client and that of the contractor.
Here we want to clarify how bogus self-employment is defined, what criteria make up false self-employment, how the review of the contractual relationship works and what consequences clients and contractors can expect in the worst case - so that you can remain on the safe side!
Definition: What is bogus self-employment anyway?
In order to really understand bogus self-employment, basic terms such as employee, freelancer or employment relationship should be defined first.
Workers: In the service of another person, an employee is obliged to perform instructional, externally determined work in personal dependence. The instruction may relate to the content, implementation, time and place of the activity. Anyone who cannot essentially freely organise their work and determine their working hours is bound by instructions. However, the type of activity determines the actual extent of personal dependence.
Freelancer: A self-employed person (also freelancer, freelancer) is first and foremost someone who is not permanently employed and can freely determine his working hours. Self-employed people are not subject to social security contributions and do not have a regular income, but have various clients. They act in a self-determined and independent manner.
Employment relationship: An employment relationship is a continuing personal obligation between two parties, the employee and the employer and always involves two parties, the employer and the employee. As a rule, the employment relationship is established by signing the employment contract. However, this can also happen when the employee enters the company, e.g. by taking up work. In this case, there would therefore be an employment relationship even without a contract.
Pseudo self-employment refers to an employment relationship between a client and a contractor defined as a contractually independent contractor (freelancer, consultant, freelancer), which, however, in practice is lived like an employment relationship between employer and employee. As a result, the contractor would actually be an employee subject to insurance within the meaning of Section 7 Paragraph 4 of the Social Code Fourth Book (SGB IV).
Seemingly freelancers, in fact employees!
This leads to the assumption that action is being taken deliberately to save the employer's share of social security contributions.
What are the criteria for maintaining bogus self-employment?
In principle, there are no fixed criteria that confirm or refute bogus self-employment. Rather, it comes down to the confluence of various circumstances which suggest that it is not a self-employed contractor but a dependent worker. Here, in particular, play three elements a special role.
A bogus self-employment can therefore result from a Commitment to instructions express, which means that the self-employed person receives instructions from his client to carry out his work, which he must follow. As an entrepreneur, a self-employed person generally benefits from his freedom of choice. Commitment to instructions, which exists, for example, when the contractor has to stick to certain working hours or when the contractor's place of work is specified, would contradict this freedom of self-employment.
In the case of an increased operational integration Care should also be taken, as a self-employed contractor should be clearly marked as an external party and not treated as a team member. The use of the client's work equipment, such as tools or digital devices, can clearly speak for bogus self-employment. A clear case is often, for example, when an employee continues to work as a self-employed person at the old employer after the employment relationship has ended. There is a high risk of bogus self-employment if the same job is carried out under the same circumstances as in the previous employment relationship (same desk, same e-mail address, etc.).
One of the decisive criteria for bogus self-employment is personal and financial dependence of the supposedly self-employed person vis-à-vis the client. This is because an essential characteristic of a self-employed person is their own entrepreneurial risk, as financial success is uncertain and does not depend on other parties. There is a particular risk of bogus self-employment if the self-employed person only works for one client over a longer period of time and thus earns the majority of his turnover from the same client. He is therefore not financially independent, as would be provided for by the status of a self-employed person.
Who clarifies the existence of bogus self-employment? How does the process work?
Access to documentation must be granted at the latest as part of a tax audit. This can be carried out either by the tax office or by the German Pension Insurance (DRV), which reviews at least once every 4 years. The tax office, on the other hand, checks all tax-relevant matters, usually in the form of an external audit.
Should there be any doubt as to whether the freelancer assignment is not a dependent employment relationship after all, it is advisable to verify the status.
But who carries them out and how does the process work?
Both contractual partners can apply to the German Pension Insurance for a status assessment in order to obtain legal certainty about self-employment or dependent employment in accordance with Section 7a (1) sentence 1 SGB IV without the consent of the other party being required. It is therefore sufficient for only one party to file the application. However, the application will only be processed if no other procedure has yet been initiated to review the insurance obligation (e.g. by a pension insurance institution im As part of a tax audit).
Our tip: It is advisable to submit the application as early as possible or within one month, as the insurance obligation in the event of a timely enquiry procedure only occurs when the DRV's decision on the existence of an employment relationship subject to insurance is announced. In this way, you can minimize back payments of social security contributions if bogus self-employment is established.
The application for status verification must be made in writing. On the one hand, the contractual arrangements of the activity are checked, and on the other hand, further details of the way the activity is carried out in practice must be provided. You can find the application form, as well as explanations and various necessary attachments here. After the written investigation has been completed, all parties involved must be heard by the DRV before a final decision can finally be issued. The average processing time is 80 days.
When doing so, keep in mind: It does not matter how the contract is titled or what is regulated in it if it can be proven that the relationship is in fact equivalent to employment under social security law.
Of course, it is advisable to make the freelancer contract legally secure and to comply with the above criteria during the assignment.
What are the risks of bogus self-employment?
Consequences for the contractor
Should a false self-employment be confirmed during a status assessment procedure, not only must the client dig deep into their pockets, the contractor also has to expect existence-threatening consequences.
From the time of false self-employment established, the contractor is considered an employee subject to social security contributions, who is granted all usual employment rights. This means that there is a right to paid vacation of at least 4 weeks a year, continued payment of remuneration and protection against dismissal in accordance with the Dismissal Protection Act (KSchG). In case of doubt, these rights can be claimed by the employee. Clear advantages so far: But on the other hand, the employment relationship for the “freshly baked” employee (formerly freelancer) also entails employee obligations. In plain language, this means payment of unpaid social security contributions. Although the employer must also pay for the employee's share, this can be claimed by deduction from pay (of up to 3 paychecks).
In addition, self-employed people are often paid higher because, in contrast to employees, they have insurance contributions and their entrepreneurial risk entirely to themselves and are only paid for hours worked. Should the remuneration received be higher than the usual wage of workers with comparable tasks, the false self-employed person must reimburse the difference between the remuneration received and the usual wage of comparable employees. This becomes particularly expensive when the hourly wage of the supposedly self-employed person is significantly higher than that of the employee.
Consequences for the client
Since all liability and payment obligations now apply to the client as to employers in relation to their dependent employees, must retroactively apply for up to four years of back payments who make social security contributions. In addition, become Late payment charges calculated, the request for status verification should not be made within one month. Rather, the employer is entitled from the employee to half of the employee's share to be paid by him, which, however, can only be made by deducting payroll payments of up to 3 months. If the employment relationship no longer exists, the employer must pay for the second share himself. Otherwise, the deduction can only be made after 3 payroll payments have been made, if the deduction was made through no fault of the employer. In most cases, however, there is of course contributory fault on the part of the employer.
An employer is legally obliged to the tax office to pay the income tax attributable to the wage to the tax office.
Therefore, when establishing a bogus self-employment, the tax office can Payroll tax back payments demand that retroactively up to four years can be charged. Should a frivolous tax cut (i.e. an administrative offense) also be identified, the deadline for repayments may be Extend to five years.
As an employee, the supposedly self-employed person may not charge any sales tax for his work, as he is not an entrepreneur within the meaning of the VAT Act. Therefore, in theory, the employer would certainly be entitled to repayment. However, since the client, as an entrepreneur, deducted from his own sales tax liability to the tax office the value added tax (so-called input tax) charged by the employee at the time as a freelancer, this claim does not apply. As a result, the employer would actually have had to pay the tax office more sales tax in the case of bogus self-employment, which is why the input tax deduction must be corrected and repaid.
But anyone who thinks that the consequences of bogus self-employment are limited to financial benefits is mistaken.
Because if the employer has intent, there is also an tax evasion Before that not only the Statute of limitations extended again to ten years, but also Fines, jail time and repayment demands may result in the offence until the statute of limitations. Apart from that, anyone acting as an employer of the health insurance “withheld” employee contributions to social security. Employer representatives (i.e. managing directors) can therefore even pay the employee's share of the social security contribution personally liable. In the event of a guilty verdict, the employer representative must heavy fines or one Imprisonment of up to 5 yearsn calculate.
Since, when false self-employment is established, the supposedly self-employed person is considered an employee, he is entitled to all rights that employees are entitled to: vacation entitlement, continued payment of pay in the event of illness and protection against dismissal. If these circumstances are not resolved amicably as a result of the status determination, the employer is threatened with a lawsuit and the associated legal costs.
It is true that working with freelancers and solopreneurs (self-employed people) has many advantages, as it offers the client the necessary flexibility and specialized expert knowledge for special projects. But is this really worth the serious risk of bogus self-employment? Because supposedly legally secure contractual conditions can be deceptive, as lived reality ultimately decides who is really self-employed or who only pretends to do so in appearance. Care and consistency are always necessary when drawing up freelancer contracts and handling them operationally. This is the only way you can permanently prevent bogus self-employment.
Bonus tip: Don't worry if you still ask yourself which factors in your company put you at risk of bogus self-employment. Our practical freelancer check quickly and easily gives you an initial indication of your risk and provides you with best practices and recommendations on how you can minimize it in the long term. You can find more information here.
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