Navigating the Status Determination Procedure for Freelancers and Subcontractors in Germany

Hiring freelancers or subcontractors can be a cost-effective and flexible solution for businesses. However, it is crucial to navigate the legal landscape carefully to avoid the pitfalls of false self-employment (Scheinselbstständigkeit). This article provides an overview of the status determination procedure and outlines the associated risks and legal implications, particularly for companies operating in Germany.

Understanding the Status Determination Procedure

The status determination procedure (Statusfeststellungsverfahren) is a formal process conducted by the German Pension Insurance Association (Deutsche Rentenversicherung) to ascertain whether a freelancer or subcontractor is genuinely self-employed or should be classified as an employee. This procedure can be initiated by the freelancer, the client, or relevant social security institutions.

Key points to consider:

  • Criteria for Determination: Factors such as the degree of personal dependence, integration into the client’s work organization, and the ability to act as an entrepreneur are considered (Section 7 para. 1 SGB IV).
  • Implications: If deemed an employee, the client must pay retroactive social security contributions and possibly taxes for up to four years, or even 30 years if intentional misclassification is proven.

Risks of False Self-Employment

Financial Risks:

  1. Social Security Contributions: Employers are liable for both the employer’s and the employee’s share of social security contributions if a freelancer is reclassified as an employee.
  2. Taxes: Retroactive income tax payments may be required, and previously deducted input VAT must be corrected and repaid.

Legal and Criminal Risks:

  1. Fines and Penalties: Negligence can result in fines, while intentional misclassification can lead to criminal charges under Section 266a StGB, which includes fines or imprisonment for withholding and misappropriating employee wages.
  2. Legal Actions: Reclassified freelancers might demand employee benefits, including paid leave and notice periods, complicating personnel planning and increasing costs.

Special Considerations for Foreign Companies

For foreign companies with subsidiaries or permanent establishments in Germany, understanding and complying with local labor laws and regulations can be particularly challenging. The German system is complex and can be difficult to navigate without prior knowledge.

Key points for foreign companies:

  • Local Compliance: It is essential for foreign companies to ensure that their hiring practices in Germany comply with local regulations to avoid significant financial and legal risks.
  • Detailed Consultation: Foreign companies should seek detailed advice and consultation before engaging freelancers or subcontractors in Germany to understand the nuances of the local system.

 

Avoiding False Self-Employment

For Clients:

  • Multiple Clients: Encourage freelancers to work for multiple clients to demonstrate genuine self-employment.
  • Independent Operation: Ensure freelancers use their own equipment, manage their own schedules, and are not integrated into internal processes.
  • Clear Contracts: Draft contracts that reflect true project-based work, avoiding long-term or open-ended agreements.

For Freelancers:

  • Entrepreneurial Presence: Maintain a professional website, advertise services, and actively seek new clients to demonstrate entrepreneurial activity.
  • Autonomy: Operate from your own premises, use your own tools, and avoid company-specific emails or uniforms to reinforce independence.

Contact Us

Navigating these complexities can be challenging. At WW+KN, a Baker Tilly Company, we specialize in payroll and collaborate closely with Baker Tilly lawyers who provide expert advice and legal representation in labor law matters. Our lawyers can also guide you through the status determination procedure to ensure compliance and mitigate risks.

For further assistance, please contact us at info@payrollgermany.de.

By ensuring compliance with these guidelines, businesses can mitigate the risks associated with employing freelancers and subcontractors, and maintain a lawful and efficient operation in Germany.