Bogus self-employment is a recurring issue for companies that employ freelancers and for freelancers themselves. And yet both sides tend to bury their heads in the sand when it comes to this issue and hope that everything will work out. However, it would be better to address this problem proactively and find solutions. After all, bogus self-employment can lead to considerable trouble with social insurance providers and authorities.
But when is a freelancer not a freelancer, but an employee? Which criteria are decisive? What are the consequences of bogus self-employment for both sides? And: How can the problem be avoided?
We provide answers to these questions in this article.
What is bogus self-employment and what is the problem?
Pseudo self-employment is when a person supposedly works for a company as an independent freelancer, but is in fact an employee.
The problem with this is that if a “freelancer” is actually an employee, the company would have to pay social security contributions for this person. However, as the company assumes that the person is self-employed, these social security contributions are not paid.
However, even if this is not done maliciously, employers are liable for unpaid social security contributions, i.e. contributions to statutory health insurance (GKV), pension insurance (GRV) and long-term care insurance (PV), for both the employer’s and the employee’s share. Depending on the amount of contributions that have to be paid and the number of bogus self-employed persons in the company, this can be an enormous financial burden. In extreme cases, the problem of bogus self-employment can become an insolvency risk for smaller companies that work a lot with “freelancers”. This is because if a case of bogus self-employment is discovered during a tax audit, for example, all freelancers in the company are usually also investigated – a domino effect …
Consequences of bogus self-employment for companies and “freelancers”
As already indicated, the consequences of a freelancer being classified as an employee are not pleasant, especially for employers. While bogus self-employed employees can generally only be held liable for social security contributions on the next three salary payments, the situation is different for employers.
In the event of negligence, employers are threatened with the subsequent payment of social security contributions plus late payment penalties and interest for four years per employment relationship, and even for 30 years in the event of intent.
At the same time, employers are also liable for non-payment of wage tax and may be subject to fines for violations of employee protection regulations, for example. Last but not least, employees are subject to statutory notice periods and are entitled to vacation, continued payment of wages in the event of illness, etc. As a result, employee status also has a significant impact on personnel planning.
What’s more, if the bogus self-employment is not only accidental, but if employees are treated as freelancers with at least a conditional intent, more trouble is imminent. Intentional non-payment of social security contributions can be punishable under Section 266a StGB (withholding and misappropriation of wages).
What are the criteria for bogus self-employment?
Because “bogus self-employment” can have considerable consequences for all parties involved, the question arises: What criteria are decisive for a supposed freelancer to be classified as an employee?
It does not matter what the contract between the parties is called. Only what is actually lived is relevant, it depends objectively on the execution of the contract.
In principle, the decisive factor for the social insurance obligation pursuant to Section 7 para. 1 SGB IV is that a person is employed on a dependent basis. However, the law does not contain any detailed legal requirements as to what constitutes dependent employment. However, the law does state: “Indications of employment are an activity in accordance with instructions and integration into the work organization of the person giving the instructions.”
Over the course of time, case law has developed a number of criteria that indicate when bogus self-employment exists and when it does not. In particular, freelancers are deemed to be dependent employees subject to social security contributions if they
- have no entrepreneurial freedom because they are bound by instructions in terms of content, time or location,
- are personally obliged to work and cannot delegate,
- cannot freely determine the remuneration for their work,
- do not have their own business premises/only work on the client’s premises,
- use the company’s work equipment,
- do not have their own working capital,
- do not operate openly on the market as self-employed persons and
- have only one client or a client who takes up almost all of the work capacity.
If, for example, reporting obligations or non-competition clauses are added to this, these are further indications of bogus self-employment, i.e. dependent employment subject to social security contributions.
The Federal Social Court (BSG) formulated it this way in a ruling from March 14, 2018 (B 12 KR 12/17 R):
“… According to the established case law of the BSG, dependent employment requires that the employee is personally dependent on the employer. In the case of employment in an external company, this is the case if the employee is integrated into the company and is subject to the employer’s comprehensive right to issue instructions with regard to time, duration, place and type of performance. This obligation to follow instructions can be restricted – primarily in the case of higher-level services – and refined to ‘functionally appropriate participation in the work process’.
In contrast, a self-employed activity is primarily characterized by the entrepreneur’s own entrepreneurial risk, the existence of their own business premises, the ability to dispose of their own workforce and the essentially freely organized activity and working hours.”
How do you avoid bogus self-employment: the status determination procedure?
However, if you are aware of the problem of bogus self-employment, it is of course possible to solve existing social security problems with such constellations or to avoid them from the outset – both in the company and as a freelancer.
On the one hand, it is possible to develop an internal system with legal support that makes it possible to assess whether the collaboration is an employment relationship or genuine freelance work before the collaboration begins.
On the other hand, it is possible to initiate a so-called status determination procedure, which provides legally binding clarity and certainty.
How can we support you?
We support you as a company so that you do not run the risk of working with bogus self-employed persons who you have engaged as freelancers but who are employees. We can check the risks of bogus self-employment in your company or provide you with professional support as part of a status determination procedure.
Do you have questions about bogus self-employment?
If you have any questions or need support, please do not hesitate to contact me.
Do not hesitate to get in touch with me. I will be happy to help you!
Yours Christian Seidel