Clients who Subcontractors on Works contract basis or external service providers should avoid bogus self-employment at all costs. Read the following article to find out how to distinguish between self-employment and bogus self-employment and why it is so important to avoid bogus self-employment.
It often happens that companies commission an external company as a subcontractor instead of their own staff to carry out certain activities. It is important that clients organise the collaboration from the outset in such a way that bogus self-employment can be ruled out.
How is bogus self-employment defined?
The term "bogus self-employment" is used when a contractual relationship with a supposedly self-employed contractor actually turns out to be a dependent employment turns out to be dependent employment. This is always the case if the specific type and nature of the collaboration fulfils the characteristics of dependent employment when viewed as a whole.
Differentiation: self-employed - bogus self-employed
The decisive criterion for distinguishing between self-employment and bogus self-employment is the Actual implementation of the cooperation. In order to assess whether self-employment or bogus self-employment exists, the activity must be evaluated in its entirety.
Important: If there are sufficient indications of bogus self-employment, the contractual designation is irrelevant. If the actual collaboration contains sufficient characteristics of fictitious self-employment, the client cannot invoke the fact that the work was contractually agreed to be performed independently.
The following criteria and characteristics speak in favour of self-employment
Criteria for self-employment:
- the contractor is not bound by instructions from the client
- the client does not specify fixed working hours
- the contractor is not or hardly integrated into the client's business organisation
- the contractor also works for other clients
- the contractor acts externally as an independent contractor
- the contractor bears its own entrepreneurial risk
Characteristics of bogus self-employment
- Complete integration into the client's business organisation
- Permanent activity for one client only
- Obligation to follow instructions from the client
- Specification of a concrete working time by the client
- the contractor wears the client's work clothes
- the contractor does not appear externally as an independent company
- the contractor does not bear any entrepreneurial risk
Both lists of criteria are not to be regarded as exhaustive; further characteristics may be added. An activity is to be classified as self-employed or bogus self-employed if this is evident from a Overall assessment of the criteria results.
Examination by means of status determination procedure possible
In order to check whether an employment is self-employment or dependent employment, it is possible to initiate a so-called status determination procedure with the German Federal Pension Insurance. In this procedure, the status under social security law is clarified. If the client or contractor does not agree with the decision made in the status determination procedure, it is possible to lodge an objection against it.
Consequences of bogus self-employment
If it subsequently transpires that the contractor is not a "genuine" self-employed person, but a bogus self-employed person, then the supposedly self-employed contractor must be recognised as a dependent employee of the client and will be subject to social security contributions. The client is therefore at risk of high back payments for social security. Deliberate non-payment of social security contributions is even punishable under § 266a.
Separate from the classification under social security law, it must be assessed whether a bogus self-employed person can also claim employee rights such as paid holiday, continued payment of wages in the event of illness or protection against dismissal. In case of doubt, the courts must decide on this.
Avoid bogus self-employment from the outset
If you use subcontractors or freelancers for certain activities, you should pay attention to this from the outset and organise the collaboration in such a way that it is a "genuine" self-employment.
The client should provide the contractor with
- Do not specify fixed working hours
- do not assign a permanent workplace in the company
- not pay a fixed monthly salary, but remunerate him according to his service or work performance
In addition, the client should do not oblige,
- that he must follow all instructions of the client
- that he may only work for one client
- that he must carry out his work in the client's company clothing
In general, clients should ensure that the contractor is not integrated into the company organisation like an employee and that he does not act externally like an employee of the client.
Conclusion
If the collaboration with a subcontractor turns out to be pseudo-self-employment, the client cannot invoke the fact that the subcontractor contract stipulates that the work was carried out independently. The decisive factor is whether the actual collaboration as a whole is to be assessed as dependent employment.
Bogus self-employed persons are to be classified as dependent employees for whom the client must pay social security contributions. Under certain circumstances, the bogus self-employed person can even claim further employee rights.
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