Conducts employment background checks

Bogus self-employed

Current

Law against illegal employment and abuse of social benefits - published in the Federal Law Gazette on July 17th, 2019
In its 979th meeting on June 28, 2019, the Bundesrat decided to approve the law passed by the German Bundestag on June 6, 2019.
Excerpt from the justification for the proposed law:

Pseudo self-employment leads to a lack of social security for the supposedly self-employed and puts a strain on the social systems. The auditing and investigative powers of the VCS are therefore being expanded so that in the future, if there is a suspicion of bogus self-employment, even without knowledge of the specific place of work, an audit can be carried out at the bogus self-employed person at the registered establishment or, if necessary, at the official office and, if necessary, investigations can be carried out.

A subsequently determined pseudo self-employment can trigger high claims for repayment of the employer against the employee (Federal Labor Court judgment of June 26, 2019, 5 AZR 178/18).

Basics

Bogus self-employment is when someone, according to the underlying contract, provides self-employed services for a third-party company, but actually carries out non-self-employed work as in an employment relationship.

The background to bogus self-employment is the opportunity to save money. In this endeavor, the client and the contractor (bogus self-employed) often agree and want to benefit from free employment.

Even if both sides are in agreement, that does not protect against consequences in an emergency. The client can even be liable to prosecution. In social security, the debtor is the employer. The employee is only liable for contributions and has to deduct his employee share from the wages. In every company, Deutsche Rentenversicherung carries out a tax audit every 4 years. The fees paid to subcontractors are also checked.

Section 7 SGB IV defines the term employment. According to this, employment is salaried work, especially in an employment relationship. Clues for employment are an activity according to instructions and an integration into the work organization of the instructor. If such employment exists, there is compulsory insurance and the employer becomes the debtor of the corresponding contributions.

On the Employees page you will find explanations on the definition of an employee and how dependent employment is differentiated from self-employment

If there is any uncertainty about the status of an employee, the self-employed (employees) or their clients can initiate a status determination procedure at the German Federal Pension Insurance, through which an activity is defined as self-employed or employment.

Definition of the German pension insurance for bogus self-employment (source: Lexicon for social insurance examination in the company):

Pseudo-self-employed employees are people who formally appear as self-employed (contractors), but who are actually dependent employees within the meaning of Section 7 (1) SGB IV. The client - like any other employer with his employees - has to check whether a contractor is employed by him or is working independently for him. If a client is of the opinion that there is no dependent employment in a specific individual case, he does not have to do anything formally. However, he takes the risk that the facts of the case will be assessed differently in the event of a tax audit and that subsequent payment of total social security contributions will become necessary. In cases of doubt, the client should therefore initiate the special inquiry procedure with the German Federal Pension Insurance Association in accordance with Section 7a, Paragraph 1, Clause 1 of SGB IV.

Criteria of the tax auditor of the Deutsche Rentenversicherung when checking freelance workers for bogus self-employment:

  • Does the freelancer only have one client?
  • Does the freelancer have no employees of their own?
  • Does the freelancer make his main turnover with a client?
  • Is the freelancer involved in the company like the permanent employee?
  • Does the freelancer have fixed working hours?
  • Is the freelancer bound in many decisions (sources of supply, use of personnel, use of capital, use of machines)?

The overall situation is always considered. If one of the criteria from the above list applies, it is not necessarily assumed that you are self-employed.

Extract from the twelfth report of the federal government on the effects of the law to combat illegal employment (printed matter 17/14800 of 09/27/2013):

The phenomenon of bogus self-employment is a form of undeclared work and occurs when an employed person appears as a formally self-employed entrepreneur (contractor), although he is actually employed in the sense of Section 7 (1) SGB IV. As a form of offense, it is subject to Section 266a of the Criminal Code (withholding and misappropriating wages). The phenomenon of bogus self-employment continued to play a significant role in the reporting period. It is characteristic that under the guise of self-employment, the existence of a social security obligation is to be concealed. Other reasons are circumventing the statutory minimum wages or violating employee protection regulations, which are not to be observed in the case of the self-employed.

If you have any doubts as to whether you are employed or self-employed, the clearing house of the German Pension Insurance Association can help. It checks the social security status.

Consequences of an established bogus self-employment

If pseudo self-employment is found, the person concerned becomes an employee of the company. In principle, if the bogus self-employment is determined, the social insurance obligation comes into effect upon commencement of the activity. The employer (client) must pay the outstanding employer and employee contributions (plus late payment surcharges and interest) to social security retrospectively for up to four years.

In terms of tax law, employers and employees are jointly and severally liable for any additional wage tax payments.

Federal Labor Court judgment of June 26, 2019, 5 AZR 178/18 - Employee status - Reversal
Principles:

If a supposedly free employment relationship turns out to be an employment relationship in retrospect, it cannot usually be assumed that the amount of the remuneration agreed for freelance work is also agreed for employment as an employee.

Excerpt from the reasons for the decision:

According to the case law of the Senate, the employer can demand the repayment of overpaid fees from § 812 Paragraph 1 Clause 1 Alt. 1 BGB if the employee status of a supposedly freelance employee is determined retrospectively. With such a determination it is also established that the obligated person was to be remunerated as an employee and that there was no legal reason for the fee payments if the remuneration owed in the employment relationship is lower than the fee agreed for the freelance employment relationship. If a lower remuneration was to be paid instead of a fee for the work in the employment relationship, the employer's claim to enrichment does not include all fee payments, but only the difference between the two remuneration.

The entrepreneurial activity ends with the establishment of bogus self-employment. This means that the trade must be de-registered with the competent trade office. Membership in the Chamber of Commerce and Industry also ends at this point.


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