Risk of disguised self-employment and how to avoid it
A popular way to be a contractor in Germany is via self-employment, especially when you are more concerned about how much you take home rather than your level of social benefits. Provided you make no claims on the state and don’t fall under the professions mentioned below, you don’t need to pay pension insurance contributions in Germany:
- Craftsmen and tradesmen
- Teachers, trainers, coaches or comparable professions if they regularly earn more than €450,00 per month
- Kindergarten and preschool teachers as well as child minders
- Caregivers who are predominantly acting on a doctor’s order
- Midwives and maternity nurses
- Artists including all persons who create perform or teach music, performing or visual arts
- Journalists such as writers, authors and also if you teach journalism
Most importantly: if you employ employees with a salary of more than €450,00 per month or if you work for only one client, you are always obliged to pay pension insurance contributions. If you don’t register with the German Statuary Pension Insurance Scheme and pay your contributions, you are subject to disguised self-employment. This is the case when you appear as self-employed but are actually a dependent employee.
To qualify as self-employed, you have to fulfill certain requirements:
- You are free to organise your own professional schedule and activities
- You are free to determine your working time
- You are free to decide your availability to work
In addition, self-employed contractors have entrepreneurial freedom of decision and at the same time bear the entrepreneurial risk. This also includes taking entrepreneurial opportunities on one’s own responsibility. The typical characteristics of self-employment include, for example, the ability to make independent decisions about
- purchase and selling prices
- purchase of goods
- employment of staff
- use of capital and machinery
- the goods reference
- the client’s method of payment (e.g. granting of discounts, immediate cash payment, deferral options)
- type and scope of advertising measures for your own company (e.g. use of your own letterheads).
With that in mind, what defines you as employee?
Indications for employment are the activity according to instructions and the integration into the work organisation of the instructing party. It is also important that the employment is performed for remuneration.
With the right to issue instructions, the employer can determine the employee’s
- working time
- the place of work
- working hours
- the type of work to be carried out
Indications for needing to be employed by the company are:
- a fixed workplace with work equipment provided by the employer
- continued payment of remuneration in the event of leave or illness
- overtime pay
- entitlement to paid vacation and company social benefits (e.g. company pension scheme)
In case of disguised self-employment, the entrepreneurial decision-making powers of the contractor are severely restricted, so that an independent entrepreneurial activity is no longer discernible.
What happens if the German Statuary Pension Insurance Scheme classifies your activities as disguised self-employment?
The German Statuary Pension Insurance Scheme audits companies in Germany on a regular basis and checks if the employer pays the social contribution charges for his employees. If they assess the social security classification differently from the employer, the employer is charged with evasion of social security contributions. In other words, if they come to the conclusion of disguised self-employment, both the employer and the respective employees are obliged to pay the contributions to the statutory pension, health, nursing care and unemployment insurance retroactively. Depending on the amount of employees and years of not having paid the contributions, the fines can be very severe. Some companies have not been able to cover the costs and have had to file for bankruptcy.
What can you do to avoid disguised self-employment?
Luckily, if you are unsure if you are classified as a self-employed contractor or an employee, you don’t have to wait until an audit. Both you and your client or employer can always ask the German Statuary Pension Insurance Scheme for an optional status determination. Based on an overall assessment of the individual case, they decide whether it is a question of dependent employment or self-employment. A decision is also made on the existence of compulsory insurance or freedom of insurance in health, pension, long-term care and unemployment insurance.
Temporary employment – Get to know different companies while being fully insured
If you don’t want to take any risks at all and be on the safe side, but still would like to work for different companies, temporary employment might be an interesting option for you. Temporary employment allows you to gain a wide range of professional experience while benefiting from all the benefits of an employee, such as only half of the costs for pension and medical insurance as well as paid sick leave and vacation days. On top of that, you don’t have to find the clients yourself, as a recruitment agency is involved who refers matching clients for you and TCP will act as your employer during your placement. Learn more about temporary employment with TCP by contacting a member of our sales team on +44 (0)208 996 0883 or via email – info@tcpsolutions.com.
