Professionals in Germany are increasingly receiving attractive job offers from digital companies abroad (in my law firm, the offers come particularly often from the US, UK, Israel and Canada). The professional living in Germany is offered a so-called contractor agreement, which means that the professional is to work for the foreign company as a self-employed entrepreneur.

In this article, I would like to give you an overview of what you should look out for when concluding a contractor agreement in connection with social security-related bogus self-employment.

1. What is a contractor agreement? 

‘Contractor’ refers to a self-employed contractor, “Freiberufler”, independent entrepreneur or freelancer. In any case, the professional should not be employed as an employee. The standard clause is therefore included in the contracts that the contractor is hired as an ‘independent contractor’.

If you do not actually want to be self-employed, but would rather be covered by social security (i.e. health, long-term care, accident, pension and unemployment insurance) as an employee, then read this blog post.

If you are just starting out as a self-employed contractor or if you are already self-employed, you should carefully check the offer of a ‘contractor agreement’ to avoid the risk of bogus self-employment.

2. Criteria for bogus self-employment in Germany

According to German social security law, a ‘contractor’ is an entrepreneur, not an employee.

I have already described in more detail in this blog post what distinguishes a self-employed contractor from an employee. The main criteria are:

• No binding instructions regarding working hours, how the work is carried out and where the work is carried out
• Entrepreneurial initiative
• Entrepreneurial risk

Contractors who typically provide services (ongoing advice, programmers, software development) often lack entrepreneurial risk, i.e. they do not use their own operating resources (such as goods, warehouses, etc.). At the same time, these service occupations differ only slightly from employees who perform similar tasks. Therefore, it must first be noted that the boundaries between self-employment and employment (or the determination of bogus self-employment) are very narrow and fluid. In a large number of rulings, the Federal Social Court in Germany has established criteria for various industries and professions, although it is difficult to predict how the DRV (German Public Pension Insurance Authority “Deutsche Rentenversicherung”) will decide in individual cases.

Therefore, it is always recommended to carry out the status determination procedure in cases of doubt.

3. Bogus self-employment in the case of activities for foreign clients

In the case of foreign clients, there are now two special features that further complicate an already unpredictable legal situation:

a. Contracts under foreign law

‘Contractor Agreements’ under Anglo-American law often contain clauses that indicate bogus self-employment under German law:

• The contractors are subject to a non-competition clause, meaning that they may only work for other clients with the consent of the client or that their activities in their own industry are restricted.
• The use of auxiliary staff is also contractually restricted.
• There are often clauses that indicate a relationship of subordination, at least in formal legal terms.
• At the same time, the liability of the foreign client is excluded in the event that bogus self-employment is established in Germany. As a result, it is often unclear whether the contractor could take legal action – abroad – against the client for payment of social security contributions.

Although in reality contractors do work autonomously or are not able or willing to employ auxiliary staff due to their traditional freelance work, ‘contractor agreements’ contain critical clauses in terms of German social security law.

For this reason, I strongly advise contractors to have their ‘contractor agreement’ checked by a lawyer before (!) they sign the contract.

It would be even better if you had your own general terms and conditions or contract and offer templates that you could present to your client for signing.

Practical tip: In contract negotiations with the foreign client, critical clauses can often be negotiated away if the client is explained what effects certain clauses have under German law.

In discussions, it often turns out that the clauses in question are simply included as standard,

• without the client enforcing them or even being able to enforce them (e.g. because a contractual prohibition is not associated with a contractual penalty or other serious legal consequence), or
• without them being of particular importance to the foreign client.

Frequently, they also contain clauses that offer no added value to the parties at all, but that are critical in terms of German social security law. The reason for this may lie in the different legal systems, for example between the US and Germany. While US law is based on precedents, in Germany we first have laws that regulate the legal situation in the abstract. As a result, we no longer have to stipulate many things in contracts under German law because the legal consequence already follows directly from the law (e.g. BGB). This is why US contracts are sometimes much more detailed and contain wording that expresses something that is self-evident to us (because it is already regulated in our law). In addition, the legal terms used do not, of course, have exactly the same meaning in the different legal systems.

If the German Public Pension Insurance Authority (DRV) examines such contracts from the perspective of ‘bogus self-employment’, even banal contract clauses may suggest an employment relationship simply because the contract is only viewed through ‘German legal spectacles’.

Practical tip: This is one reason why it is so important that you do not blindly sign an offer for a contractor agreement (no matter how attractive it may be), but rather read it critically and, if necessary, have it checked by a lawyer in advance.

b. Liability of the German contractor in the event of bogus self-employment

The second and even more important reason for carefully reviewing the contract BEFORE (!) signing it is your personal liability!

Attention!

It can no longer be ruled out that you, as a contractor in Germany, will be held liable for the total social security contribution of currently approx. 40% if it is determined by the authority that you are a bogus self-employed person under German social security law! 

The legal basis for the claim could be § 28m (1) SGB IV. If your client is based abroad, the social security authorities in Germany cannot enforce any additional contribution claims in the event of the determination of bogus self-employment abroad. At least that is what a recent ruling by the LSG Berlin-Brandenburg of 11 January 2024 (L 14 KR 139/22) indicates. Although the ruling concerned a different matter (backdated contribution claims in the context of an employment relationship), it would be the only logical legal consequence to apply it to cases of bogus self-employment (Contractor-Cases).

For this reason, it is extremely important to check the contract BEFORE signing it, especially in the interest of the German contractor!

c. The status determination procedure does not offer a practical solution

From a purely legal point of view, liability for contractors can only be avoided if a status determination procedure is carried out.

In practice, however, this has so far hardly been a helpful tool, because: according to the DRV, status determination procedures for foreign clients take about 9 months, and in my experience even over 1.5 years.

But in practice, we have the following situation: a digital company from Silicon Valley offers a programmer an interesting project in which the programmer is to provide support as quickly as possible. 1.5 years is an eternity in the software industry and no matter what the DRV decides in the end, the probability that the German contractor will be left alone with the resulting financial consequences is very high.

This is a good example of how bureaucracy actively puts obstacles in the way of professionals and the self-employed in Germany.

4. What contractors who want to work for foreign clients can and should do! 

• Read your contractor agreement very carefully and negotiate the critical contract clauses away.
• Better still: work with your own terms and conditions and order confirmations! You can still make individual additional agreements with the foreign clients, but your own terms and conditions will protect you very well indeed. 
• Negotiate a sufficiently high fee that factors in the financial consequences of bogus self-employment.
• If you have been working for a foreign client for a long time, adjust the existing contracts if they contain critical clauses. 
• Especially in the case of long-term cooperation, you should carry out the status determination procedure together with your client. This is primarily in your interest so that you are not alone in the event of bogus self-employment in the worst case, namely bogus self-employment!
• As part of an initial consultation, I can check for you quickly and at short notice what the risk of bogus self-employment is for you (i.e. by reviewing your contractor agreement) and develop quick solutions for your individual case. When it comes to interesting job offers from abroad, speed and pragmatism are often required so that you do not have to turn down the interesting job offer. 

What is technically possible should not fail because of bureaucracy! 

As a lawyer, I have therefore specialized in cross-border mobile working (so-called Global Mobility Law) and advise digital companies, self-employed and employees on a daily basis on how to make mobile working legally compliant in Germany and pragmatically feasible. 

What clients say about my work on anwalt.de and Google.

5. Are you a tax consultant?

Do you work as a tax consultant (e.g. a specialist in international tax law) in the field of international tax law? Feel free to contact me!

In order to provide my clients with the best possible service, I like to network with tax advisors who can take on the tax declaration obligations for my clients and are interested in a professional exchange.

I look forward to hearing from you!

Your lawyer
Romy Graske