Hiring a Contractor in Germany as a foreign company I About bogus self-employment in Germany
Are you a foreign company without a permanent establishment in Germany? Would you like to hire a professional in Germany, either as an employee or as an independent contractor? Or would you like to work for a foreign client as a contractor living and working in Germany?
German professionals should never be hired as independent contractors without all parties involved being aware of the risks. This blog post is intended to give you an overview of the topic of bogus-self-employment under social security law in Germany.
1. US citizens in Germany as independent contractors
In my law firm, I regularly encounter US citizens (or citizens of countries such as Canada, Israel, and the UK) who want to work from Germany for a foreign client in their home country. Very often, foreign companies offer their citizens the opportunity to work remotely for the company as so-called independent contractors.
However, there is often a lack of understanding of how the German social security system works and how high the financial risks can be if the social security authority (known as the “Deutsche Rentenversicherung” or DRV) subsequently determines that the person works under bogus self-employment.
2. What is bogus self-employment under German law?
Employers in Germany are obliged to pay social security contributions on their employees‘ earned income to the health insurance fund as the collection agency (§ 28h (1) SGB IV). As an employer, you must calculate approximately 20% in social security contributions in addition to the gross salary, which the employer must pay. A further 20% is deducted from the employee’s gross salary and paid by the employer to the collection agency. This results in a total social security contribution of around 40%.
This total social security contribution includes the employer’s and employee’s contributions for:
- Health insurance
- Long-term care insurance
- Pension insurance
- and unemployment insurance
for employees living and working in Germany.
If, for example, a US company hires a US citizen who lives and works exclusively in Germany as a self-employed freelancer (often referred to as a “contractor”), this may constitute so-called bogus self-employment under German social security law. If the supposedly self-employed contractor does not meet all the criteria for self-employment, the DRV can retrospectively classify the contractor as an employee within the meaning of German social security law. The consequence is that the employer must pay the total social security contribution retroactively on the fees paid to the contractor:
- In any case, for the past 4 years, as this is the limitation period under German social security law pursuant to 25 (1) SGB IV.
- If the employer acted intentionally, the limitation period is even 30 years!
Furthermore, failure to pay social security contributions is a criminal offense in Germany pursuant to § 266a (1) StGB.
German companies usually pay the total social security contribution themselves if bogus self-employment is subsequently determined, i.e., 40% subsequent payment of social security contributions on the fees paid is an enormous economic loss for employers if the DRV subsequently determines bogus self-employment.
In practice, the core problem is primarily that the DRV and also the social court jurisdiction in Germany interpret the term “employment” very broadly. The legal criteria for determining when self-employment and employment exist are very vague and depend on a variety of individual circumstances in each case. Even though the DRV publicly states otherwise, as a lawyer, I often have the impression that the authority argues in a results-oriented manner, i.e., it attempts to classify as many “contractors” as possible as employees in order to ultimately get more contributors into the German social security system.
It is precisely this legal uncertainty and lack of predictability that leads companies in Germany to refuse to work with freelancers (i.e., freelancers or solo self-employed persons without their own employees) for fear of subsequent bogus self-employment.
It is possible to carry out a so-called status determination procedure (in German: Statusfeststellungsverfahren). In this procedure, the authorities can determine in advance whether the person is self-employed or in an employment relationship. However, this procedure is quite complex and slow, and classification as an employee often proves to be unrealistic. This procedure does not meet the practical needs of a fast-paced digital economy, especially in the Anglo-American region. Further details can be found here.
Practical tip: Anglo-American contractor agreements often contain very critical clauses that clearly indicate bogus self-employment under German social security law. You should therefore have your contractor agreement reviewed by a lawyer before signing it! Further details can be found here.
In addition to bogus self-employment under social security law, there is also bogus self-employment under labor and tax law. However, the greatest financial risks are currently likely to lie in bogus self-employment under social security law.
3. Pension insurance obligation for self-employed persons in Germany
A distinction must be made between bogus self-employment under social security law and the so-called pension insurance obligation under German social security law.
Certain self-employed persons in Germany are obliged to pay into the statutory pension insurance system, even though they are actually self-employed. This is an exception to the rule, as the principle is that self-employed persons do not have to pay into the statutory social security system.
Typical self-employed persons who are obliged to pay into the German statutory pension insurance system are:
- Self-employed persons who work permanently and essentially for only one client and do not employ any staff of their own (further details can be found in this blog post).
- Teachers who do not employ their own staff. This also includes those who work as trainers, online coaches, etc. (Further details can be found in this blog post).
Foreign nationals living in Germany for private reasons often work as solo self-employed persons for only one or a few foreign clients in their home country. As a contractor, you should therefore familiarize yourself with the statutory pension insurance obligation for self-employed persons in Germany, because otherwise you may face very high additional payments (Further details can be found in this blog post).
Important note: The pension insurance obligation for self-employed persons is not the same as bogus self-employment! The two are very often confused and misunderstood. Further details can be found here.
4. Are employer-of-record models a suitable alternative?
There are now numerous so-called employer-of-record service providers, mainly from the Anglo-American region, who advertise that they offer legally compliant solutions for cross-border mobile working (so-called remote work).
The solution models are essentially:
- Employing an employee in Germany through a partner company in Germany so that the work can be passed on to the foreign (de facto) employer (so-called employer-of-record model)
- Hiring freelancers in Germany via the platform provided by the provider (so-called freelancer solution)
In any case, the offer to hire freelancers in Germany in a legally compliant manner should be treated with great caution! Although the providers make extensive contractor agreements available as templates, they ultimately pass on the legal liability for the risk of bogus self-employment to the client and contractor. I often have the impression that clients and contractors are under a false sense of legal certainty.
Practical tip: Read the terms and conditions of such providers very carefully. In my experience, they make very expensive marketing promises that they simply cannot legally keep.
The employer of record model, on the other hand, can be a sensible solution in certain cases. Further information on the employer of record model can be found here.
5. Employing staff in Germany as a foreign company without a permanent establishment
Of course, you can also employ staff in Germany. Admittedly, this is not always possible, for example, if the tax risk for the foreign company is too high (so-called permanent establishment). But in many cases, this is possible with manageable risks.
I often find that foreign clients are under the misconception that they cannot employ anyone in Germany without establishing an entity or subsidiary in Germany. This is not the case! For this reason, professionals should not simply be hired as “independent contractors,” as this entails enormous financial risks, especially for the contractor in Germany (details can be found in this blog post).
6. I am your specialist for global mobility law in Germany
As a lawyer (under German law), I am a specialist in cross-border mobile working (known as global mobility law) and advise small and medium-sized digital companies, self-employed persons, and employees daily on all aspects of cross-border mobile working (known as cross-border remote work).
What clients say about my work on anwalt.de and Google.
I firmly believe that cross-border mobile working should not be hindered by German bureaucracy. That is why I have made it my mission to develop understandable and pragmatic solutions for digital companies, entrepreneurs, and employees to implement remote work related to Germany.
7. Are you a tax advisor or lawyer abroad?
Do you work as a tax advisor or lawyer in the field of global mobility law outside Germany? Feel free to contact me!
In order to provide my clients with the best possible service, I am happy to network with tax advisors and lawyers who can support my clients abroad and who are also interested in professional exchange.
I look forward to hearing from you!
Your lawyer
Romy Graske
