What is pseudo self-employment or « Scheinselbständigkeit » ? Use this checklist to recognize pseudo-self-employment (translation from the German article on this blog) :
If you employ freelancers as a company, there is a risk that they will be classified as pseudo-self-employed and your company may face high penalties. To avoid this, it is important to recognize signs of pseudo self-employment. This checklist will help you identify potential pseudo-self-employment and take appropriate action.
The distinction between self-employment and pseudo-self-employment is a complex issue that has been debated for a long time and has produced numerous court rulings. However, there is no uniform legal definition of it. Konstanze Brieskorn, an attorney for labor law, points out, « The discussion has been going on for decades, there are countless judgments, but no legal definition. »
Bogus self-employment is defined by the German Pension Insurance on its website as follows: « Persons who formally appear as independent contractors, but are in reality dependent employees in accordance with Section 7 (1) SGB IV, are referred to as bogus employees. »
What is pseudo self-employment?
There are criteria for determining pseudo-self-employment in labor law, social security law and tax law. These include:
1- Degree of personal dependence: a self-employed person whose work is similar to a permanent employee has a higher degree of personal dependence. For example, an IT freelancer who works exclusively for one client and is left with no income if the contract is lost may be considered a pseudo-self-employed person.
2- Autonomy: A self-employed person should have the freedom to organize his or her work independently. For example, if a contractor is bound to shift schedules, this may be an indication of pseudo-self-employment.
3- Bound by instructions: In contrast to salaried employees, self-employed persons may make their own decisions regarding working hours and working methods and are not bound by instructions. Being bound by instructions indicates dependent employment.
In order to make the distinction between self-employment and pseudo self-employment, there are various criteria that are laid down in labor law, social security law and tax law. An important indication of pseudo self-employment is the degree of personal dependence: the more the work of a self-employed person resembles the employment relationship of a permanent employee, the higher the degree of personal dependence. Further indicators are the degree of external control, i.e. the integration of the self-employed person into the operating procedures of the client, as well as the degree to which the self-employed person is bound by instructions, i.e. the number of instructions that the self-employed person must follow.
Another criterion is the entrepreneurial appearance: If a freelancer can freely set his or her own prices, create his or her own offers and do his or her own marketing, this tends to speak in favor of self-employment. However, these criteria are like pieces of a puzzle that only form a picture when viewed as a whole. Individual criteria are not sufficient to determine pseudo-self-employment. Bogus self-employment is prohibited because it contradicts the meaning and purpose of the welfare state principle and undermines the social security system.
What is pseudo self-employment?
Is ignorance protected from additional payments?
In the event of a social security audit, can one hope that ignorance regarding bogus self-employment will be accepted as an excuse? The answer is no. The state expects contractors to exercise general due diligence, including a duty to provide information about bogus self-employment. If an entrepreneur appears ignorant during an audit and hopes for leniency, he will be disappointed. The authorities always assume negligence. It is therefore advisable for entrepreneurs to seek advice from lawyers or have a free status determination procedure conducted by the Clearing House of the German Pension Insurance Association before contracting a freelancer.
For companies that have already awarded a contract, our expert recommends that they do not approach the procedure lightly, but think wisely about how to proceed. In case of uncertainty, companies should consult a lawyer who is sworn to secrecy. The subject is very complex, and there are many pitfalls for both sides. However, the harsher sanctions usually hit the company.
To avoid bogus self-employment in the case of freelancers, the safest way is a status determination procedure by the clearing office of the German Pension Insurance Fund in accordance with § 7 a SGB IV. However, companies should carefully check whether they have all the necessary documents and whether they are quick enough. The application for the status procedure must be submitted one month after the freelancer starts working.
It is also advisable to establish compliance processes for projects with freelancers. A checklist can help identify risks for bogus self-employment, and law firms offer such a check. If there is a risk, companies can readjust accordingly.
Under no circumstances, however, should companies try to cover up indications of bogus self-employment by keeping the work assignment as vague as possible. A tax audit could then arouse suspicion and delve deeper into the matter. If companies cannot prove that they have tried everything to rule out bogus self-employment, they could be suspected of intent.
This checklist will help you identify whether your freelancers may be pseudo self-employed. If you answer yes to several of the following questions, there are clues:
1- Does your freelancer have to follow your instructions, for example regarding working hours, work location and working methods, as is the case with salaried employees?
2- Is he integrated into the company structure and does he receive clear instructions from team or project leaders?
3- Do you provide him with working space and resources?
4- Does the freelancer not have his own corporate structure, such as his own office space, website, tools or machines?
5- Is the freelancer contractually obligated to use certain IT, hardware or software, which gives you more control?
6- Does the freelancer receive a monthly fee, regardless of services rendered?
7- Does working for you limit the freelancer’s entrepreneurial opportunity, for example, by not giving him time to work for other clients?
8- Are you the freelancer’s primary client and financially dependent on you?
9- Do you require that the freelancer not accept assignments from your competitors while working with you?
10- Do you insist that the freelancer is personally responsible for your project instead of subcontracting and using other freelancers or employees?
11- Do you forbid the freelancer from acquiring new clients while working for you?
12- Does the freelancer have to get your permission when taking time off?
13- Do you grant vacation and vacation pay for the freelancer?
14- Do you continue to pay him when he is sick, similar to employees?
15- Do you require the freelancer to attend certain events such as Christmas parties, company outings, or employee training?
16- Does the freelancer work on open-ended projects?
17- Do you require detailed reporting on work progress and time allocation?
18- Does the freelancer use your company’s business cards?
19- The more of these questions are answered in the affirmative, the higher the probability that your freelancer is a bogus self-employed person.
Solution approach to avoid bogus self-employment :
Pay-roll employment can actually be a solution approach to avoid bogus self-employment. In this case, the freelancer is not paid directly by the client, but by a employer of record who is responsible for the payment of social security contributions and taxes. This ensures that the freelancer is not classified as an employee and that the criteria for self-employment are met. This type of contract can be advantageous for both parties, as the client does not have to assume any employer obligations and the freelancer is still subject to social security contributions and has coverage in the event of illness or unemployment. However, it is important that the umbrella company is carefully examined and that the general conditions for self-employment are fulfilled in order to avoid a failure of the solution.