Pseudo self-employment / Employee-like self-employment

Pseudo self-employment can be assumed if the person has registered as self-employed with the relevant tax office, even though the conditions for “employment” are met. According to Section 7 para. 1 sentence 1 of the Social Security Code IV (SGB IV), employment is defined as non-self-employed work, in particular in an employment relationship.

From 1999 onwards, if the parties in an employment relationship to be assessed refused to cooperate in clarifying the question of whether pseudo self-employment had arisen, social insurance agencies were allowed to assume that a dependent employment relationship existed and thus that the employment was subject to compulsory insurance if at least three of the five characteristics specified in the law were identified.

On January 1, 2003, this presumption rule pursuant to Section 7 para. 4 of the Social Security Code IV (SGB IV) ceased to apply. Subsequently, Section 7 para. 4 of the Social Security Code IV (SGB IV) only stated that persons who applied for a start-up grant under Section 421 para. 1 Social Security Code III (SGB III) (“Ich-AG”), it was disputably assumed that they were self-employed during their (maximum three-year) grant period, unless proven otherwise. On July 1, 2009, this paragraph was removed in its entirety.

As before, the facts must be determined on the basis of Section 7 para. 1 of the Social Security Code IV (SGB IV) – usually with the cooperation of clients and contractors. The decisive factor is an examination within the framework of an overall assessment of the individual case.

The Clearingstelle “is the decision-making body at the German Federal Pension Insurance Fund for determining whether someone is to be classified as an employee or a self-employed person. At the request of the parties concerned (employer, employee, client, contractor), it determines the status, i.e., employee status or self-employment. The decision is legally binding.

If an obvious case of pseudo self-employment arises in a contractual relationship, the alleged client (i.e., the person giving instructions) has no choice but to register the pseudo self-employed person with the health insurance fund.

If in doubt about the question of pseudo self-employment, the parties involved can apply for and carry out a status determination procedure (“determination of employment status” in accordance with Section 7a of the German Social Security Code IV (SGB IV) with the German Federal Pension Insurance Fund (DRV Bund). To do this, a written application for determination of possible employment must be submitted. The DRV Bund then informs the parties involved what information and documents it needs for its decision. It will set the parties involved a reasonable deadline within which the information must be provided and the documents submitted. Once the review has been completed, the DRV will inform the parties involved of the decision it intends to make, record the facts on which it intends to base its decision, and give the parties involved the opportunity to comment on the intended decision.

The Clearingstelle of the German Pension Insurance (formerly bfA) is responsible for the application procedure through which the parties involved can obtain clarification of the status issue.

If a decision has been made by the DRV or the health insurance funds, an appeal or legal action may be lodged against it. These have suspensive effect, which means that no contribution claims may be made until a decision has been made on the appeal or legal action.

If the German Federal Pension Insurance Fund (DRV Bund) determines that the work is “dependent employment” without the parties involved having initiated a review of their status, social security contributions are generally payable from the start of employment.

If an application procedure is carried out, the insurance obligation only comes into effect under the conditions (in accordance with Section 7a para. 5 sentence 1 of the German Social Security Code IV (SGB IV) once the decision is final (within the meaning of Section 31 of the German Social Security Code X (SGB X) if:

“... the application for determination of employment status is submitted within one month of commencement of employment ...”

"... if the employee

1. agrees and

2. has taken out insurance against the financial risk of illness and for old-age provision for the period between taking up employment and the decision, which corresponds in type to the benefits of statutory health insurance and statutory pension insurance."

Pseudo self-employment can have consequences under social insurance, labour and tax law, which are explained in the following sections.

4.1. Social insurance law consequences

The previous client is now, as an employer, required to pay the usual employer and employee contributions to the statutory health insurance funds and to register the employee as such.

The health and long-term care insurance obligation depends on the respective insurance situation (including income level and current contribution measurement limit). In addition, the client must generally pay all social security contributions (including the employee's share) back to the start of the employment relationship. These claims for back payments only expire four years after the end of the calendar year in which they became due, or even after 30 years in the case of intentionally withheld contributions. In contrast, the employer may only withhold part of the employee's salary for three months. Any deviating recourse provisions between the parties are invalid.

4.2 Consequences under labour law

The pseudo self-employed person can take legal action to establish its employee status. If the labour court determines that they are an employee, the supposedly self-employed person is now an employee with protection against dismissal, vacation entitlement, and continued payment of wages in the event of illness.

4.3 Tax consequences

The change in circumstances can also have tax consequences.

Although the income tax is owed by the employee, the employer is liable for withholding and paying the income tax, even if the employer assumes that they are working with a supposedly self-employed person who is in fact an employee. The employer and the employee are jointly and severally liable for the subsequent payments, meaning that both can be required to pay the outstanding amounts in full. However, the requirement for the employer to unilaterally pay is without abuse of discretion if the employer has deliberately or recklessly failed to withhold tax (Federal Fiscal Court (BFH), judgment of February 12, 2009 - VI R 40/07). Economic reasons can also play a role if the employee has no financial resources. In order to reduce the liability risk for the client from the outset, it is possible to clarify the employee status of certain persons and thus also their income tax liability with the local tax office (appeal information). Even if the information was objectively incorrect, the employer is released from liability if they have complied with the information provided. A refusal to provide appeal information also has an indicative effect for self-employment under social insurance law as part of the overall assessment.

Pseudo self-employed persons must note that, as employees, they are subject to wage-/income-tax regulations and will no longer generate income from their business operation.

Whether an individual carries out an activity independently is to be determined separately for tax law purposes and independently of social law. Natural persons are not self-employed if they are integrated into a company in such a way that they are bound by instructions. Legal entities lack independence if, based on the overall picture of the actual circumstances, they are financially, economically, or organizationally integrated into the company of the controlling entity and are thus subsidiaries. However, anyone who shows a tax amount on an invoice even though they are not entitled to do so owes the amount shown. However, it is possible to declare the invoice invalid and correct it if the risk to tax revenue has been eliminated. Since the employer has generally deducted input tax, there is generally a risk to tax revenue. This can be eliminated by requesting the employer to repay the input tax as part of a special VAT audit or by voluntarily correcting the incorrect input tax shown on the invoices.

If the tax assessment is not made within a certain assessment period, the assessment becomes time-barred. This period is generally four years from the end of the calendar year in which the tax arose; in the case of tax evasion or reckless tax evasion, the assessment period is ten or five years, respectively. Claims arising from the tax liability are subject to a special limitation period for payment and expire after five years.

4.4 Consequences under commercial law

At the latest upon determination of “employment” (see above), the entrepreneurial activity for the operated business also ends.

This means that the business must be deregistered. For further information on this, please contact the responsible authority. In Berlin, this is the public order office of the district in which your company's place of business is located.

Legal membership in the Chamber of Industry and Commerce and the legal obligation to be a member of the employers' liability insurance association also end at this point.

4.5 Consequences under criminal law

In addition, criminal law consequences are also to be expected.

An employer is liable to prosecution of withholding contributions if they do not pay employee´s contributions. These contributions can include health insurance, pension, and social insurance. Since there is no independent definition of an employer under criminal law, the concept of an employer under social law is used in criminal law.

Whether a person is an employer is determined by social law (Federal Court of Justice, decision of September 24, 2019 - 1 StR 346/18, juris para. 24). Social law, in turn, bases its assessment of employer status on civil service contract law in accordance with Sections 611 et seq. of the German Civil Code (BGB). Accordingly, an employer is someone who, as the party entitled to services, is entitled under a private law contract to demand the performance of work from another person (employee) in a relationship of personal dependence and is obliged to pay them a wage in return. Personal dependence is expressed above all by the integration of the employee into the employer's business and the employer's comprehensive right to issue instructions. Whether such an employment relationship exists is determined by the actual circumstances, which must be considered as a whole (Federal Court of Justice, loc. cit., juris para. 24; Federal Court of Justice, decision of March 23, 2022 - 1 StR 511/21, juris para. 15; decision of January 16, 2019 - 5 StR 249/18, juris para. 26, SSW-Criminal Code/Saliger, 6th ed. (2024), § 266a para. 8, each with further references)."

(District Court Nuremberg-Fürth, decision of March 28, 2024 – 12 KLs 504 Js 1820/21)

An “employer” is therefore a person who, as the party entitled to receive services, is authorized by a private law contract to demand the performance of work from another person (employee) in a relationship of personal dependence and is obliged to pay that person a wage in return. The decisive criterion is personal dependence. This requires integration into the company and subordination to the employer's right to issue instructions with regard to the time, duration, place, and type of work performed. The actual circumstances are decisive, not the contractual arrangement. The employer can therefore also be the person who commissions the pseudo self-employed person. If “the employer” mistakenly assumes that an employment relationship does not exist, even though it is in fact a case of pseudo self-employment, intent may be ruled out in this respect. On the other hand, (conditional) intent must be assumed if the pseudo self-employed person contractually undertakes to pay the employee contributions internally if an audit qualifies him or her as such.

If the relevant taxes have not been paid or have not been paid in full, a reckless tax reduction (administrative offense) may also be considered. If the pseudo self-employment was deliberately constructed, there is even tax evasion (criminal offense). In both cases, however, there is the possibility of a voluntary disclosure that exempts the person from punishment (see Sections 371 para 1 and 378 para 3 of the German Tax Code). However, voluntary disclosure by pseudo self-employed persons often fails because a court order to search the premises of the accused employer notifies them that criminal proceedings have been initiated against them, thereby creating a blocking effect that prevents exemption from punishment. Secondarily, the risk of withholding taxes may also be considered. According to this, the employer acts improperly if they intentionally or recklessly fail to fulfil an obligation to withhold and pay income tax.

“According to Section 2, Sentence 1, No. 9 of the Social Security Code VI (SGB VI), self-employed persons who do not regularly employ employees subject to compulsory insurance in connection with their self-employed activity and who work permanently and essentially only for one client are subject to compulsory pension insurance (so-called self-employed persons with only one client).” (German Pension Insurance Bund)

This means that “self-employed persons with only one client” are generally subject to compulsory pension insurance. They must pay their contributions in full themselves and register immediately with the responsible pension insurance institution (German Pension Insurance Bund).

In the following cases (pursuant to Section 2, sentence 1, no. 9 Social Security Code VI (SGB VI), Section 6, para. 1a, sentence 1, no. 1, para. 2 Social Security Code VI (SGB VI), you can apply for exemption from compulsory pension insurance:

The application can be made at any time. If it is submitted within three months of the commencement of the insurance obligation, the exemption shall take effect from the beginning. If the application is submitted after three months, the exemption shall take effect from receipt of the application.

The special case of commercial agents: With the abolition of the presumption criteria, the exemption for commercial agents has also lapsed. Decisive for the determination of their independence therefore is whether they are essentially free to organise their activities and determine their working hours (section 84 para. 1 sent. 2 of the German Commercial Code). If these requirements are not met, commercial agents may also be self-employed. Indications of this are, for example, sales targets, tight controls on the part of the employer, compulsory attendance, prescribed obligatory appointments with customers, tour plans, holiday arrangements with the client as well as a ban on hiring employees.

Address of the German Pension Insurance Association (DRV):

Ruhrstraße 2

10704 Berlin

Tel. (030) 86 51

Fax (030) 86 52 72 40

E-Mail: drv@drv-bund.de

Internet: http://www.deutsche-rentenversicherung-bund.de