Independent Contractors & Employment Guidelines in Germany
Contract length allowance
There are no limitations on the use of independent contractors in Germany.
Fixed-term contract limitation
It may not exceed 24 months, and the employee may not have worked for the same employer before.
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What makes someone an employee
In Germany, the distinction between an employee and an independent contractor is not regulated by one specific regulation. There is a strict assessment under various criteria, which partly come from German law regulations but mostly from rulings of the German labour courts and the German administrative courts. Both courts use slightly different criteria for assessing whether a person is an employee or an independent contractor, which may lead to different rulings regarding their status. However, mostly, the assessment with both kinds of criteria will lead to the same results.
The decision of whether a contractor is to be qualified as an employee or an independent contractor depends on an overall consideration of the criteria listed below. In their considerations, labour courts tend to focus more on the degree of personal dependency, whereas the social security authorities rely more on the economic dependence of a contractor.
For an independent contractor to not be considered an employee, they should not:
- Receive instructions on when or how to work
- Be provided with company equipment
- Be provided with a regular workplace, telephone line or company email address
- Receive fixed payments every month
Typically, a worker can be safely classified as an independent contractor if they answer \"yes\" to the following questions:
- Do they control the nature of their work?
- Are they free from supervision, control and instructions in the process?
- Can they set their hours and overall schedule?
- Can they choose their place of work?
- Do they only receive payment for completed work?
- Do they have other paying clients?
- Do they market their services to the public?
- Are they liable for their business expenses?
- Can they reject an order or project?
As these criteria are still vague and, in border cases, hard to assess, the social security authorities have developed several criteria, which may be taken into account when determining the status of an employee:
- Does the contractor have to provide their services in person, or can they engage an employee or subcontractor for the job?
- Who bears the economic risk of no performance or poor performance?
- Is the contractor integrated into the business organization of the principal?
- Is the contractor named in duty rosters?
- Who provides the equipment for the work performance?
- Does the contractor have a regular workplace at the principal’s location? Do they have branded business cards of the principal?
- Does the contractor attend internal team meetings, training sessions or internal events and parties?
- Is the contractor obliged to notify about holidays or other leave?
- Does the contractor receive a fixed monthly remuneration, or are they paid only for the services they actually provided?
- Do they have to send invoices?
- Are they covered for sick leave or holiday?
- Does the contractor have their own registered business?
- Does the contractor have other clients? Are they free to choose clients?
It is important to highlight that any independent contractor can initiate an investigation into their employment status through the labour or administrative courts. If the employer and or the contractor want to have clarity about the employment status, it is possible to initiate a status determination procedure (Statusfeststellungsverfahren) at the German Pension Insurance (Deutsche Rentenversicherung).
Employee vs contractor
In Germany, a comprehensive statutory social security system is established for employees, including health insurance, long-term care insurance, unemployment insurance and a state pension scheme. Contributions are paid by both employers and employees equally. Employee contributions will be withheld from the monthly salary and paid to the relevant authorities by the employer.
Independent contractors, on the other, do not participate in the German statutory social security system, needing to arrange and pay for their own accord. Health insurance is mandatory in Germany. Pension insurance is not mandatory but is recommended for contractors.
Employee\'s remuneration is subject to income taxes. Independent contractors are subject to VAT (except for small businesses), income tax and trade tax in case of commercial activity (for sole entrepreneurs and private companies only in case of profit above €24,500).
Regarding termination, employees are vastly protected under German employment laws, especially in cases that involve handicapped or pregnant employees. In contrast, independent contractors may be terminated without a cause, observing a contractual notice period.
Finally, employees enjoy limited liability regarding their work performance in case of normal negligence and are represented by work councils (if any), while an independent contractor is generally fully liable for their services and has no representation in work councils.
Penalties for misclassification in Germany
Employers face severe penalties for misclassification and have an obligation to retroactively pay social security contributions for the employee without being allowed to deduct the employee\'s contribution from their salary for up to 4 years - in case of intentional misclassification, for up to 30 years - plus a late payment fine, which generally equals to 1% of the due amount per month. Financial authorities can hold the employer liable for income tax, and reimbursement from the employee can be difficult.
Moreover, the managing director in charge may be held liable under criminal law for wrongful non-payment of the employee\'s social security contributions, with the possibility of being sentenced to up to 5 years of imprisonment or charged with a fine. If convicted, the director may also be personally liable for the outstanding employee\'s social security contributions.
If a company provides manpower to another company and misclassifies those persons as contractors instead of employees, this will qualify as hidden personnel leasing, which can cause fines of up to €30,000, up to €500,000 for a breach of equal pay and equal treatment obligation, as well as the above-mentioned consequences like retroactive payment of social security contributions for the employee, liability for income tax and liability under criminal law.
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