Increased focus of authorities on allegations of self-employment in Germany

Increasing enforcement activity and legal risks

The intensifying activities of authorities highlight the scale of the issue. Recent statistics demonstrate the scope of enforcement efforts:

• Over the past year, the Financial Control for Undeclared Work ("Finanzkontrolle Schwarzarbeit") audited 42,631 employers.
• These audits resulted in 101,423 criminal proceedings and 48,812 administrative offense proceedings being initiated.

Recent ourt rulings further indicate a continuous tightening of legal standards. For instance, the Federal Social Court ("Bundessozialgericht") on 20 July 2023 (B 12 BA 1/23), clarified that social security obligations are not automatically exempted due to contractual relationships with single-member corporations. This judgment emphasizes the necessity for businesses to carefully assess their contractual and operational frameworks when engaging freelancers or independent contractors.

Understanding the compliance landscape: Key risks and tensions

The legal and compliance risks surrounding false self-employment extend beyond social security contributions and taxes. Companies must navigate a complex landscape filled with overlapping issues, including:

• Social security contributions and payroll taxes: Incorrect classification of workers can result in retroactive claims for unpaid social security contributions and payroll taxes.
• Personal liability: Managers and executives may face personal liability for non-compliance.
• Employment relationships: Misclassification risks creating unintended employment relationships, with associated rights and obligations for such employees.
• Administrative and criminal penalties: Authorities can impose significant fines or even pursue criminal charges for violations.

This tension around the potential risk of misclassification requires careful navigation to avoid both administrative and legal pitfalls.

Key focus areas in government investigations

When investigating allegations of false self-employment, authorities typically focus on the following:

1. Contracts and working relationships: Authorities scrutinize the contractual agreements between the company and the worker to determine whether they align with the actual contractual relationship.
2. Communication: Communication between the company and the worker  is analysed for evidence of de facto employment relationships.
3. Integration into business operations: Investigators assess whether workers are integrated into the company's operations through factors such as supervisory instructions, onboarding processes or the utilization of company equipment.
4. Personnel records: Documentation such as time tracking, payroll records, social security contributions, and work permits is reviewed to identify (alleged) inconsistencies or irregularities.

Proactive compliance: How to protect your business

To mitigate the risks of false self-employment, companies need robust compliance processes that ensure freelancer relationships meet the criteria for genuine self-employment. Key steps include:

1. Pre-Engagement assessments

Before hiring a freelancer, conduct a detailed evaluation of the working relationship. Consider for example:

• Do the individuals operate independently?
•  Are they free to determine how and when they complete their work?
• Do they work for multiple clients?

This assessment should be documented to create an audit trail that demonstrates due diligence.

2. Clear contractual arrangements

Contracts should clearly outline the independent nature of the relationship. Avoid clauses that:

• Impose rigid working hours or locations.
• Grant the company control over how tasks are performed.

Instead, emphasize the freelancer’s autonomy and entrepreneurial responsibility.

3. Ongoing monitoring

Even after engagement, monitor the relationship to ensure compliance. Periodically review whether the freelancers:

• Continue to work independently.
• Take on projects for other clients.
• Maintain the tools and resources necessary to perform their work.
• Is not integrated in the team.

4. Training and awareness

Train HR and managers to understand the distinctions between employment and self-employment. Ensure they are aware of the legal risks and the importance of maintaining compliance.

5. Dawn raid readiness

As enforcement efforts increase, companies must prepare for potential dawn raids by authorities. Key measures include:

• Establishing a response team: Designate individuals responsible for handling inspections, including legal and compliance experts.
• Document preservation: Ensure all relevant records, contracts, and communications are properly organized and readily accessible.
• Staff training: Train employees on how to respond during a raid, including the importance of cooperation and avoiding obstruction.
• Legal support: Have external counsel on standby to provide immediate assistance during an inspection.

Authored by Désirée Maier, Angeline Leder, and Silvia Tomassone.